Most Read Contributor in New Zealand, September 2016
Equity swaps are sometimes used by investors to gain exposure to
the economic performance of a particular security, without the need
to acquire the underlying physical security. Investment banks
offering such products will however often acquire the underlying
security as a hedge against their counterparty exposure under the
Concerns have been expressed, not without foundation based on
examples in Australia and the USA, that the eventual natural buyer
of the physical securities acquired as a hedge may be the
counterparty to the equity swap. In this way, equity swaps could be
used to effectively warehouse shares in a target company, in
advance of a takeover offer or other corporate transaction.
Responding to this concern, New Zealand's new Financial
Markets Conduct Act and the Takeovers Code now require public
disclosure of certain equity derivative positions.
The ability to use equity swaps to take substantial equity
positions without requiring disclosure has been curtailed, although
synthetic investment may still have some taxation benefits.
Investors contemplating such transactions should seek advice and
make sure their disclosure procedures are updated to reflect the
The information in this article is for informative purposes
only and should not be relied on as legal advice. Please contact
Chapman Tripp for advice tailored to your situation.
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