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Derivatives

Pressure Builds For Equity Houses To Adopt New Docs

Some of the most active derivatives houses operating in Europe, including Morgan Stanley, UBS and HSBC, are expected to come under increasing peer pressure to adopt the 2002 International Swaps and Derivatives Association equity derivatives definitions, according to City lawyers.

Some of the most active derivatives houses operating in Europe, including Morgan Stanley , UBS and HSBC , are expected to come under increasing peer pressure to adopt the 2002 International Swaps and Derivatives Association equity derivatives definitions, according to City lawyers. Banks that have implemented the definitions are becoming increasingly frustrated with what they see as foot-dragging by counterparties and are considering ways to bring them into line. Indeed, one of the major U.S. houses has composed a letter to eight counterparties that have yet to make the transition. Stronger measures could include cutting trading lines, according to two lawyers who declined to comment on whether their firms expect to take that step. Officials at Morgan Stanley, UBS and HSBC were unable to provide comment by press time.

Around half of the most active equity shops, including Deutsche Bank , JPMorgan and Goldman Sachs , adopted the definitions in June. These firms complain they are now being forced to run 2002 and 1996 documents in parallel, causing delays in confirmations, increasing basis risk and doubling their work load. "It's causing log-jams in the market around confirming transactions," said Tim Hailes , v.p. and assistant general counsel at JPMorgan in London. "Apart from the sheer inconvenience, there is the basis risk caused by running two different sets of documents around the same products," he added.

There are several key differences between the 1996 and 2002 definitions which raise the possibility of documentary basis risk. One example is that the 1996 definitions make no specific provision for the de-listing of shares. There are also differences between business day definitions, which could affect transactions between counterparties operating on different documents.

Opinions vary as to why some banks have been so reluctant to adopt the new definitions. One theory is that the depressed state of the cash equity market has resulted in subdued interest in the OTC market and therefore, in the new definitions. Others argue that the absence of external pressure has encouraged backsliding.

Chris Georgiou , partner at Ashurst in London, said it is common for definitions to take a while to be adopted, but normally when the definitions are so critical to the market, as in the case of the 2003 credit derivatives definitions, they are adopted much more quickly.

 

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