EMTA User s Guide to Documenting Non-Deliverable Currency Option Transactions

Transcription

1 Updated June 26, 2008 EMTA User s Guide to Documenting Non-Deliverable Currency Option Transactions I. Introduction The EMTA Template Terms for Non-Deliverable Currency Option Transactions (the NDO Template Terms ) provide a standardized set of terms for nondeliverable currency option transactions and allow the parties to the transaction to incorporate currency-specific provisions for the chosen currency of the transaction. The NDO Template Terms were designed as a universal template, for use with any currency. Sample confirmations are included herein for the convenience of documentation specialists and other practitioners to illustrate the way the NDO Template Terms are intended to be used. The NDO Template Terms are intended to be compatible with existing architecture in the non-deliverable FX market and are suitable for use with (i) existing master agreements like the ISDA, IFEMA, FEOMA, ICOM and IFXCO Master Agreements, (ii) the 1998 FX and Currency Option Definitions and Annex A thereto, and (iii) in recognition of the hedging relationship between nondeliverable forward and non-deliverable currency option transactions, specific provisions from the EMTA Template Terms for Non-Deliverable Forward FX Transactions for various currencies (each being the NDF Template Terms for the Reference Currency). The NDO Template Terms were prepared specifically for use in the foregoing market and may not be suitable for use with other kinds of option products such as binary or barrier options where certain documentation presumptions and conventions may differ. The Template Terms for Non- Deliverable Forward FX Transactions for various currencies are located on EMTA s website at Unless otherwise noted, terms defined in the various EMTA Template Terms for Non-Deliverable Forward FX Transactions and in the 1998 FX and Currency Option Definitions (the 1998 Definitions ) and Annex A thereto published by the International Swaps and Derivatives Association Inc, EMTA and The Foreign Exchange Committee are used herein as defined therein, respectively. II. The Template Terms and the Endnotes For ease of market use, the NDO Template Terms are set up in a form substantially similar to the Non-Deliverable Forward Template Terms, with Endnotes that indicate which provisions should be used to incorporate currency 1

2 specific information from the NDF Template Terms for the Reference Currency into the transaction. Individual terms and provisions are explained below. Option Style Option Style is limited to a European style option. The NDO Template Terms are not suitable for use with other option styles, and to provide for a Bermuda or American style transaction, substantial modification would be needed. The choice to limit the form to a European option style is a pragmatic choice reflecting the current focus and volume of NDO market activity. Reference Currency: Aside from its definitional role in the documentation, this provision will determine which set of NDF Template Terms will need to be used to provide the Disruption Events, Disruption Fallback and other provisions. Settlement Currency For the NDO Template Terms, USD settlement only is contemplated. Standardized terms for other Settlement Currencies (such as the Euro) may be dealt with in the future. Parties wishing to include a settlement currency other than the US Dollar should consult with legal counsel on necessary modifications to the NDO Template Terms. Settlement Date An Endnote is included with this provision to alert the documentation specialist that the settlement convention may vary currency by currency. While the majority of currencies currently operate on a two Business Day settlement convention, a few operate on a different one (for example, Philippine Peso and Russian Ruble, at the time of this publication). Settlement Consistent with the NDF Template Terms, Non-Deliverable must be specified in order to override the presumption in the 1998 Definitions (Section 1.7) that settlement is deliverable. Settlement Rate Option An Endnote directs the practitioner to the Settlement Rate Option identified in the NDF Template Terms for the Reference Currency. For example, in the case of Brazilian Reais, the primary Settlement Rate Option is PTAX (BRL). 2

3 Expiration Date, Valuation Date and Exercise Date In the case of a European-style non-deliverable currency option, Expiration Date, Valuation Date and Exercise Date all will be the same date. A determination needed to be made as to which of these definitions should be included in the NDO Template Terms and why. The decision was made to include Valuation Date and Expiration Date, but not to include Exercise Date. Expiration Date is defined simply as the Valuation Date (as adjusted from time to time). This allows the introduction of the term Valuation Date and thus a convenient leg up on the various defined terms that are used in other provisions (see, e.g., Scheduled Valuation Date ) that need to be imported from the NDF Template Terms. It was possible to include ONLY the definition of Valuation Date, but it was thought clearer from a reader s perspective to include the term Expiration Date to accompany the term Expiration Time. Including the words as adjusted from time to time with Expiration Date operates to effectively override the presumption found in the 1998 Definitions (Section 3.5(d)) that a Following Business Day convention applies. The definition of Valuation Date is the same as the definition of Valuation Date used in the NDF Templates, utilizing the Date Certain concept and recognizing a Preceding Business Day adjustment convention (except in the event of an Unscheduled Holiday). This recognizes and incorporates the market practice of the NDF market in this regard, but is, in fact, contrary to certain provisions in the 1998 Definitions, which are largely rooted in the practices of the deliverable currency option market. See the below Note on Business Day Adjustment Conventions. A choice was made NOT to utilize the term Exercise Date as redundant. While Exercise Date was arguably important in the context of American and Bermuda style options, it was not felt to be particularly so in the case of a European style option. Automatic Exercise In accordance with Section 3.6 (c) of the 1998 Definitions, Automatic Exercise will be deemed to apply to non-deliverable forward transactions documented using the NDO Template Terms. If the parties wish to alter this, and to override this presumption, the parties will need to include Automatic Exercise: Inapplicable in the confirmation. Parties choosing to do this should to review the provisions for Expiration Time which, as a consequence, may need to be modified to account for notice delivery arrangements. Expiration Time 3

4 A standardized approach for all currencies is suggested for this term to eliminate the need to add the fixing time for each currency. Premium Payment Date The presumption regarding a Following Business Day adjustment for Premium Payment Dates as included in the 1998 Definitions (Section 3.4(b)) is recognized here. In addition, a term for Relevant City for Business Day for Premium Payment Date has been included and New York is designated as the Relevant City for all currencies, similar to the provision for Relevant City for Business Day for Settlement Date. Disruption Events The Endnote instructs the practitioner to import all Disruption Events in the NDF Template Terms for the Reference Currency. The practitioner may incorporate the full text of the Disruption Events from the NDF Template Terms for the Reference Currency or may utilize a short-form approach with the language suggested in the Endnote. See, alternatively, Annex B-1 and Annex B-2, hereto. Disruption Fallbacks The Endnote instructs the practitioner to import all Disruption Fallbacks in the NDF Template Terms for the Reference Currency. The practitioner may incorporate the full text of the Disruption Events from the NDF Template Terms for the Reference Currency or may utilize a short-form approach with the language suggested in the Endnote. See, alternatively, Annex B-1 and Annex B-2, hereto. Other Terms The Endnote instructs the practitioner to import all Other Terms in the NDF Template for the Reference Currency. The practitioner may incorporate the full text of the Disruption Events from the NDF Template Terms for the Reference Currency or may utilize a short-form approach with the language suggested in the Endnote. See, alternatively, Annex B-1 and Annex B-2, hereto. In particular, parties will need to include a Calculation Agent provision for each transaction. Consideration should be given to the Calculation Agent provisions included in the documentation for any related hedge transaction and any such provision should reflect the normal practices and policies of each institution. Likewise, a Relevant City for Business Day for Premium Payment Date (New York, in all cases) should be included in Other Terms. 4

5 In addition, parties may choose to include language regarding any related activities of the parties in providing quotes for any primary or fallback settlement rate option. See language suggested in the Endnotes to the NDF Template Terms for any currency. III. A Note on Business Day Adjustment Conventions Market practices for Business Day Adjustment Conventions in the nondeliverable currency option market previously were not entirely settled and the NDO Template Terms implement the practice in this regard recommended in EMTA FX and Currency Derivative Market Practice No. 42 dated April 13, Based on the hedging relationship between the non-deliverable currency option and forward markets, a determination was made to recommend market practices on Business Day Adjustments that reflect the market practices in the nondeliverable forward market. Thus, Valuation Date (and by definition, the Expiration Date) in the NDO Template Terms adjusts in the same way that it does for the NDF Template Terms to ensure that both the transaction and its hedge work in tandem on Business Day adjustments. The term Exercise Date is not used in the NDO Template Terms. IV. Annexes Attached hereto are several annexes; the first, Annex A, is the NDO Template Terms. Annex B is an illustrative example of the application of the NDO Template Terms in the context of a specific currency. For the convenience of the EMTA membership, both a long form (Annex B-1) and a short form (Annex B-2) have been prepared. Both long and short forms incorporate all necessary substantive terms and parties may choose to use either form depending upon their internal legal and documentation policies and procedures. 5

6 ANNEX A EMTA TEMPLATE TERMS for Non-Deliverable Currency Option Transactions General Terms: Trade Date: [Date of Annex A] i : Buyer: Seller: Put Currency and Put Currency Amount: Call Currency and Call Currency Amount: Option Style: Option Type: Reference Currency: Settlement Currency: Strike Price: Settlement Date: Settlement: Settlement Rate Option iii : Expiration Date: Valuation Date: Expiration Time: Premium: European [CURRENCY] Put / [CURRENCY] Call U.S. Dollars [DATE CERTAIN], subject to adjustment if the Scheduled Valuation Date is adjusted in accordance with the Following Business Day Convention or if Valuation Postponement applies, and in each such case, the Settlement Date shall be as soon as practicable, but in no event later than [ ] ii Business Days after the date on which the Spot Rate is determined. Non-Deliverable Valuation Date (as adjusted from time to time in accordance with its terms) [DATE CERTAIN], (Scheduled Valuation Date ) subject to adjustment in accordance with the Preceding Business Day convention and in the event of an Unscheduled Holiday, subject to adjustment in accordance with the Following Business Day convention. iv The time at which the Spot Rate is determined. 6

7 Premium Payment Date: Disruption Events: v : Disruption Fallbacks vi : Other Terms vii : 7

8 ENDNOTES i ii iii iv v vi vii Only include if parties wish to modify the presumption that Annex A is incorporated as amended through the Trade Date. Insert the number of Business Days for the market standard settlement cycle as indicated in the EMTA Template Terms for Non-Deliverable FX Transactions for the Reference Currency published on EMTA s website as of the Trade Date. Include the Settlement Rate Option included in the EMTA Template Terms for Non-Deliverable FX Transactions for the Reference Currency published on EMTA s website as of the Trade Date. In the case of BRL/USD Non-Deliverable Currency Option Transactions, parties may wish to insert the additional language which is included in the NDF Template Terms for USD/BRL transactions: Notwithstanding the foregoing, if the parties have specified a Scheduled Valuation Date that falls on a date that, as at the Trade Date, is not a scheduled Business Day in New York, no adjustment shall be made on account of the fact that such date is not a Business Day in New York. Include all Disruption Events from the EMTA Template Terms for the Reference Currency published on EMTA s website as of the Trade Date by including either (a) the words Incorporated in their entirety from the current EMTA Recommended Template Terms for [INSERT CURRENCY] Non-Deliverable FX Transactions as set forth at as of the Trade Date or (b) the full text of the provisions included for Disruption Events in the NDF Template Terms for the Reference Currency. Include all Disruption Fallbacks from the EMTA Template Terms for the Reference Currency published on EMTA s website as of the Trade Date by including either (a) the words Incorporated in their entirety from the current EMTA Recommended Template Terms for [INSERT CURRENCY] Non-Deliverable FX Transactions as set forth at as of the Trade Date or (b) the full text of the provisions included for Disruption Fallbacks in the NDF Template Terms for the Reference Currency. Include all Other Terms from the EMTA Template Terms for the Reference Currency published on EMTA s website as of the Trade Date by including either (a) the words Incorporated in their entirety from the current EMTA Recommended Template Terms for [INSERT CURRENCY] Non-Deliverable FX Transactions as set forth at as of the Trade Date or (b) the full text of the provisions included for Other Terms in the NDF Template Terms for the Reference Currency. In addition, terms for Calculation Agent and Relevant City for Business Day for Premium Payment Date (New York) should be included as Other Terms. 8

9 ANNEX B-1 SAMPLE EMTA LONG FORM TEMPLATE TERMS for BRL/USD Non-Deliverable Currency Option Transactions General Terms: Trade Date: Date of Annex A: Buyer: Seller: Put Currency and Put Currency Amount: Call Currency and Call Currency Amount: Option Style: Option Type: Reference Currency: Settlement Currency: Strike Price: Settlement Date: Settlement: Settlement Rate Option: Expiration Date: Valuation Date: [BRL ] [USD ] [BRL ] [USD ] European [CURRENCY] Put / [CURRENCY] Call Brazilian Real U.S. Dollars [DATE CERTAIN], subject to adjustment if the Scheduled Valuation Date is adjusted in accordance with the Following Business Day Convention or if Valuation Postponement applies, and in each such case, the Settlement Date shall be as soon as practicable, but in no event later than two Business Days after the date on which the Spot Rate is determined. Non-Deliverable BRL PTAX (BRL09) Valuation Date (as adjusted from time to time in accordance with its terms) [DATE CERTAIN], subject to adjustment in accordance with the Preceding Business Day Convention and in the event of an Unscheduled Holiday, subject to adjustment in accordance with the Following Business Day Convention. Notwithstanding the foregoing, if the parties have specified a Scheduled Valuation Date that falls on a date that, as at the Trade Date, is not a scheduled Business Day in New York, 9

10 no adjustment shall be made on account of the fact that such date is not a Business Day in New York. Expiration Time: Premium: Premium Payment Date: Disruption Events: Price Source Disruption: Price Materiality Primary Rate: Secondary Rate: Price Materiality Percentage: Disruption Fallbacks: 1. First Fallback Reference Price: 2. Valuation Postponement: 3. Second Fallback Reference Price: The time at which the Spot Rate is determined. Applicable Applicable BRL09 EMTA BRL Industry Survey Rate (BRL 12), or EMTA BRL Indicative Survey Rate (BRL13), as the case may be. 3%, provided however, that if there are insufficient responses on the Valuation Date to the EMTA BRL Industry Survey or the EMTA BRL Indicative Survey, as the case may be, the Price Materiality Percentage will also be deemed to have been met. EMTA BRL Industry Survey Rate (BRL 12) EMTA BRL Indicative Survey Rate (BRL 13) 4. Calculation Agent Determination of Settlement Rate Other Terms: Unscheduled Holiday: Unscheduled Holiday means that a day is not a Business Day and the market was not aware of such fact (by means of a public announcement or by reference to other publicly available information) until a time later than 9:00 a.m. local time in the Principal 10

11 Financial Center(s) of the Reference Currency two Business Days prior to the Scheduled Valuation Date. Deferral Period for Unscheduled Holiday: Valuation Postponement for Price Source Disruption: Cumulative Events: In the event the Scheduled Valuation Date becomes subject to the Following Business Day Convention, and if the Valuation Date has not occurred on or before the 30th consecutive day after the Scheduled Valuation Date (any such period being a Deferral Period ), then the next day after the Deferral Period that would have been a Business Day but for the Unscheduled Holiday shall be deemed to be the Valuation Date. Valuation Postponement means, for purposes of obtaining a Settlement Rate, that the Spot Rate will be determined on the Business Day first succeeding the day on which the Price Source Disruption ceases to exist, unless the Price Source Disruption continues to exist (measured from the date, that, but for the occurrence of the Price Source Disruption, would have been the Valuation Date) for a consecutive number of calendar days equal to the Maximum Days of Postponement. In such event, the Spot Rate will be determined on the next Business Day after the Maximum Days of Postponement in accordance with the next applicable Disruption Fallback. Notwithstanding anything herein to the contrary, in no event shall the total number of consecutive calendar days during which either (i) valuation is deferred due to an Unscheduled Holiday, or (ii) a Valuation Postponement shall occur (or any combination of (i) and (ii)), exceed 30 consecutive calendar days in the 11

12 aggregate. Accordingly, (x) if, upon the lapse of any such 30 day period, an Unscheduled Holiday shall have occurred or be continuing on the day following such period, then such day shall be deemed to be a Valuation Date, and (y) if, upon the lapse of any such 30 day period, a Price Source Disruption shall have occurred or be continuing on the day following such period, then Valuation Postponement shall not apply and the Spot Rate shall be determined in accordance with the next Disruption Fallback. Maximum Days of Postponement: Relevant Cities for Business Day for Valuation Date: Relevant City for Business Day for Settlement Date: Relevant City for Business Day for Premium Payment Date: Calculation Agent: Thirty (30) calendar days Any of Rio de Janeiro, Brasilia or São Paulo and New York City New York New York [TO BE ADDED] 12

13 ANNEX B-2 SAMPLE EMTA SHORT- FORM TEMPLATE TERMS for BRL/USD Non-Deliverable Currency Option Transactions General Terms: Trade Date: Date of Annex A: Buyer: Seller: Put Currency and Put Currency Amount: Call Currency and Call Currency Amount: Option Style: Option Type: Reference Currency: Settlement Currency: Strike Price: Settlement Date: Settlement: Settlement Rate Option: Expiration Date: Valuation Date: [BRL ] [USD ] [BRL ] [USD ] European [CURRENCY] Put / [CURRENCY] Call Brazilian Real (BRL) U.S. Dollars [DATE CERTAIN], subject to adjustment if the Scheduled Valuation Date is adjusted in accordance with the Following Business Day Convention or if Valuation Postponement applies, and in each such case, the Settlement Date shall be as soon as practicable, but in no event later than two Business Days after the date on which the Spot Rate is determined. Non-Deliverable BRL PTAX (BRL09) Valuation Date (as adjusted from time to time in accordance with its terms) [DATE CERTAIN], subject to adjustment in accordance with the Preceding Business Day Convention and in the event of an Unscheduled Holiday, subject to adjustment in accordance with the Following Business Day Convention. Notwithstanding the foregoing, if the parties have specified a Scheduled Valuation Date that falls on a date that, as at the Trade Date, is not a scheduled Business Day in New York, 13

14 no adjustment shall be made on account of the fact that such date is not a Business Day in New York. Expiration Time: Premium: Premium Payment Date: Disruption Events: Disruption Fallbacks: Other Terms: Relevant City for Business Day for Premium Payment Date: Calculation Agent: The time at which the Spot Rate is determined. Incorporated in their entirety from the current EMTA Recommended Template Terms for USD BRL Non- Deliverable FX Transactions as set forth at as of the Trade Date. Incorporated in their entirety from the current EMTA Recommended Template Terms for USD BRL Non- Deliverable FX Transactions as set forth at as of the Trade Date. Incorporated in their entirety from the current EMTA Recommended Template Terms for USD BRL Non- Deliverable FX Transactions as set forth at as of the Trade Date. New York [TO BE ADDED] 14