2011 ISDA Equity Derivatives Definitions
- New Approach | Main Changes | Architecture | Main Book | Appendix | Transaction Matrix | Transaction Supplement | Bespoke Transactions | Legs | Elections | Features | Pricing Disruption Events | CDR Costs Allocation Election | Calculation Dispute Resolution Procedure (Art. 22) | Dispute Resolution Payment Election (s. 22.1) | Resolution Process (s. 22.2) | Notices (Art. 23) |
ISDA published the 2011 ISDA Equity Derivatives Definitions on 8 July 2011. It is a significant departure from the 2002 Equity Derivatives Definitions in terms of the way OTC equity derivatives are documented (and the way ISDA definitions are updated) and creates a new modular framework for documenting equity derivatives transactions e.g. through the use of the Main Book, the Appendix, Transaction Matrices and Transaction Supplements (see below) and by combining provisions and defined terms through the use of methodologies (cf. e.g. s. 10.2), features (cf. Article 3), toggles and suffixes (cf. e.g. "Currency Business Day" in s. 5.7.1(iv)) and prefixes (cf. e.g. "Initial, Interim and Final Type of Date" in s. 5.2.1).
The 2011 ISDA Equity Derivatives Definitions also significantly expanded the definitions of the 2002 ISDA Equity Derivatives Definitions and consolidated provisions of numerous equity derivatives master confirmation agreements and general terms confirmations that have been developed since the 2002 ISDA Equity Derivatives Definitions. The new architecture of the 2011 ISDA Equity Derivatives Definitions is designed to promote the electronic processing, matching and reporting of OTC equity derivatives transactions.
Similar to the 2002 ISDA Equity Derivatives Definitions, the 2011 ISDA Equity Derivatives Definitions can be used with the ISDA 1992 and 2002 Master Agreement and will not affect any equity derivatives transactions incorporating the 1996 or 2002 ISDA Equity Derivatives Definitions.
The main changes from the 2002 ISDA Equity Derivatives Definitions are set out in the next section.
The 2011 ISDA Equity Derivatives Definitions have made very substantial changes to the 2002 ISDA Equity Derivatives Definitions.
The main changes include an expansion of the underlying securities e.g. depositary receipts and futures contracts ("Derivatives Contracts" under Section 2.3.1 of the Main Book).
Extraordinary Events and Market disruption events under 2002 ISDA Equity Derivatives Definitions have also been significantly revamped (market disruption events are renamed "Pricing Disruption Events" under Article 9 of the Main Book). The definition of "Cancellation Amount" has also been substantially amended and now in Section 2.10 of the Main Book.
In addition, the 2011 ISDA Equity Derivatives Definitions now have a new calculation agent dispute resolution procedure (cf. Article 22 of the Main Book).^
The 2011 ISDA Equity Derivatives Definitions adopt a new document architecture in that an OTC equity derivatives transaction will be documented with a combination of the following documents:
(a) the "Main Book";
(b) the "Appendix";
(c) the "Transaction Matrix"; and
(d) a Transaction Supplement.
Each of the documents is discussed briefly below.^
Similar to the 2002 ISDA Equity Derivatives Definitions, the 2011 ISDA Equity Derivatives Definitions Main Book contains the core definitions and provisions relating to events and consequences relating to equity derivatives transactions.
However, the 2011 ISDA Equity Derivatives Definitions Main Book have been significantly expanded from 54 pages for the 2002 ISDA Equity Derivatives Definitions to the 333 pages in the 2011 ISDA Equity Derivatives Definitions.
One major difference from the 2002 ISDA Equity Derivatives Definitions is the open-ended approach adopted by the 2011 ISDA Equity Derivatives Definitions i.e. instead of the hard-wiring the provisions together, the provisions of the Main Book are the "building blocks" of features fields, data, consequences which can be selected and combined to form terms of an equity derivatives transaction.
Although in theory the parties are free to combine the various possible elections in the Main Book, such freedom is limited by the Appendix (discussed in the next section) which restricts the possible combinations so as not to produce any unintended consequences or obligations. The terms and conditions typical to a type of equity derivatives are further standardised by the Transaction Matrices (discussed below) to be published by ISDA.^
The 2011 ISDA Equity Derivatives Definitions are actually a combination of the Main Book and Appendix to be published by ISDA. When published, the Appendix will contain "assemblies" or "modules" of the core terms and provisions of the Main Book according to the equity derivatives transaction type to be entered into. Tables in the Appendix will also set out the possible fallbacks that will apply if the parties do not specify any elections.
The Appendix will be updated continuously by ISDA to cater for different types of equity derivatives transactions.
Tables in the Appendix will allow the parties to an equity derivatives transaction to agree:
(a) Payment and delivery obligations by combining formulae and methodologies
(b) Risk allocation by specifying the relevant elections for consequences and adjustments e.g. Extraordinary Events in the Main Book (Article 19)
The content of the Appendix is likely be driven by demand of the market for the combination of definitions, fields and elections for equity derivatives products.^
A Transaction Matrix will be transaction or product specific and will combine the standardised definitions and elections in the Main Book and the Appendix for a particular type of equity derivatives transaction. The Transaction Matrix will contain all the "operative" provisions for the type of equity derivatives transaction whereas the economic terms of the trade will be set out in the Transaction Supplement (see below).^
A Transaction Supplement for an equity derivatives transaction is a short form confirmation that incorporates the relevant Transaction Matrix and will contain all the trade specific economic terms for the equity derivatives transaction e.g. dates, payment amounts, underlying securities or assets. Parties to an equity derivatives transaction may document the transaction using the Transaction Supplement or, alternatively, a long form confirmation or some other bilateral agreement incorporating the 2011 ISDA Equity Derivatives Definitions.^
Like the 2002 2011 ISDA Equity Derivatives Definitions, the 2011 ISDA Equity Derivatives Definitions are extremely flexible and the parties will be able to use the definitions in the Main Book and/or the Appendix or even the Transaction Matrix with modification for more bespoke equity derivatives transactions.^
The 2011 ISDA Equity Derivatives Definitions use the term "Leg" to describe the cashflow and settlement terms within an equity derivatives transaction. An equity derivatives transaction will have one or more Legs, including the equity derivatives Leg and non-equity derivatives Leg. For example, a simple equity swap will have the equity Leg under which the Equity Amount payer pays and the Equity Amount receiver receives the Equity Amount. In consideration of the Equity Amount, the Equity Amount receiver may agrees to pay a funding amount calculated by reference to the equity notional amount.
The 2011 ISDA Equity Derivatives Definitions use the terms "ED Leg" (s. 1.2.2) and "Non ED Leg" (s. 1.2.2) to describe the equity and non-equity parts of a transaction.
Legs within an equity derivatives transaction may be "linked" (called "Linked Legs") i.e. paired so that if any event or date occurs to one Leg (e.g. termination or postponement, cf. s. 4.8), it will have certain consequence to the other Linked Leg.^
As explained in the section entitled "Appendix" above, as part of the open-ended design of the 2011 ISDA Equity Derivatives Definitions, the Appendix will set out table of modules or structural components of equity derivatives transactions. The Appendix tables make use of concepts such as:
(a) "Fields" (i.e. a term of the equity derivatives that requires input of Data, cf. s. 1.4.4);
(b) "Data" (e.g. dates, time, Value agreed by the parties in relation to a Field, cf. s. 1.4.1);
(c) "Value" (e.g. amount, level or price, cf. s. 1.4.3); and
(d) "Fallback" i.e. the term that will apply if no Data is "Specified" cf. s. 1.4.9.
These concepts should be familiar to users of the 1996 and 2002 ISDA Equity Derivatives Definitions and are now turned into defined terms of the 2011 ISDA Equity Derivatives Definitions.^
Another aspect of the open-ended architecture of the 2011 ISDA Equity Derivatives Definitions is the use of "Features" in the Appendix to identify the relevant type of equity derivatives transactions agreed to be entered into by the parties. As defined in s. 1.4.11 of the Main Book, Features to be specified in the Appendix includes e.g.:
(a) Primary Feature (e.g. whether it is a swap, option of forward transaction)
(b) Secondary Feature (e.g. it is a Variance, Volatility or Equity Performance transaction)
(c) Tertiary Feature (e.g. KIKO or Equity Reset)
(d) Underlier Feature (e.g. Single Security or Single Exchange Index)
(e) Settlement Feature (i.e. cash or physical)
(f) Valuation Feature (i.e. Single or Multi-Valuation)
(g) Dividend Feature (e.g. Include or Recovery)^
Last updated July 2011^