Introducing the 2002 ISDA Equity Derivatives Definitions (VE) V2.0

Overview

On 21 January 2025, ISDA published Version 2.0 of the 2002 ISDA Equity Derivatives Definitions (Versionable Edition) (the Equity Definitions (VE)), along with related pro-forma confirmations.

Like the 2021 Interest Rate Definitions (the 2021 Definitions), the Equity Definitions (VE) are digitised and published through ISDA’s online ‘MyLibrary’ platform (as opposed to using paper or pdf format). This enables amendments to be incorporated directly into a new consolidated version of the definitions, rather than via standalone supplements.

Version 1.0 of the Equity Definitions (VE) was published in 2024 and made minimal changes to the original 2002 ISDA Equity Derivatives Definitions (the 2002 Equity Definitions) focusing on changes that were necessary to move the definitions over to the digital format and updating references to the 2000 ISDA Definitions with the 2021 Definitions. However, with the recently published Version 2.0, some more substantive (though largely optional) changes are introduced.

Importantly, the Equity Definitions (VE) do not automatically replace the 2002 Equity Definitions, nor do they automatically impact existing or new trades. However, we do expect to see further work from ISDA on the roll out of this equities initiative as we head deeper into 2025, with potential for an ISDA protocol to smooth any transition.

In the meantime, read on for a summary of the changes introduced in Version 2.0 of the Equity Definitions (VE).

Summary of changes introduced in Version 2.0 of the Equity Definitions (VE)

• Futures Price Valuation – The 2002 Equity Definitions (and Version 1.0 of the Equity Definitions (VE)) allow for Futures Price Valuation to be applied to an Index. Version 2.0 of the Equity Definitions (VE) extends this to Shares, enabling parties to elect Futures Price Valuation for both Shares and Indices. Additionally, a new electable provision offers the choice of alternative consequences (either Cancellation and Payment or Exchange Adjustment) for the non-commencement or discontinuance of the relevant Exchange-traded Contract.
• VWAP and TWAP – New elections (together with related provisions and modifications) are included for parties that wish to use volume-weighted average price per Share or time-weighted average price per Share in connection with determinations of the Relevant Price or Settlement Price.
• Separate Valuation/Combined Calculation – New provisions are included which allow the parties to elect for each Share or Index to be valued independently with the values combined to produce a single value for the Basket. The provisions list a range of potential variables, such as Valuation Date and Valuation Time, to be determined separately in respect of each Share or Index, along with a catch-all provision allowing the Calculation Agent to determine any others as appropriate. An election can also be made for certain adjustments and extraordinary events to apply partially, to just the affected Shares rather than all the Shares in the Basket, and there is an option to specify for staggered settlement to apply.
• Benchmark Provisions – Benchmarks provisions are included which largely replicate the existing ISDA Benchmarks Supplement. These can be expressly switched on by the parties with an election in the confirmation, but it is also worth highlighting that (unless expressly disapplied in the confirmation), they will automatically apply if both parties have adhered to the ISDA 2018 Benchmarks Supplement Protocol or otherwise adopted the terms of the ISDA Benchmarks Supplement for equity derivatives transactions governed under the ISDA.
• Depository Receipt Provisions – Depository receipt provisions have been included, largely copying across from the 2007 Partial Lookthrough Depository Receipt Supplement and the 2007 Full Lookthrough Depository Receipt Supplement to the 2002 Equity Definitions. Parties may elect for these to apply in the confirmation, instead of having to separately incorporate by reference the relevant supplement.
• Other changes - Changes are also included to reflect the move from TARGET to TARGET 2, and to amend the definition of Clearance System to remove the reference to Physically-settled Transactions allowing it to apply more generally in connection with Shares.

Other points to note about the Equity Definitions (VE)

Firms considering moving across to the Equity Definitions (VE) should note that the version of the definitions that will apply to a Transaction will always be the latest version of the definitions on the Trade Date, unless the parties agree otherwise. This means that a Transaction will not automatically be impacted if a new version of the definitions is published during its life. However, this approach does require some consideration particularly in relation to master confirmation agreements.

Questions?

For further information on the Equity Definitions (VE), please speak to your usual Simmons & Simmons contacts or any of the contacts named in this article.