UK: 2011 ISDA Equity Derivatives Definitions

Last Updated: 28 July 2011
Article by Will Dibble, Mark Bines and Jason Harding

The 2011 ISDA Equity Derivatives Definitions (the "2011 EDD") were published on 8 July 2011 after a process lasting more than 17 months and involving more than 60 market participants on both the buy and sell side. The 2011 EDD significantly alters the way that OTC equity derivatives are documented and expands, amongst other things, the type of products that are subject to the core definitions and the risk allocation provisions. 

The 2011 ISDA Equity Derivatives Definitions (the "2011 EDD") were published on 8 July 2011 after a process lasting more than 17 months and involving more than 60 market participants on both the buy and sell side. The 2011 EDD significantly alters the way that OTC equity derivatives are documented and expands, amongst other things, the type of products that are subject to the core definitions and the risk allocation provisions.

1. Objectives

The key objectives that needed to be accomplished with the 2011 EDD were to:

  • consolidate, update and, where applicable, expand the 2002 ISDA Equity Derivatives Definitions (the "2002 EDD") in light of market events over the last nine years including those arising out of the financial crisis. Consolidation in particular was required due to an increase in the variety of equity derivatives products since 2002 and an ever growing number of product specific master confirmation agreements ("MCAs") in relation to such products;
  • standardise terms to aid in the electronic processing, matching and reporting of transactions. Indeed product standardisation is an extremely important driver in the context of the 2011 EDD as this has guided the format and structure (known as the "architecture") of the 2011 EDD which, as we shall see, is in many respects unique amongst the various definitional booklets that ISDA has published. As market participants will be aware, product standardisation is one aspect of the general push towards central clearing of OTC derivatives generally; and
  • allow for new products to be created pursuant to a common framework as markets change without the need to create entirely new documentation (e.g. MCAs) for each such product.

2. New Structure

The publication of the 2011 EDD comprises more than a straightforward update of the 2002 EDD and establishes a new architecture for documenting equity derivatives. It is anticipated that a standard transaction documented under the 2011 EDD will usually combine four key documents:

  • the Main Book;
  • the Appendix;
  • an ISDA Transaction Matrix; and
  • a short form Transaction Supplement (the "T-Supp").

2.1 The Main Book

The Main Book comprises a menu of the key definitions, events, consequences and provisions upon which certain further terms and provisions can be built. These are the building blocks for transactions. The extent of the changes to the 2011 EDD from the 2002 EDD are immediately apparent in the Main Book as this runs to just over 300 pages as opposed to 54 pages for the 2002 EDD.

2.2 The Appendix

The Appendix is an appendix to the Main Book and will contain tables that assemble the core terms and provisions from the Main Book in certain ways according to transaction type as well as incorporating any new core definitions or provisions that may be required for a particular transaction. These combinations are then defined to be used in one or more ISDA Matrix Transaction Supplements. As a result, the Appendix will be amended, restated and republished on a fairly frequent basis as the 2011 EDD are increasingly used. As of the date of this Law-Now, the published Appendix contains only template headings and has not been populated. The Main Book together with the Appendix comprises the 2011 EDD.

2.3 ISDA Transaction Matrices

ISDA Transaction Matrices will combine various elections and definitions from the Main Book and the Appendix in relation to a particular product type. The industry has committed to producing the first two ISDA Transaction Matrices for US and EU Variance Swaps by 31 August 2011.

2.4 T-Supp

The T-Supp comprises a short form confirmation which will incorporate by reference the relevant ISDA Transaction Matrix where it is intended that all of the operative provisions will be. The T-Supp will at its core contain only the trade specific economic terms for that transaction such as the underlying, dates and amounts.

Other documents

In addition (or alternatively) to the documents stated above, parties may wish to enter into other bespoke transactions such as long form confirmations or bilateral agreements which incorporate and/or amend an ISDA Transaction Matrix or just use certain bespoke definitions and terms (whether based upon those from the 2011 EDD or not). It is anticipated that parties may wish to include bespoke representations and warranties in relation to particular trades.

3. Main changes and differences from 2002 EDD

Apart from the structural changes outlined above, the 2011 EDD consolidates, expands and updates the 2002 EDD. In particular the 2011 EDD provides for:

  • an expansion of the types of underlying to include, for example, depositary receipts and derivative contracts (including such things as futures contracts);
  • the incorporation of commonly used provisions (e.g. observation periods);
  • a revision and expansion of market disruption events (now called "Pricing Disruption Events");
  • substantial expansion and amendment of the risk allocation provisions (i.e. the "Extraordinary Events");
  • the inclusion of a new calculation agent dispute resolution procedure;
  • a substantial amendment to the potential methods of calculation of the Cancellation Amount; and
  • a new framework for creating provisions and defined terms through the use of methodologies, features, toggles and suffixes and prefixes.
  • We turn to some of these in a little more detail below.

4. Pricing Disruption Events

Pricing Disruption Events are the renamed and expanded Market Disruption Events from the 2002 EDD. There are now 60 Pricing Disruption Events which allow, amongst other things, for events affecting specific components of baskets of securities to be tailored to those particular components. Similarly, the range of consequences that can be applied to these events are now much wider (28 in all) and can be further refined by the use of various suffixes (such as " - Calculation Agent Modification" to allow the Calculation Agent to take into account what would have happened in relation to a hypothetical or actual hedge position).

5. Risk Allocation Provisions

5.1 The concept of Extraordinary Events has been retained albeit on a substantially expanded basis and comprises either those which are automatically applied (unashamedly called "Automatically Applied Extraordinary Events") and those which are elected by the parties ("Additional Disruption Events").

5.2 Notable changes to the Automatically Applied Extraordinary Events include:

  • the inclusion of the Potential Adjustment Event as an Automatically Applied Extraordinary Event (rather than as a separate provision) and its requirement to have a "material effect either on the theoretical value of [the relevant Securities] or on the [equity derivative transaction]";
  • the split of Merger Event into two distinct events (Merger Event and Reverse Merger Event);
  • the amendment of Delisting to capture delisting without there being any announcement and requirement that there is reasonable certainty that the relevant security is not or will not be (or where the delisting has been announced, the requirement that the Calculation Agent determines that there is reasonable certainty that the security will not be) relisted on certain securities exchanges (known as "Acceptable Securities Exchanges"); and
  • the amendment of Nationalization to allow, amongst other things, for specific thresholds to be stated (instead of the "all or specifically all" test in the 2002 EDD) and to recognise Nationalization by the acquisition of securities over a period of time by the government.

5.3 The Additional Disruption Events allow for the parties to specify a more detailed risk allocation between the parties and contain, amongst other things:

  • three (as opposed to one in the 2002 EDD) Change in Law provisions (Change in Law, Transaction Illegality and Increased Performance Cost due to Change in Law) which in turn allow for the parties to specify certain elections (Legal Uncertainty or Inadvisability) and, in relation to Change in Law itself, Avoidance that allows for further fine-tuning (as to which see below);
  • five (as opposed to two in the 2002 EDD) Hedging related provisions (Increased Cost of Hedging, Market Wide Hedging Disruption, Hedging Party Hedging Disruption, Increased Capital Charge Event and Foreign Ownership Event);
  • seven (as opposed to two) Securities lending provisions (Loss of Securities Borrow, Inability to Borrow, Increased Cost of Stock Borrow, Increased Collateral Percentage Event, Increased Long Divergence Event, Increased Short Divergence Event, Loss of Synthetic Securities Borrow);
  • new Governmental Intervention and Modified Governmental Intervention Events to cover events where the government intervenes which are not a Nationalization; and
  • new Dislocation events.

5.4 Certain Additional Disruption Events (for example, Change in Law) allow for the parties to specify that the hedging party must take "all commercially reasonable action .... that would satisfy all of the Avoidance Conditions in order to avoid the relevant [Additional Disruption Event]" before that party may take actions in relation to such Additional Disruption Event. This concept is similar to the requirement in the 2002 EDD that a Hedging Disruption can only occur if the Hedging Party is "unable, after using commercially reasonable efforts, to [hedge]" but attempts to provide clarity around what is "reasonable" by setting out nine specific Avoidance Conditions, all of which must be satisfied.

As a general rule, the parties are free to choose one or more consequences (called "Consequences") to apply to an Extraordinary Event (for example Cancellation and Payment or Calculation Agent Adjustment). In certain cases however and in relation to what are called "Prescribed Consequence Events" (e.g. Change in Law or Hedging Party Hedging Disruption) a certain Consequence or Consequences must apply as other permutations would not be logical (for example, a Failure to Deliver may only lead to Delivery and Cancellation). In addition and other than in relation to Prescribed Consequence Events, the parties may choose a waterfall of Consequences in relation to that event (e.g. Security Substitution followed by Calculation Adjustment etc.). One Consequence, as with the 2002 EDD, of any Extraordinary Event, is cancellation and payment of the Cancellation Amount.

6. Cancellation Amount

Cancellation Amount (which was previously a one page provision in the 2002 EDD) has been expanded considerably and now covers more than ten pages.

Whereas the approach taken in the 2002 EDD was for the determining party to determine losses, costs or gains in replacing the relevant transaction, the 2011 EDD sets out a variety of options and data inputs that the relevant determining party can take into account when determining the value of the
Cancellation Amount to cover, amongst other things, scenarios where no replacement transaction is possible (e.g. where the relevant share is no longer available due to Nationalization). In addition, how hedging gains and losses are taken into account can be tailored by the parties according to each transaction. The Calculation Agent Dispute Resolution Procedure mentioned below, can also be specified to apply to the determination of the Cancellation Amount and indeed is deemed specified if, amongst other things, the Calculation Agent is the only party determining the Cancellation Amount.

7. Calculation Agent Dispute Resolution Procedure

The 2011 EDD contain a new Calculation Agent Dispute Resolution Procedure. This reflects, amongst other things, a desire to try to standardise a variety of calculation agent dispute provisions in the market and in particular "co-calculation agent" provisions which have not always been entirely satisfactory.

At its core, there are two separate routes within the new dispute resolution procedure:

  • the Standard Resolution Process where the parties can each appoint up to two dispute resolution calculation agents (the "DRCAs"); and
  • the Anonymous Dispute Resolution Procedure where the parties appoint a dispute agent who then appoints up to four DRCAs while maintaining the anonymity of the appointing parties.

Once the DRCAs have been appointed, the DRCAs can make determinations in relation to the relevant dispute being categorised as either mathematical determinations or non-mathematical determinations including as to whether something is commercially reasonable. Before this process is undertaken, the disputing party must have paid all amounts due and will have elected whether to pay the undisputed amount only, the original amount claimed, half the disputed amount or to have the disputed amount placed in escrow.

In addition to the Calculation Agent Dispute Resolution Procedures, ISDA is proposing the establishment of an Equity Derivatives Determinations Committee for making determinations to assist the market on a similar basis to that in the credit derivatives world.

8. Implication for equity linked product programmes

Many structured product programmes (e.g. for notes, certificates and warrants) contain equity linked provisions at their core. As the OTC market will take time to adopt and use the 2011 EDD for transactions, an immediate amendment of any such programme is not required but will need careful consideration, particularly when taken in conjunction with the proposals set out in the recent consultation paper (the "Consultation Paper") published by the European Securities and Markets Authority ("ESMA") on 15 June 2011.

Key considerations in incorporating the 2011 EDD into any structured product programme are:

  • the fact that the Main Book contains only definitions and provisions which need to be combined through the Appendix and an ISDA Transaction. Whilst one approach could therefore be to only include definitions that are to used for a particular ISDA Transaction Matrix or for a particular trade, this will mean that new 2011 EDD definitions will need to be incorporated for any subsequent issue which requires different terms (e.g. a different ISDA Transaction Matrix); and
  • ESMA's conclusion that, in summary, final terms should only contain very specific information (e.g. pricing information) and that the relevant base prospectus should contain all other information (e.g. redemption formulae) in relation to the terms and conditions of the relevant product.

As a result of these factors and in particular the current ESMA conclusion, one option is to (1) incorporate the Main Book (and certain aspects of the Appendix) fully into the relevant programme albeit amended to account for the fact that the products are funded and not bilateral contracts and (2) for product specific sections to be set out in the terms and conditions for each type of product that the issuer wishes to issue (e.g. barrier reverse convertible notes). In this scenario, the product specific sections would be conceptually similar to the ISDA Transaction Matrix with the Final Terms purely containing the relevant pricing information. As additional or further products are to be issued, supplements to the base prospectus (incorporating the relevant additional product specific conditions) would need to be issued. All options which allows for a variety of products to be issued into the market on an ongoing basis will however and, if the conclusions of the ESMA paper are followed through, involve more work at the base documentation level for the relevant programme.

9. Next steps

As mentioned above, as of the date of this Law-Now, the published Appendix contains only template headings and has not been populated. It is not anticipated that this will occur until the first ISDA Transaction Matrices (being EU and US Variance Swaps) are published, currently scheduled for the end of August.

Once the ISDA Transactions Matrices are published, it is anticipated that market participants will gradually adopt the 2011 EDD through the ongoing adoption of new ISDA Transaction Matrices. Until (and even after) then, parties can continue to document the transactions pursuant to the 2002 EDD and the various MCAs or can incorporate certain provisions from the 2011 EDD (e.g. from the new Risk Allocation Provisions) into their trades.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 26/07/2011.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.