Introduction to ISDA 2002 Equity Derivatives Definitions

In this briefing, we summarise the structure and application of the 2002 ISDA Equity Derivatives Definitions for products including equity swaps, options, and forwards. We discuss essential provisions of the Definitions, covering valuation procedures, settlement mechanics for both cash and physical settlement, and the treatment of dividends. We also detail the framework for adjustments related to corporate actions and the consequences of Extraordinary Events such as Merger Events, Tender Offers, Nationalisation, Insolvency, Delisting, and examine the heavily negotiated provisions for Market Disruption Events and Additional Disruption Events, including Change in Law, Hedging Disruption, and Loss of Stock Borrow. Finally, we consider recent developments, including the introduction of the 2002 ISDA Equity Derivatives Definitions (Versionable Edition) (VE) and the related protocol for its market adoption.

Equity derivatives are financial instruments that derive their value from the price movements of an equity stock, an index, or a basket of stocks and/or indices (each referred to as a permitted underlier that is said to be underlying the transaction). Equity derivatives include a range of products like swaps, options, and forwards, each with unique features and complexities along with additional payment-related variables.

In 2002, the International Swaps and Derivatives Association (ISDA) published the 2002 ISDA Equity Derivatives Definitions (2002 Equity Definitions), which provide a framework for documenting privately negotiated equity derivatives transactions. The 2002 Equity Definitions have been widely adopted across the market owing in large part to their broad scope, both as to the type of products covered and the variety of equity reference assets contemplated.

This scope stands in stark contrast to the 1996 ISDA Equity Derivatives Definitions (1996 Equity Definitions), which primarily focused on options and to the extent other basic equity derivatives were addressed, certain key considerations, including settlement options, were limited. On the other end of the spectrum are the hyper-specific 2011 ISDA Equity Derivatives Definitions (2011 Equity Definitions), which users have found overly complex and not user-friendly. This complexity has resulted in limited application of the 2011 Equity Definitions, with their most common use being in connection with index volatility swaps.

The 2002 Equity Definitions are designed to be incorporated into equity derivatives transaction confirmations, which are often long and detailed master confirmation agreements (MCAs), providing a framework for transactions including equity swaps, options, and forwards. The 2002 Equity Definitions provide standard language, but as with any other ISDA document, the parties are permitted to negotiate bespoke versions of the provided terms to suit their unique needs. Parties to equity derivatives transactions typically modify the 2002 Equity Definitions or agree to apply or disapply certain provisions of the 2002 Equity Definitions in the transaction confirmation. As a result, language in equity derivatives transactions confirmations varies as broadly as the number of market participants.

The 2002 Equity Definitions include provisions relating to a broad range of products, which contributes to their utility and widespread adoption. They accommodate not only basic derivatives products such as options, but also exotics, such as "Barrier" instruments. The 2002 Equity Definitions afford flexibility as to settlement provisions, such as the choice of physical or cash settlement across transaction types. The framework of the 2002 Equity Definitions also permits versatility in handling corporate events like a merger or reorganisation, with distinctions for various market interruptions, detailed procedures for Market Disruption Events and negotiable Additional Disruption Events, such as Change in Law and Hedging Disruption.

Any terms defined in the 2002 Equity Definitions used but not defined in this briefing have the meanings given to them in the 2002 Equity Definitions. Except as expressly noted, references in this briefing to the 2002 Equity Definitions mean the 2002 ISDA Equity Derivatives Definitions (Versionable Edition) (Equity Definitions VE). 

Article 1: Certain General Definitions

Article 1 of the 2002 Equity Definitions establishes a standardised set of definitions and terms that create a common language designed to facilitate mutual understanding and reduce the potential for disputes between parties involved in these transactions.

There are defined terms for specific derivative transactions: "Option Transaction", "Forward Transaction" and "Equity Swap Transaction", along with a more generic term, "Transaction" meaning any of the foregoing or any other transaction that incorporates the 2002 Equity Definitions. Terms for each type of permitted underlier are also included, such as "Index Transaction" and "Share Transaction." Many generic equity terms are therefore bifurcated based on the nature of the underlier. For example, there are different standard definitions of "Relevant Price" and "Exchange" for Index Transactions and Share Transactions.

Article 1 also includes both generic payment-related terms (such as Settlement Currency and Clearance System Business Day) and payout-specific terms such as Knock-in Event and Knock-out Event with their related definitions Knock-in Price and Knock-out Price, respectively.

Section 1.40 sets out the general standard for the calculation agent when making calculations or determinations under the agreement, requiring it to act in good faith and in a commercially reasonable manner. To the extent parties negotiate a different calculation agent standard and/or dispute rights in the ISDA Schedule or transaction confirmation, those provisions govern. The extent of discretion permitted for equity-specific determinations by the calculation agent is addressed in subsequent articles, in particular Articles XI and XII.

While the standard definitions in Article 1 are quite broad, parties incorporating the 2002 Equity Definitions should still consider whether the nature of their permitted underliers and/or their economics require modifications to these standard terms. For instance, an index with constituents that trade on multiple exchanges in multiple jurisdictions may require bespoke modifications to the ISDA "Index" definitions by the parties in the ISDA Schedule or transaction confirmation.

Articles 2 and 3: General Terms Relating to Option Transactions and Exercise of Options

The definitions and provisions related to option transactions are set out in Article 2 of the 2002 Equity Definitions. These include:

• The type of option – call or put.
• The style of option:
  • American (exercisable on any scheduled trading day during an exercise period);
  • Bermuda (exercisable on each Potential Exercise Date during the exercise period); or
  • European (exercisable only on the expiration date).
• Terms for premium payments.

Article 2 also sets out transaction-specific option terms to be included in the confirmation, such as the commencement date, the number of options, the Option Entitlement (the number of shares or baskets per option) and the strike price.

Article 3 of the 2002 Equity Definitions specifies terms related to the exercise of options, such as the date(s) and time(s) an option may be exercised and the specific procedure by which the option holder may exercise. Rather than requiring an election to exercise, for European options, which are only exercisable on the expiration date, parties typically elect Automatic Exercise to be applicable. With this approach, if the relevant option is in the money as of the Exercise Time on the expiration date, the option will be deemed exercised without requiring any action by the option holder. The Multiple Exercise feature allows for the exercise of multiple options on different days within the exercise period, where permitted under the options contract (under an American or Bermudan contract), with specific rules for minimum and maximum numbers of options that can be exercised.

Article 4: General Terms Relating to Forward Transactions

The key terms and provisions related to forward transactions are set out in Article 4. Despite the relative simplicity of forwards compared to options, forward mechanics were excluded from the 1996 Equity Definitions. From a pricing standpoint, the key terms are the Forward Price (the agreed purchase/sale price) and, if applicable, the Forward Floor Price and Forward Cap Price, which set the minimum and maximum purchase/sale prices, respectively. This Article also outlines terms related to prepayment, where the buyer pays the seller an agreed amount before the transaction's maturity (often at inception).

Article 5: General Terms Relating to Equity Swap Transactions

Article 5 of the 2002 Equity Definitions defines the key terms and provisions related to equity swap transactions. As with any other swap, the relevant terms include:

• The roles of the Equity Amount Payer and Equity Amount Receiver, the parties responsible for making and receiving payments, respectively; and
• Initial Exchange Amount and Final Exchange Amount, the amounts payable by the parties on the Initial Exchange Date and Final Exchange Date.

The Rate of Return is the default formula used to calculate the return on the equity swap, based on the difference between the final price and initial price of the underlying asset, adjusted by a multiplier (if applicable). The initial price is the price specified at the start of the transaction, while the final price is determined on each Valuation Date based on the prevailing market value of the applicable permitted underlier; the manner in which the final price is determined varies based on the nature of the permitted underlier.

Finally, Equity Notional Reset, if applicable in the confirmation, applies when there are multiple Cash Settlement Payment Dates and the parties wish to adjust the notional amount of the equity swap based on the equity amount calculated on each Cash Settlement Payment Date.

Article 6: Valuation

Article 6 of the 2002 Equity Definitions outlines the terms and procedures for valuing equity derivative transactions. It defines the specific time (the Valuation Time) and date(s) (the Valuation Date(s)) when the value of the relevant permitted underlier is determined. While those terms are transaction-dependent, this section also addresses what happens if a Market Disruption Event occurs on a scheduled Valuation Date. This provision sets out the circumstances, if any, under which a party to an equity derivative transaction may postpone the date of determination and/or deviate from the baseline price determination provisions.

Market Disruption Event

Section 6.3 specifies a number of events that could constitute a Market Disruption Event, though the parties can, and often do, expand and modify this list of events. Included in Section 6.3 are the following, any of which can give rise to a Market Disruption Event:

• Trading Disruption, which is any suspension or limitation imposed on trading in the permitted underlier by the relevant exchange or related exchange;
• Exchange Disruption, which is any event other than early closure that disrupts or impairs the ability of market participants to effect transactions in or obtain market values for the permitted share underlier (or 20% of the constituents of an index); and
• Early Closure, which is the closure of the relevant exchange (or of exchanges relating to 20% of the constituents of an index) before its scheduled closing time, unless previously announced within a specified period.

These are some of the more heavily negotiated provisions in equity derivatives contracts. Common modifications to the definitions of the various Market Disruption Events include modifications to the timing during which trading can be disrupted, to the notice required for an early closure and to the relevant percentage of constituents required to trigger a particular Market Disruption Event for an index.

If the calculation agent determines that a Market Disruption Event has occurred and the transaction does not include Averaging Dates, where the final price or other applicable price is determined over multiple trading days instead of a single Valuation Date, the ramifications are addressed in Section 6.6 of the 2002 Equity Definitions. The default mechanic under the 2002 Equity Definitions for a Market Disruption Event for a transaction with a single permitted underlier is that the affected Valuation Date is postponed until the first subsequent scheduled trading day on which no Market Disruption Event occurs or is continuing, provided it is not postponed by more than eight scheduled trading days. If a Valuation Date is postponed eight scheduled trading days, the calculation agent makes a good faith estimate of the value that would have prevailed absent the Market Disruption Event. For a transaction based on a basket or multiple permitted underliers, unless otherwise specified, the value of any unaffected permitted underlier is determined on the originally scheduled Valuation Date.

For transactions that include Averaging Dates, there are three permitted modifications for a Market Disruption Event, each set out in Section 6.7 of the 2002 Equity Definitions:

• Omission, which means any Averaging Date affected by a Market Disruption Event is deemed not to be a relevant Averaging Date for purposes of determining the applicable value;
• Postponement, which would delay any Averaging Date affected by a Market Disruption Event until the next scheduled trading day on which no Market Disruption Event occurs or is continuing, even if that day is already an Averaging Date (the value on such first subsequent date would count as the value for the originally scheduled Averaging Date and for each previously postponed Averaging Date); and
• Modified Postponement, which instead postpones any Averaging Date affected by a Market Disruption Event until the next scheduled trading day on which no Market Disruption Event occurs or is continuing and that is not already an Averaging Date. Consistent with Section 6.6, the maximum postponement for an affected Averaging Date is eight scheduled trading days.

Additionally, Article 6 includes provisions for Futures Price Valuation, which permit an index swap or index basket swap to be priced by reference to a futures contract on the index, rather than the published value of the index itself. Section 6.8 explains how the relevant price is determined based on the official settlement price of the relevant futures contract and addresses adjustments for changes in the terms of the futures contract or its discontinuation. If "Consequence of Non-Commencement or Discontinuance of the Exchange-traded Contract" is specified in the related confirmation, the transaction will either be cancelled, or the calculation agent will make necessary adjustments to the transaction based on the exchange's announcements.

Basket Transactions

Version 2.0 of the VE introduced provisions relating to Volume-Weighted Average Price (VWAP) and Time-Weighted Average Price (TWAP) valuations (Section 6.9) and provisions for separate valuation/combined calculation in share basket transactions or index basket transactions (Section 6.10).

Section 6.9 details that if a transaction specifies "VWAP VE" or "VWAP VE Excluding Close," the relevant price, final price, or settlement price of the underlying share is determined based on the volume-weighted average price per share during the regular trading session, excluding after-hours trading. Similarly, for "TWAP VE" or "TWAP VE Excluding Close," the relevant price of the underlying share is determined based on the time-weighted average price per share at specified intervals during the trading session. Section 6.9 also details related adjustments to the definitions of Market Disruption Events and the procedures for determining prices on disrupted days, ensuring that the calculation agent can make necessary VWAP- or TWAP-related adjustments.

Section 6.10 addresses the provisions for separate valuation/combined calculation in share basket transactions or index basket transactions. When "Separate Valuation/Combined Calculation" is specified as applicable in the confirmation, each component of the basket is valued independently as if it were a separate transaction. This means that variables such as scheduled trading day, exchange business day, averaging date, valuation date, disrupted day, valuation time, and relevant price are determined separately for each basket component. These individual values are then combined to produce a single value for the entire basket.

Articles 7, 8 and 9: General Terms Relating to Settlement, Cash Settlement, and Physical Settlement

Article 7 of the 2002 Equity Definitions contains general terms relating to settlement mechanics, including:

• Whether the parties may elect cash settlement or physical settlement;
• When and how to make that election;
• The default settlement method; and
• How the relevant value of the permitted underlier (the Settlement Price) is determined.

Articles 8 and 9 of the 2002 Equity Definitions then set out how the settlement amounts are calculated for each of a cash-settled and a physically settled option, forward, and equity swap transaction:

• Cash-settled option transactions. If the option buyer exercises a cash-settled call option, the seller pays the buyer the option cash settlement amount, which is the product of the difference between the strike price and the spot price on the exercise date and the number of options exercised;
• Cash-settled forward transactions. The forward cash settlement amount is equal to the difference between the settlement price and the forward price, so if the settlement price is greater than the forward price, the forward seller pays the forward purchaser that difference, and if the settlement price is less than the forward price, then the forward purchaser pays the difference to the forward seller; and
• Cash-settled equity swap transactions. The equity amount payer pays to the equity amount receiver (if the price rises) or receives from the equity amount receiver (if the price falls) the product of the price movement of the underlying shares and the equity notional amount. In the simplest scenario referencing one unleveraged share, a 1% increase or decrease in the share price would result in a 1% increase or decrease, respectively, in the equity amount paid.

All cash settlement payments must be made on a specified cash settlement payment date:

• Physically settled option transactions. If the option buyer exercises a physically settled call option, the option seller delivers the shares or baskets of shares to the buyer based on the number of options and the Option Entitlement, with the buyer paying the settlement price for each share or basket delivered;
• Physically settled forward transactions. The buyer pays the forward price and the seller delivers the specified number of shares or baskets; and
• Physically settled equity swap transactions. The equity amount payer delivers the shares or baskets to the equity amount receiver and pays the cash value of any fractional share amounts in exchange for payment by the equity amount receiver of the equity notional amount, which is, in effect, the price agreed to by the parties around the time the transaction is consummated (subject to adjustment in accordance with the terms of the relevant confirmation).

Article 9 also addresses issues such as:

• Settlement disruption events that would prevent delivery by a party required to make a delivery required by it under the agreement;
• Expenses related to the transfer of shares; and
• Indemnification for failure to deliver shares when required.

Article 10: Dividends

Article 10 of the 2002 Equity Definitions outlines the terms and conditions related to how dividends are treated in equity derivative transactions. The first question parties must consider is whether or not dividends will be accounted for in the payments to be made under the transaction. If dividends are to be included, there are several options for both when and how they are paid from one party to the other or otherwise given effect in the transaction. Section 10.1 defines the term Dividend Amount, which is based on any Record Amount, Ex Amount, or Paid Amount of any dividend payments made during the dividend period, depending on the parties' election.

The dividend payment date is the date on which the dividend is paid, and the dividend period is the period during which the dividend is calculated. Additionally, if the parties elect Reinvestment of Dividends, as applicable, any dividend amount is added to the equity notional amount for future calculations. Additional elections include, for example, whether the dividends under the transaction for a particular dividend reference period are based on:

• Dividend amounts actually paid during that period;
• Dividends that had an "ex" date (traded on the open market without the right to receive the dividend) during that period; and
• Dividends for which the record date occurred during the relevant dividend period.

Article 10 also covers the treatment of extraordinary dividends, which are significant, non-recurring dividends that may require special handling. The term Excess Dividend Amount is used where dividends exceed a certain threshold. Article 10 is designed to provide for consistent handling of all dividend-related payments and adjustments. In addition to trade-specific economic considerations, parties should also consider any applicable tax implications on their chosen dividend mechanics.

Article 11: Adjustments and Modifications Affecting Indices, Shares, and Transactions

Index Adjustments

Section 11.1 of the 2002 Equity Definitions addresses adjustments to underlying indices. For example:

• If an index is no longer calculated by its original sponsor but is taken over by a successor sponsor or replaced by a successor index using a similar calculation method, the Successor Index is deemed the relevant index; and
• In cases of material changes to the index calculation method (an Index Modification), Index Cancellation, or failure to announce the index level, the calculation agent may adjust the transaction terms to reflect the economic impact of these changes. These adjustments can include recalculating the settlement price, final price, strike price, forward price and other relevant variables based on the last known method of calculation before the adjustment event.

Section 11.1 permits parties to elect one of the following three effects upon the occurrence of such an event, usually agreed by the parties in the transaction confirmation:

• Calculation agent may make adjustments in accordance with the existing index formula;
• Negotiated close-out permitting termination only if the parties agree, or else continuing the transaction under existing terms; and
• Cancellation and Payment.

Adjustments to Share Transactions and Share Basket Transactions

Section 11.2 addresses adjustments to share transactions and share basket transactions. When a potential adjustment event, such as a stock split, dividend distribution, or other corporate event occurs with respect to any of the underlying shares, the calculation agent determines whether it has a dilutive or concentrative effect on the value of the shares. Depending on the specified method of adjustment, the calculation agent may adjust certain economic terms of the agreement to account for the impact of the event. These may include:

• For of a share (or share basket) option transaction, the strike price, number of options, and option entitlement; and
• For a share (or share basket) forward transaction, the forward price and relevant number of shares.

Section 11.2 provides that, to account for the effect of any such dilutive or concentrative event, the calculation agent may take one of the following two approaches, as agreed by the parties in the confirmation:

• Make the adjustments made by the relevant Options Exchange relating to options contracts on the affected shares (note that Options Exchange Adjustment may apply to any type of share transaction, as long as the affected share has listed options that trade on an Options Exchange); and
• Make calculation agent-determined adjustments.

Note that the option permitting calculation agent-determined adjustments does not permit adjustments to account solely for changes in volatility, expected dividends, stock loan rate, or liquidity of the underlying share.

Adjustments to Certain Share Transactions and Share Basket Transactions in European Currencies

Section 11.3 addresses adjustments to share transactions and share basket transactions involving any underlying shares originally quoted in a European currency that later switch to being quoted in euros where no exchange rate is specified. In this case, the calculation agent adjusts relevant variables, such as the strike price, forward price, and settlement price, to reflect the change in currency denomination. These adjustments are designed to preserve the economic terms of the transaction despite the currency change.

Correction of Share Prices and Index Levels

Section 11.4 provides that any share price or index level used for a calculation or determination may be updated to reflect any subsequent corrections if those errors are identified and updated within one settlement cycle. As with any other term, the parties can, and often do, modify the terms of this provision in their transaction confirmations, often to disapply these corrections.

Benchmark Provisions for an Index

Section 11.5, which was added in version 2.0 of the VE, sets out the procedures to be followed if an index used in a transaction is affected by an index cancellation or an administrator/benchmark event. If an alternative pre-nominated index is specified by the parties in the confirmation, the transaction terms will be adjusted to replace the original index with the alternative pre-nominated index, subject to agreement on any necessary payment adjustment. If no alternative pre-nominated index is specified or agreed upon, the administrator/benchmark event is treated as an Index Adjustment Event. If using any fallback index is unlawful or contravenes licensing requirements, the first compliant fallback is used.

Article 12: Extraordinary Events

Mergers and Tender Offers

Section 12.1 of the 2002 Equity Definitions sets out the framework for identifying and categorising extraordinary events and their impact on affected underlying shares. Section 12.1 details the definitions of Merger Event and Tender Offer, including the criteria and implications for each. In addition, Section 12.1 provides for the details required for a public announcement related to these events, which triggers the ability to adjust the transaction pursuant to their occurrence.

The primary difference between a Merger Event and a Tender Offer under the 2002 Equity Definitions lies in the extent of the ownership change. A Merger Event typically results in a complete transfer of shares, leading to significant changes to the structure of the company whose shares are underlying the equity derivatives transaction, while a Tender Offer involves the acquisition of a substantial portion of shares of the company whose shares are underlying the equity derivatives transaction without necessarily resulting in a complete transfer of the company's shares.

Sections 12.2 and 12.3 of the 2002 Equity Definitions outline the consequences of Merger Events and Tender Offers, respectively. Section 12.2 sets out that, as the result of a Merger Event, the terms of the transaction may be adjusted, cancelled, or modified depending on the type of consideration paid for the shares of the company whose shares underlie the relevant equity derivatives transaction (Share-for-Share, Share-for-Other, or Share-for-Combined). Other merger-related adjustment options that the parties may elect in their transaction confirmations include:

• Adjustments consistent with those made by the relevant options exchange;
• Cancellation and Payment;
• Calculation Agent Adjustment, which permit adjustments for updated terms other than to account solely for changes in volatility, expected dividends, stock loan rate, or liquidity of the underlying shares; and
• Modified Calculation Agent Adjustment, which does permit changes solely to account for volatility, expected dividends, stock loan rate, or liquidity of the underlying shares.

Section 12.3 addresses the consequences of Tender Offers. Similar to Merger Events, the consequences of the occurrence of a Tender Offer depend on the type of consideration paid for the shares of the company whose shares underlie the relevant equity derivatives transaction. The range of consequences for a Tender Offer are also similar to Merger Events, including options exchange adjustment, Cancellation and Payment, Calculation Agent Adjustment, and Modified Calculation Agent Adjustment.

Section 12.4 outlines how any new shares or other consideration exchanged for the existing underlying shares in connection with a Merger Event or Tender Offer are valued for both cash-settled and physically settled transactions. Under Section 12.4:

• For cash-settled non-share consideration, the calculation agent determines the cash value of the consideration paid for the underlying shares; and
• For physically settled transactions, the relevant party delivers the new shares and/or other consideration.

Section 12.5 addresses the Composition of Combined Consideration, which addresses how the parties make an equivalent election for the relevant transaction where a Merger Event or Tender Offer permits holders of the original underlying share to elect the quantity and/or type of consideration it receives:

• If Composition of Combined Consideration is specified as applicable in the related confirmation, the Combined Consideration will be deemed to be new shares at the maximum value permitted, if the holder of the shares can determine the composition and receive new shares; and
• If Composition of Combined Consideration is not specified as applicable, the calculation agent determines the composition in its sole discretion (provided the parties have not negotiated a bespoke provision covering this).

Nationalisation, Insolvency, and Delisting

Section 12.6 of the 2002 Equity Definitions addresses the consequences of nationalisation, insolvency, and delisting of a company whose shares underlie the relevant equity derivatives transaction. Under this section, Nationalisation occurs when all the shares or substantially all the assets of an issuer are transferred to a governmental entity. Insolvency refers to situations where an issuer's shares are transferred to a trustee or similar official due to bankruptcy or similar proceedings or when shareholders are legally prohibited from transferring their shares due to an insolvency event related to the company whose shares underlie the relevant equity derivatives transaction. Delisting happens when shares cease to be listed, traded, or publicly quoted on an exchange and are not immediately re-listed on another exchange in the same country.

Under Section 12.6, upon becoming aware of the occurrence of any of these events, the parties must promptly notify each other. Unless otherwise specified by the parties in the relevant confirmation, the consequences of nationalisation, insolvency, or delisting are either:

• Negotiated Close-out, in which the parties may mutually agree to terminate the transaction or continue it under existing terms; or
• Cancellation and Payment, under which the transaction is cancelled as of the Announcement Date and a payment is made based on the value determined by the calculation agent (see Payment Upon Certain Extraordinary Events).

For share basket transactions, Partial Cancellation and Payment may apply, under which only the portion of the transaction related to the affected shares is cancelled. The remainder continues with necessary adjustments to preserve the economic terms of the transaction.

Payment Upon Certain Extraordinary Events

Section 12.7 specifies the resulting effects where the parties have elected or subsequently agreed that Cancellation and Payment or Partial Cancellation and Payment applies to the affected transaction upon the occurrence of any Extraordinary Event. Extraordinary Events include any Index Adjustment Event, Nationalisation, Insolvency, Delisting, Merger Event, Tender Offer, or any other applicable Additional Disruption Event.

When an Extraordinary Event occurs, an amount is paid by one party to the other, determined by either the calculation agent or the Determining Party. That amount (the Cancellation Amount) equals the amount of losses and costs or gains, as the case may be, of the Determining Party that are or would be incurred or realised under then-prevailing circumstances, which may be determined by reference to quotations and/or other relevant market data, including a party's internal sources.

Extraordinary Events for Option Transactions

For option transactions, unless otherwise specified by the parties in the relevant confirmation, upon the occurrence of an Extraordinary Event, the Cancellation Amount to be paid by party to the other must be agreed by the parties within five Exchange Business Days after the event date. If the parties cannot agree, the Cancellation Amount is determined by the calculation agent using either the Agreed Model or Calculation Agent Determination method as follows:

• The Agreed Model involves calculating the value of the underlying share based on factors including volatility and expected dividends for a period around the closing date (the Unadjusted Value) relative to those same factors over a period around the announcement date (the Adjusted Value), in an attempt to isolate the impact of the Extraordinary Event on those terms; and
• "Calculation Agent Determination" method allows the calculation agent to determine the Cancellation and Payment amount based on similar factors.

Extraordinary Events for Forward and Equity Swap Transactions

For forward and equity swap transactions, unless otherwise specified by the parties in the relevant confirmation, upon the occurrence of an Extraordinary Event, the transaction is cancelled. The Cancellation Amount must be determined by the Determining Party (or Determining Parties) using commercially reasonable procedures and considers relevant market data, quotations, and internal information to calculate this amount.

Section 12.8 outlines the determination of the Cancellation Amount in the event of an Extraordinary Event that leads to the termination or cancellation of a transaction. The Cancellation Amount represents the losses or costs incurred, or gains realised, by the Determining Party in replacing or providing the economic equivalent of the terminated transaction's material terms, including option rights. The Cancellation Amount must be determined in good faith and calculated using commercially reasonable procedures, which may include market quotations, relevant market data or internal sources. The Cancellation Amount is payable within three Currency Business Days following the determination and notification of the amount by the Determining Party.

Additional Disruption Events

Section 12.9 of the 2002 Equity Definitions details the handling of Additional Disruption Events, which include:

• Change in Law;
• Insolvency Filing;
• Failure to Deliver;
• Hedging Disruption, which occurs if the hedging party (typically the dealer party) is unable, after using commercially reasonable efforts, to acquire, maintain, dispose of, or realise proceeds from its related hedging transactions;
• Increased Cost of Hedging, which is triggered if the hedging party would incur a materially increased cost in maintaining any related hedge transactions;
• Loss of Stock Borrow, which occurs if the hedging party is unable to borrow or maintain the borrowing of shares at a rate equal to or less than the negotiated Maximum Stock Loan Rate; and
• Increased Cost of Stock Borrow, which occurs if the hedging party would incur a rate to borrow shares that is greater than the Initial Stock Loan Rate.

Each of these Additional Disruption Events and their applicability to a particular transaction are generally subject to extensive negotiation. For example, parties often expand Change in Law to ensure that even certain technically informal guidance could be a sufficient trigger. The hedging party (usually the dealer) usually attempts to negotiate broader definitions of Permitted Hedging Transactions, lower trigger thresholds, and so forth.

Section 12.9 outlines specific procedures for termination or adjustment of the transaction upon the occurrence of any of these events. For instance, unless otherwise specified by the parties in the relevant confirmation, a Change in Law or Insolvency Filing allows either party to terminate the transaction with notice, while a Failure to Deliver involves partial delivery and potential termination by the Receiving Party. Hedging Disruption and Loss of Stock Borrow allow the Hedging Party to terminate the Transaction if certain conditions are not met. Increased Cost of Stock Borrow and Increased Cost of Hedging involve notifying the Non-Hedging Party of cost increases and potentially adjusting the transaction or terminating it if no agreement is reached. The Determining Party must calculate any Cancellation Amounts payable in a commercially reasonable manner.

Article 13: Miscellaneous

Article 13 of the 2002 Equity Definitions includes various provisions that parties may elect to include in their confirmations. As a matter of practice, parties to equity derivatives transactions almost always agree these provisions are applicable:

• Non-Reliance. Each party represents that it is acting as principal, not relying on the other party as a fiduciary, and has made its own independent decisions regarding the contemplated transaction(s);
• Agreements and Acknowledgments Regarding Hedging Activities. This provision establishes that neither party is relying on the other's hedging activities or communications about such activities and that each party's hedging is proprietary; and
• Additional Acknowledgments. Each party represents that it:
  • is not relying on any investment, tax, accounting, legal, or other advice of the other party;
  • has had the opportunity to obtain any information it deems relevant;
  • understands the other party may have conflicts of interest and may engage in competing transactions; and
  • had the opportunity to obtain necessary information to evaluate the transaction independently.

Finally, Article 13 includes an index-specific acknowledgement which, if applicable, serves as an acknowledgment by each party that the Index Sponsor has no obligation to any party to the relevant transaction and may act in its sole discretion in making any decisions with respect to the applicable index without any regard to such transaction.

Article 14: Depository Receipt Provisions

Article 14 was introduced in version 2.0 of the VE. Article 14 effectively incorporates into the 2002 Equity Definitions both the 2007 Partial Lookthrough Depository Receipt Supplement and the 2007 Full Lookthrough Depository Receipt Supplement. Accordingly, the related confirmation for depository receipt-linked trades simply requires an election as to whether the Full Depository Receipt Lookthrough (Sections 14.2 and 14.3) or Partial Depository Receipt Lookthrough (Sections 14.2 and 14.4) is applicable.

The primary difference between the Full Lookthrough and Partial Lookthrough Depository Receipt Supplements lies in the extent of the lookthrough to the underlying shares and the mandatory nature of certain adjustments. The Full Lookthrough provides a more comprehensive and mandatory reference to adjustments made by the depository, while the Partial Lookthrough allows for more flexibility and discretion by the calculation agent.

The 2002 Equity Definitions: Versionable Edition

The 2002 Equity Definitions remained largely unchanged until January 15, 2024, when ISDA published the Equity Definitions VE. Substantively, the Equity Definitions VE are basically unchanged from the original 2002 Equity Definitions. ISDA's release of the Equity Definitions VE is a part of its move to an online infrastructure intended to allow for updates to the definitions without the need to publish supplements and, ideally, reducing the need for bilateral amendments while increasing uniformity. The 2021 ISDA Interest Rate Derivatives Definitions were the first to employ this online-only, versionable edition approach. On January 21, 2025, ISDA published version 2.0 of the Equity Definitions VE.

To facilitate adoption, on October 27, 2025, ISDA opened general adherence for the ISDA 2025 2002 Equity Derivatives Definitions (VE) Protocol (VE Protocol). The VE Protocol provides a standardised mechanism to amend the terms of certain equity master confirmation agreements to incorporate the Equity Definitions VE on an "as in effect on the Trade Date" basis. Adherence by both parties results in each in-scope master confirmation being amended with effect from the later of the parties' Implementation Date and Protocol Effective Date, with no change to legacy transactions entered into before that date and, for all transactions, with bespoke terms in existing documents preserved and applied mutatis mutandis to the equivalent Equity Definitions VE provisions.

The VE Protocol sets clear timing mechanics for when amendments to confirmations adopting the Equity Definitions VE take effect, while permitting annual revocation on a go-forward basis without disturbing amendments already made. For counterparties that prefer not to adhere to the VE Protocol, ISDA has also published a Template Form of Amendment for bilateral use which allows parties to opt in to the protocol's amendment package to specified existing master confirmations, to make targeted additional elections and to specify precedence between the bilateral amendment and any later protocol adherence.

For further information on the Equity Definitions VE, see the ISDA Equity Definitions VE InfoHub, which is designed to serve as a repository for information from ISDA relating to the initiative to update the 2002 Equity Definitions.