The International Swaps and Derivatives Association has published a blueprint for the new equity derivatives definitions it plans to publish before year end. One of the most significant changes is the clarification of mergers and the options that are available to deal with these events in derivatives contracts, said Karl Rogers, director and head of legal counsel for trading and derivatives at Dresdner Kleinwort Wasserstein in London. In the 1996 definitions all the shares of the companies involved in a merger had to be transferred to the new entity in order for the option to also be transferred, which caused problems if minority shareholders kept shares. The most recent example of this was the Mannesmann and Vodafone merger. But, the new definitions have a tender offer clause in which derivatives professionals can select options from a menu depending on how many of the shares are transferred.
The market disruption definitions have also been clarified in light of the Sept. 11 terrorist attacks and Argentinean stock market closure. For the full draft document (in pdf format), click here.
"We don't expect large sections [of these draft definitions] to be cut or added," said Richard Metcalfe, co-head of the European office in London. The definitions will replace the 1996 documents. Rogers said the draft covers many of the developments in the equity derivatives market in the last six years. These include new products, such as barrier options, and procedures for dealing with events such as the Malaysian crisis, where investors were able to exercise options but not convert the currency.
ISDA members are invited to comment on the definitions by Friday, followed by a New York and London video conference in mid September. The draft is the result of over a year's discussion with ISDA members, said Metcalfe.
