Appendix 8
Euronext.liffe
corporate action
policy
Corporate events policy
The following extracts from the Euronext.liffe Corporate Action Policy will
help readers to understand how the exchange approaches dealing with a cor-
porate action on an underlying and how it affects the derivatives listed.
It is important to understand the process and to make sure clients under-
stand process and the changes that might occur to their positions, indeed
reference is made to this in the exchange document the full version of which
is available at the Euronext.liffe website.
Policy
When shares become ex entitlement in respect of a Corporate Event, a hold-
ing in cum entitlement shares is, in effect, transformed into the ex entitle-
ment shares and the Relevant Entitlement. For example, in the case of a
rights issue, a holding in cum entitlement shares is transformed into ex enti-
tlement shares and nil paid rights in the appropriate proportions. In some
cases, e.g. share splits, subdivisions and consolidations, the ex entitlement
shares may cease to exist, leaving only the entitlement.
The methodology detailed in this Policy Document is based on the principle
that, when the shares underlying an Individual Equity Option Contract
(which has not been exercised) or a Universal Stock Futures Contracts (cash
settlement) and Universal Stock Futures Contracts (physical delivery)
become ex entitlement, contracts on such shares should be amended to
reflect in economic terms (as far as practicable) a holding equivalent to ex
entitlement shares and the Relevant Entitlement. This could be achieved in a
number of ways, e.g. by modifying the underlying security to become a
package consisting of ex entitlement shares and the value of the entitlement
or, as is usually the case, by altering the exercise prices of Individual Equity
Option Contracts, or the price used as the base to determine variation mar-
gin flow for Universal Stock Futures Contracts (cash settlement) and
Universal Stock Futures Contracts (physical delivery), (i.e. the previous day’s
daily settlement price) (hereafter the ‘reference price’), and/or the lot size of
the contracts. If contracts are amended in line with this principle, those with
open positions should not be unduly advantaged or disadvantaged economi-
cally by the Corporate Event.
The next section explains the methodology, which the Board shall, in most
situations, follow to determine what adjustments (if any) will be made to
Individual Equity Option Contracts, Universal Stock Futures Contracts (cash
settlement) and Universal Stock Futures Contracts (physical delivery) to
cater for special dividends, bonus/scrip issues, rights issues and demergers.
In cases where it is inappropriate or impossible to adjust contracts in line
with this methodology, or in cases where the Corporate Event is an event
other than a special dividend, bonus/scrip issue, rights issue or demerger,
the Exchange will have regard, as far as practicable, to the principle detailed
above in determining the appropriate adjustment.
Methodology: Adjustments
As noted, the Board retains the right to determine how any particular
Corporate Event will be reflected in contract adjustments. However, as a gen-
eral rule:
Demergers
In the case of demergers which create two substantial new companies the
‘package method’ will be used. The Board shall use the following guideline in this
context: a company shall be considered to be ‘substantial’ if the market capitali-
sation is likely to represent 20 per cent or more of the market capitalisation of
the original company. In the case of a multiple demerger, this guideline may not
be appropriate or readily applicable, and the Board will have regard to the partic-
ular nature of the demerger and its timing in determining contract adjustments.
Where a demerger applies to an Individual Equity Option Contract, the company
shares should be readily available for settlement in the UK.
In the case of Individual Equity Option Contracts, the ‘package method’ does
not entail alterations to either the lot size or the exercise price of a contract.
On exercise, Delivery Sellers are required to deliver the number of ex entitle-
ment shares they have contracted to sell together with the proportionate
number of entitlements.
In the case of Universal Stock Futures Contracts (cash settlement), the ‘pack-
age method’ does not entail alterations to either the lot size or the reference
price of a contract. Futures contracts will become contracts on the package of
the ex entitlement shares and the proportionate number of entitlements. The
Exchange will determine the EDSP as the value of this package.
250 Euronext.liffe corporate action policy
In the case of Universal Stock Futures Contracts (physical delivery), the ‘pack-
age method’ does not entail alterations to either the lot size or the reference
price of a contract. Futures contracts will become contracts on the package of
the ex entitlement shares and the proportionate number of entitlements. On
the last trading day, Delivery Sellers are required to deliver the number of ex
entitlement shares they have contracted to sell together with the proportionate
number of entitlements.
Bonus/Scrip Issues
In the case of bonus/scrip issues, the ‘ratio method’ will be used. This
method entails creating a ratio (and corresponding inverse ratio) of the num-
ber of post event shares in issue to the pre-event shares in issue.
In the case of Individual Equity Option Contracts, the ratio and inverse ratio
are used to alter the lot size (by multiplying the lot size by the ratio) and the
exercise price of each series (by multiplying the exercise price by the inverse
ratio). On exercise, Delivery Sellers are required to deliver the adjusted num-
ber of ex entitlement shares in return for a consideration of the adjusted
exercise price multiplied by the adjusted lot size.
In the case of Universal Stock Futures Contracts (cash settlement), the
ratio and inverse ratio are used to alter the lot size (by multiplying the lot
size by the ratio) and the reference price of each contract (by multiplying the
reference price by the inverse ratio).
In the case of Universal Stock Futures Contracts (physical delivery), the
ratio and inverse ratio are used to alter the lot size (by multiplying the lot
size by the ratio) and the reference price of each contract (by multiplying the
reference price by the inverse ratio). On the last trading day, Delivery Sellers
are required to deliver the number of ex entitlement shares they have con-
tracted to sell together with the proportionate number of entitlements.
Rights Issues, Cash and Non-Cash Special Dividends and Demergers Not
Creating Two Substantial Companies
In the case of rights issues, cash and non-cash special dividends and
demergers which do not create two substantial companies:
In the case of Individual Equity Option Contracts:
(i) the ratio method will be used if the application of this method would result
in an increase in the lot size of more than 20 shares where the standard con-
tract size is 1,000 shares, or more than 2 shares where the standard lot size is
100 shares. This method entails creating a ratio (and corresponding inverse
ratio) of the cum entitlement share price to the ex entitlement share price. The
lot size will be multiplied by the ratio and the exercise price will be multiplied
by the inverse ratio; otherwise (ii) the ‘reduction in strikes method’ will be used.
This method entails reducing the exercise price of each series by the value of
the entitlement. On exercise, Delivery Sellers will be required to deliver the
number of ex entitlement shares they have contracted to sell in return for a
Euronext.liffe.corporate action policy 251
consideration of the adjusted exercise price multiplied by the standard lot size.
It should be noted that, in the case of cash special dividends, exercise prices
will be reduced by the net amount of the special dividend.
In the case of Universal Stock Futures Contracts (cash settlement) and
Universal Stock Futures Contracts (physical delivery):
(i) the ratio method will be used if the application of this method would
result in an increase in the lot size of more than 20 shares where the
standard contract size is 1,000 shares, or more than 2 shares where the
standard lot size is 100 shares; otherwise
(ii) the ‘reduction method’ will be used. This method entails reducing the ref-
erence price of each contract by the value of the entitlement. It should be
noted that, in the case of cash special dividends, the reference price will
be reduced by the net amount of the special dividend.
Note: Complex capital adjustments could necessitate the use of a combina-
tion of the above methods.
Ordinary Dividends
It should be noted that the Board will not adjust contracts to cater for
ordinary dividends. The Board will use the following criteria for deciding
whether a dividend should be considered to be a special dividend:
(a) the declaration by a company of a dividend additional to those divi-
dends declared as part of the company’s normal results and dividend
reporting cycle; merely an adjustment to the timing of the declaration of
a company’s expected dividend would not be considered as a special
dividend circumstance; or
(b) the identification of an element of a cash dividend paid in line with a
company’s normal results and dividend reporting cycle as an element
that is unambiguously additional to the company’s normal payment.
Methodology: Prices used as the basis for adjustments
Certain methods of adjustment require a valuation of one or more of the fol-
lowing in order to determine the appropriate level of adjustment: the cum
entitlement share price; the ex entitlement share price; and the Relevant
Entitlement. The Board’s approach regarding the prices used as the basis for
adjustments is set out below.
The Board will seek to determine any adjustments after the determination of
the daily settlement price on the last day of trading of the relevant share cum
entitlement (such adjustments will not become effective until the start of
trading of the contract on the first day of trading of the share ex entitlement).
This will be feasible if no valuation is required, or if it is in practice possible to
carry out a valuation accurately at or around the time of the determination of
the daily settlement price on the last day of trading of the relevant share cum
entitlement.
252 Euronext.liffe corporate action policy
However, this is not always possible and it may be necessary to carry out the
valuation when the underlying stock market opens on the first day of trading
of such share ex entitlement. In the case of Individual Equity Option
Contracts, this will entail a suspension of trading, potentially for the entire
trading session, for the necessary contract adjustments to be made. In con-
trast, in the case of Universal Stock Futures Contracts (cash settlement) and
Universal Stock Futures Contracts (physical delivery), trading will continue
in the relevant futures contract on a ‘cum entitlement’ basis, with the nec-
essary contract adjustments being made after the close of business on the
first day the share is trading ex entitlement.
As stated above, the Board retains the right to determine how contracts
should best be adjusted. However, as a general rule in the case of rights
issues, cash and non-cash special dividends and demergers:
(a) if it is possible to carry out a reliable valuation of the relevant compo-
nents on the underlying stock market at or around the time of determi-
nation of daily settlement prices on the last day of trading of the relevant
share cum entitlement, adjustments will be determined after the close of
business on that day; and
(b) if it is not possible to carry out a reliable valuation on the underlying stock
market at or around the time of determination of daily settlement prices
on the last day of trading of the relevant share cum entitlement, adjust-
ments will be determined on the basis of opening prices of the relevant
components on the first day of trading of such shares ex entitlement. As
stated above, this will necessitate suspending trading in the relevant
Individual Equity Option Contract, potentially for the entire session.
It should be noted that in limited circumstances it may be appropriate or
necessary to use ‘when issued’ prices as the basis for adjustments. Such
prices will only be used if the Board, in its judgement, considers them to
reflect reliably the value of the relevant components.
It should also be noted that the timing of an announcement by a company of
a Corporate Event may result in the Exchange not being able to effect the
appropriate contract adjustments before the start of trading on the first day
the shares trade ex entitlement. In such circumstances, the Exchange will
suspend trading of the relevant Individual Equity Option Contract, poten-
tially for the entire trading session, until the necessary contract adjustments
have been made. In contrast, in order to provide market access for the great-
est period of time, Universal Stock Futures Contracts (cash settlement) and
Universal Stock Futures Contracts (physical delivery) will open for trading on
a ‘cum entitlement’ basis for that trading session, and necessary contract
adjustments will be made after the close of business of the first day on which
the share trades ex entitlement.
Furthermore, it should be noted that the timing of an announcement by a
company of a Corporate Event may occur during the trading session where,
Euronext.liffe.corporate action policy 253
..................Content has been hidden....................
You can't read the all page of ebook, please click here login for view all page.