ISDA publishes version 2.0 of the Equity Definitions VE | Eversheds Sutherland (US) LLP
On January 21, 2025, the International Swaps and Derivatives Association, Inc. (ISDA) published version 2.0 of the 2002 Equity Derivatives Definitions (Versionable Edition) (Equity Definitions VE). The updated version includes a number of changes in the valuation section of the definitions, new benchmark provisions adapted from the ISDA Benchmark Supplement,1 and depository receipts provisions adapted from the 2007 Full/Partial Lookthrough Depository Receipt Supplements.2 Updated confirmation templates are also available to accommodate new terms set forth in version 2.0.
The Equity Definitions VE was borne of ISDA’s initiative to make certain improvements to the 2002 ISDA Equity Derivatives Definitions (2002 Definitions), which included publishing a digital version available on ISDA’s MyLibrary platform.3 Version 1.0 of the Equity Definitions VE, published in January 2024, does not differ substantively from the 2002 Definitions.4 As with other of ISDA’s definitional booklets currently available on MyLibrary, the Equity Definitions VE can be updated over time and users can compare versions with each update, if needed.5 With the advent of version 2.0, ISDA intends to launch a protocol in October 2025 that will allow market participants to amend their ISDA agreements and master confirmation agreements to reference the Equity Definitions VE, thereby replacing the 2002 Definitions.
This alert discusses ISDA’s key substantive changes in the Equity Definitions VE, including: (i) certain changes to the valuation provisions in Article 6, (ii) the addition of benchmark adjustments, and (iii) the incorporation of depository receipt provisions.
- Changes to Article 6: Valuation
It is not uncommon for equity transactions to be priced by reference to the price of futures contracts. The Equity Definitions VE add new elections that can be made in relation to this.
- Consequences for Certain Discontinuances of Exchange-traded Transactions. Section 6.8(e) of the Equity Definitions VE addresses how parties will proceed if there is a non-commencement or discontinuance of an exchange-traded contract (i.e., a futures contract). If there is no “Official Settlement Price” because trading in the exchange-traded contract did not commence or is permanently discontinued, the Official Settlement Price for that Valuation Date is the level of the relevant index or share at the close of the regular trading session on the exchange. Section 6.8 has been revised to add a new subsection (g), which allows market participants to select from two new consequences for such non-commencement or discontinuance: “Cancellation and Payment” or “Exchange Adjustment.” If Cancellation and Payment is selected, the transaction is terminated as of the date of the discontinuance and payment is made as though an “Extraordinary Event”6 has occurred. If Exchange Adjustment is selected, the Calculation Agent will wait a commercially reasonable amount of time for the exchange or clearinghouse to announce the contract. If announced, the Calculation Agent adjusts accordingly. If not announced, the parties terminate the transaction, and payment is made as though an “Extraordinary Event” occurred. For Section 6.8(g) to apply, parties must specify one of the two options under “Consequence of Non-Commencement or Discontinuance of the Exchange-traded Contract” in the trade confirmation.
- Application to Shares. In addition to the above changes, Article 6.8 has been modified to allow parties to apply “Futures Price Valuation” to a “Share,” which previously could only apply to an “Index.” If Futures Price Valuation is applicable, the Valuation Date is defined as a date on which the “Official Settlement Price” is published, irrespective of whether such day is a “Disrupted Day.”
- New Valuation Methods for Share Transactions
The Equity Definitions VE include a new Section 6.9, VWAP and TWAP, for purposes of determining the “Final Price,” “Relevant Price” or “Settlement Price.” Market participants can choose volume-weighted average price per Share (VWAP VE), based on trades executed during the regular trading session on the relevant exchange on the Valuation Date.7 The Calculation Agent would make the determination based on a price source specified in the Confirmation or, if no price source is specified, reported market data. Market participants also have the option to select time-weighted average price per Share (TWAP VE or TWAP VE Excluding Close), which functions similarly to the terms for VWAP VE.
If neither a pricing source nor market data is available, or the Calculation Agent determines the source is “manifestly incorrect,” the Calculation Agent determines the price in good faith and in a commercially reasonable manner. Section 6.9 also provides that where a Scheduled Valuation Date is a Disrupted Day, the Calculation Agent may determine that such day is a Disrupted Day only in part, affording the Calculation Agent substantial discretion in further determinations relating to the Final Price, Relevant Price or Settlement Price.8
- New Calculation Methodology for Basket Transactions
Market participants have the option to select a new calculation methodology called “Separate Valuation/Combined Calculation,” for share basket and index basket transactions. By making this election, parties agree that certain key terms of a transaction, such as “Scheduled Trading Day,” “Exchange Business Day,” “Valuation Date,” “Disrupted Day,” and any other variable the Calculation Agent deems appropriate, shall be used to determine each individual share or index in the basket. If parties elect this option, these variables are treated independently and then combined to produce a single value for the basket. This methodology also has the potential benefit of preventing the entire basket from being impacted by a disruption in circumstances where only certain components within the basket are affected.
- Changes to Article 11: Adjustments and Modifications Affecting Indices Shares and Transactions
The Equity Definitions VE includes a new Section 11.5, Benchmark Provisions in respect of an Index, which largely incorporates ISDA’s 2018 Benchmarks Supplement (Benchmarks Supplement). As market participants will recall, the Benchmarks Supplement was created in anticipation of the cessation of LIBOR. This new section provides that if an index is cancelled or becomes unlawful, market participants can select an alternative index to apply (referred to as the Alternative Pre-nominated Index.). If an alternative index has not been selected, or the parties dispute the payment amount as per the alternative index, the index transaction is cancelled, and existing fallbacks apply. If the parties have not selected any fallbacks, ISDA provides a default framework for index transactions pursuant to the Benchmarks Supplement. If both parties have adhered to the ISDA 2018 Benchmarks Supplement Protocol, these provisions automatically apply in any case. If not, the parties must affirmatively make the selection to have Section 11.5 apply in the relevant trade confirmation.
- New Article 14: Depository Receipt Provisions
The Equity Definitions VE include a new Article 14, Depository Receipt Provisions, lifting the provisions of the 2007 Full/Partial Lookthrough Depository Receipt Supplements to the 2002 ISDA Equity Derivatives Definitions. These provisions, which may be used in documenting equity transactions referencing depository receipts, are often incorporated by reference in trade confirmations. Article 14 now allows parties simply to specify either “Full DR Lookthrough” or “Partial DR Lookthrough” in the trade confirmation if they wish to have the provisions apply. Full DR Lookthrough is more comprehensive than Partial DR Lookthrough. For example, when making an adjustment, the Calculation Agent must give deference to any change made by the bank holding the assets under the deposit agreement. “Disruption Events” and “Hedging Shares” are revised to cover the underlying shares and the underlying shares issuer. Partial DR Lookthrough affords the Calculation Agent more discretion. When making an adjustment, the Calculation Agent can, but does not have to, refer to any changes made by the bank holding the assets. The delisting of underlying shares is not considered an adjustment event if the shares are immediately re-listed or re-quoted on an exchange. Certain Disruption Events (e.g., Increased Cost of Hedging) do not cover underlying shares and the underlying shares issuer.
- Confirmation Templates and User’s Guide
Alongside the Equity Definitions VE, ISDA published confirmation templates to accompany this latest version. ISDA also updated the User’s Guide to the 2002 Equity Definitions for purposes of the Equity Definitions VE (version 1.0) but has not yet done so to address the changes in version 2.0.
Implementation
As noted above, ISDA expects that market participants will shift to the Equity Definitions VE within the next year and intends to launch a protocol to facilitate the change from the 2002 Equity Definitions to the latest versionable edition.
ISDA’s announcement of its changes to the 2002 Equity Derivatives Definitions is available here.
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1 International Swaps and Derivatives Association, Inc., ISDA Benchmarks Supplement (Sept. 19, 2018), accessible at https://www.isda.org/2018/09/19/isda-publishes-benchmarks-supplement/.
2 International Swaps and Derivatives Association, Inc., ISDA 2007 Full/Partial Lookthrough Depository Receipt Supplements (Sept. 17,2007), available at https://www.isda.org/a/xuMDE/2007-Full-Lookthrough-DRS.pdf and https://www.isda.org/a/WuMDE/2007-Partial-Lookthrough-DRS.pdf.
3 International Swaps and Derivatives Association, Inc., 2002 ISDA Equity Derivatives Definitions (Versionable Edition), accessible at https://www.isda.org/2025/03/05/equity-definitions-ve-infohub/.
4 The 2002 Definitions provide standardized terms and templates that govern equity derivative transactions. Although ISDA published a new definitional booklet for equity derivatives in 2011, market participants continue to use the 2002 Definitions due to its ease of use and familiarity.
5 Note that the latest version of the Equity Definitions VE in place on the date of a trade will control for that transaction, unless otherwise agreed by the parties. Parties must specify the specific version of the Equity Definitions VE they would like to apply to their transaction, if not the latest version.
6 “Extraordinary Event” means a Merger Event, Tender Offer, Index Adjustment Event, Nationalization, Insolvency, Delisting or any applicable Additional Disruption Event, as the case may be. The occurrence of such events typically afford the Calculation Agent discretion to determine value or early terminate a transaction.
7 If the parties select “VWAP VE Excluding Close,” the result would not factor in the closing auction held by the Exchange.
8 Corresponding modifications are made to Article 6.3(a), 6.3(c) and 6.6(a). At a high level, a Disrupted Day is a day on which futures pricing is not available.
