ISDA Prepares Final Equity Definitions Draft
The International Swaps and Derivatives Association is planning to unveil the final draft of the 2002 equity derivatives definitions within the next week, with the intention to seek comments by Nov. 15 and publish the final document before year-end.
One of the most interesting parts of the draft is the clarification of what constitutes an exchange business day and a scheduled trading day, said Tim Hailes, senior equities lawyer at JPMorgan and member of ISDA's equity definitions working group in London.
Refining the merger provisions has continued to be "painful and a nightmare," according to an official involved in the process. The most significant addition to the merger sections in this draft is the term "ordinary or common" to describe what types of shares can be transferred to an investor after a merger. The draft also attempts to eliminate basis risk between derivatives and cash positions, for example, it matches the timing of the dividend payouts on the shares and options.
This is the first draft to include provisions for barrier options, including knock-ins and knock-outs. It has taken until now to include this language because equity derivatives professionals have been arguing over whether the reference point should be at the close of the day or any point during the trading day. In the end ISDA decided to make the language flexible enough to allow both.
Other significant changes include a concise format for the consequences of merger events and tender offers, the refinement of provisions dealing with forwards and the elimination of the adjustments of the official settlement price provision--barring the receipt of a compelling argument from members for keeping it.
ISDA circulated the draft to the equity derivatives working group about a week ago. To view the new draft, the accompanying memo and two sample confirmation templates, see below.
For Part 1 in pdf format, click here.
For Part 2 in pdf format, click here.
For Part 3 in pdf format, click here.
For Part 4 in pdf format, click here.
For Part 5 in pdf format, click here.