NZX Derivatives Market. Options on Equity Securities Corporate Actions Policy

Transcription

1 NZX Derivatives Market Options on Equity Securities Corporate Actions Policy Issue Date: March 2015

2 1. Introduction 1.1 This document (the Policy ) details the policy of NZX Limited ( NZX ) in relation to corporate actions in an underlying equity security that may affect options over those securities quoted on the Derivatives Market. 1.2 This Policy does not replace, and is to be read subject to, the NZX Derivatives Market Rules, the New Zealand Clearing Limited ( NZC ) Clearing and Settlement Rules and Clearing and Settlement Procedures. If there is any inconsistency between this Policy and any of those Rules or Procedures, the Rules and Procedures prevail. 2. General Policy and Procedure 2.1 If an Issuer of an equity security over which an option is quoted announces a corporate action that affects its capital structure, NZX will determine whether the option contract should be adjusted to reflect the corporate action. 2.2 The intention of an adjustment is to ensure that the value of open positions in options is, as far as practicable, the same as it would have been had the relevant corporate event not occurred. Such adjustments aim to avoid the option taker or the writer being unfairly affected by the corporate action. 2.3 Adjustments to the terms of an option contract are intended to preserve the option s notional value (contract size * price per underlying equity security) and the total value of exercising the option (being the contract size * exercise price) as far as is practicable. In other words, the total contract exercise value of the option should be maintained no matter what adjustment has been made. 2.4 The adjustment will be applied to existing option series, and all open positions in each option contract (i.e. calls, puts, or different maturities will be adjusted in the same manner). NZX will list any new option series on the standard terms specified in the contract specifications without any adjustment. 2.5 NZX discretion NZX will follow this Policy except where doing so is impractical or inappropriate. Where an adjustment in accordance with this Policy is impractical or inappropriate, NZX has absolute discretion to determine how contracts will be adjusted (if at all) to meet the intention set out in section 2.2 above Corporate actions that may require a non-standard adjustment include mergers, takeovers, special dividends, and buy backs. 2.6 Notification of corporate actions and adjustments Once NZX is advised of a corporate action that may affect an option, it will determine the relevant adjustment in accordance with this Policy NZX will then notify NZX Market Participants and Clearing Participants (together, Participants ) of any adjustment to an option contract as a result of a corporate action by way of a Corporate Actions Notice. Notifications will be by market announcement, prior to commencement of trading in the adjusted option. The Corporate Actions Notice will provide detail regarding the adjustment, the effective date of the adjustment, whether a trading halt will be required, and specify the timeframe for further Corporate Actions Notices (if any). 2 of 7

3 If a day of trading in the underlying security is required before the adjustment can be determined, NZX will advise Participants of the adjustment factor to be applied, and details of any trading halt to be implemented, by way of a Corporate Actions Notice. 2.7 Types of adjustments NZX may make an adjustment to any of the terms or specifications of the relevant option, including but not limited to, one or more of the following: Contract size where an adjustment to the contract size will be made, it will usually be accompanied by a corresponding inverse adjustment to the option exercise price Exercise price where the price of the underlying equity security will be significantly affected by the corporate action, the exercise price may be adjusted Underlying instruments if a corporate action results in the exchange or conversion of an existing underlying equity security for a new security (including by way of a name or ticker code change), the contract may be adjusted to refer to the new security Reinvestment where a corporate action involves the return of cash or the distribution of other securities ( Disbursed Securities ), a reinvestment method whereby one underlying is maintained and the cash and/or Disbursed Securities are reinvested into the original underlying equity security will apply A basket of options if a corporate action may give rise to holders of the original underlying equity security holding a number of different securities, NZX may decide to convert one option to a basket of options with the underlying as a portfolio comprising of the original underlying equity security plus the Disbursed Securities The number of contracts of each open position where an adjustment to the contract size and/or exercise price is not adequate to ensure the value of open options positions is the same as it would have been had the relevant corporate event not occurred, NZX may adjust the number of contracts for affected Participants. 2.8 Corporate Actions not subject to an adjustment Dividends paid by an Issuer regularly in accordance with its dividend policy are not subject to an option adjustment. Market participants are expected to take a dividend policy into account when pricing an option. Options will be adjusted to take account of special or extraordinary dividends in accordance with this Policy Tax, trading impact and transaction costs are excluded in the determination of an adjustment NZX will not apply an adjustment in relation to a corporate action that does not affect all of the securities in the class in a similar way. Corporate actions that may not result in any adjustment to options include: Share purchase plans; Voluntary buy backs; Voluntary conversion; Non-pro rata entitlement issues; and Placements of shares. 3 of 7

4 2.9 Termination NZX may terminate an option if it considers no adjustment can be made to the terms or specifications of the option. For example, NZX may consider termination of the option upon events resulting in the delisting of the underlying equity security such as a liquidation, merger, or takeover of the Issuer, or where the underlying equity security converts to a security over which there is no option In circumstances where termination of the option is deemed by NZX to be necessary following the corporate event, all existing options will be terminated by a cash settlement at the option s intrinsic value on the last Trading Day as determined by NZX Rounding An adjusted contract size will be rounded to the nearest integer and will be rounded up if the number is exactly halfway between the two integers An adjusted exercise price will be rounded to the nearest two decimal places and will be rounded up if it is exactly halfway between two exercise prices Note that the above are general principles only, and the rounding treatment applied in a particular adjustment will be specified in the relevant Corporate Action Notice Restrictions on exercise In addition to adjustments to any of the terms or specifications of the option contracts, NZX may impose a restriction on when an option may be exercised, with reference to the effective date of the corporate action NZX may also delay settlement resulting from the exercise of an option if the corporate action takes effect during or after the T+3 settlement period Trading halts NZX may impose a trading halt on an affected option contract in the context of an adjustment arising from a corporate action. 3. Specific Corporate Action Types The following are examples of specific corporate action adjustments that may be made. NZX has absolute discretion to determine how contracts will be adjusted (if at all). 3.1 Consolidation Adjustments in relation to a consolidation of the underlying equity security will involve changes to the option contract size and the exercise price. New Contract Size = Old Contract Size * Share Consolidation Ratio 3.2 Share split Adjustments in relation to a share split will involve changes to the contract size and the exercise price. New Contract Size = Old Contract Size * Share Split Ratio 4 of 7

5 3.3 Bonus issue of the same underlying equity security Adjustments related to the bonus share will involve changes to the contract size and the exercise price. New Contract Size = Old Contract Size * (1+ Share Bonus Ratio) 3.4 Bonus issue of a different security Where the corporate action involves the distribution of a Disbursed Security from the underlying equity security, the underlying equity security of the option may remain unchanged while the contract size may be adjusted based on a notional reinvestment of the Disbursed Securities into more of the original underlying equity securities. The contract size and exercise price will be adjusted based on the rule of maintaining the equivalent option exercise value. The price used to determine the conversion ratio of Distributed Securities into original underlying equity securities will be the volume weighted average on market trading price ( VWAP 1 ) of both the Disbursed Security and the underlying equity security on the Ex Date. New Contract Size = Old Contract Size + Implied market value of the Disbursed Security per original underlying equity security * Old Contract Size / Ex Date VWAP of original equity security Implied market value of the Disbursed Security per original underlying equity security = disbursement ratio * VWAP of the Disbursed Security NZX will publish a Corporate Actions Notice after the corporate action has been announced to the market. However, Participants will be notified of the contract specifications of the adjusted option series by way of a further notice after the close of trading on the Ex Date for the corporate event. Note that the option adjustment in this case becomes effective on the commencement of trading on the Ex Date of the bonus issue of the underlying instrument but the extent of the adjustment will only be published by NZX after close of trading on the Ex Date. A demerger or spin off may be treated in the same way as a bonus issue with different security, if NZX considers practicable. 3.5 Cash return of capital to shareholders Where the corporate event involves the return of cash to shareholders, for example, by a special dividend, the contract size and the exercise price will be adjusted to maintain the total value of the options. The contract size will be adjusted to ensure that the notional value of the option contract remains the same. The exercise price will be adjusted to ensure that the total value of exercising the option remains the same. 1 VWAP is a measure of the average price a stock and is calculated as the ratio of the total trading value to total trading volume over a particular time horizon. 5 of 7

6 The calculation is generally based on the VWAP of the underlying equity security on the last trading day before the Ex Date. New Contract Size = Old Size + value of return for each Old Contract / (Cum VWAP - cash return per security) New Exercise Price = Old Exercise Price * (Old Contract Size / New Contract Size) NZX will publish a Corporate Actions Notice after the corporate action is announced. Participants will be notified of the contract specifications of the adjusted option series by way of a further notice after the close of trading on the last trading day before the Ex Date. 3.6 Capital reduction with cash Where the corporate action involves return of cash and the cancellation of shares, the contract size and exercise price of the option will be adjusted to reflect the reduction of capital as well as the cash return. The adjustment will be based on the VWAP of the underlying equity security on the last trading day before the Ex Date for the capital return. New Contract Size = (Old contract size - cancelled number of shares per contract) + value of return per old contract / Ex price per share where Ex price per share = (Cum VWAP - Cash return per original share)/(1- cancellation ratio) New Exercise Price = Old Exercise * (Old Contract Size / New Contract Size) NZX will publish a Corporate Actions Notice after the corporate action is announced. Participants will be notified of the contract specifications of the adjusted option series by way of a further notice after the close of trading on the last trading day before the Ex Date. A compulsory off market buy back will be treated in the same way as a capital reduction with cash, if NZX considers practicable. 3.7 Rights issue A rights issue is where every shareholder on the relevant record date is given the right to subscribe for new shares. Where the offer is pro rata, the option contract size and exercise price will be adjusted by assuming that the value of the rights will be reinvested into the underlying equity security. The adjustment will be based on the VWAP of the underlying equity security at the last trading day before the Ex Date. New Contract Size = Old Contract Size + value of the right per share * Old Contract size / Ex price per share where Value of the right per share = (Cum VWAP price - Rights Subscription price) / (1 + number of old shares held to get the right to buy one new share) Ex price per share = Cum VWAP price Value of the right per share New Exercise Price = Old Exercise * (Old Contract Size / New Contract Size) In the above examples, NZX will publish a Corporate Actions Notice after the corporate action is announced. Participants will be notified of the contract specifications of the adjusted option series by way of a further notice after the close of trading on the last trading day before the Ex Date. 6 of 7

7 3.8 Change in name, ticker code or ISIN Where there are changes to the name, ticker code or ISIN of the underlying equity security the subject of the option, the underlying equity security will be replaced by the new security. 7 of 7