9
Impact of corporate
actions
Introduction
Many derivatives are affected by corporate actions that occur on the
underlying. This is particularly the case with equity, where there may
be a change to the capital structure of a firm and bond derivatives
where the deliverable list of bonds may change because of some event
on a bond in that basket. However, there are events that occur with
derivative products that we might refer to as being similar to corporate
actions. These might be maturity and tender, exercise/assignment
actions and changes to the number of shares or the amount of under-
lying decided by the exchange in response to a significant change
in the price of the underlying. For example, if a share price rises to
say £30 per share the exchange might change the contract size from
1000 shares to 100 shares. If the price then fell to £3 the exchange
may change the contract size back to 1000 shares.
The key thing is that a firm or investor risks financial loss if they
fail to deal with changes to contract specifications, which could occur
when there is a corporate action on an underlying, or fail to deal with
an action or event related to the derivative itself.
It is therefore crucially important that as part of the derivatives
clearing and settlement process there is good-quality data manage-
ment including static data covering:
• Expiry dates
• Delivery periods
• First and Last notice days
• Deliverable baskets
• Last trading dates
• Exercise triggers
• ITM/ATM/OTM data
• Corporate actions on underlyings.
Exchanges publish data on the contracts listed by them including
maturity and expiry dates, notice days and last trading days (see
Appendix: IPE Expiry Dates). The deliverable baskets and various
delivery options are also provided by the exchange. These will include
whether the contract is physical, cash, EFP or EFS and what delivery
processes there may be.
When it comes to a corporate action on an underlying, the exchange
will also publish what action it proposes to take. This may be a change
to the contract specification and therefore has great importance.
To illustrate this we can loom at the following notice related to a cor-
porate action issued by the CBOE and also one issued by Euronext.liffe
144 Clearing and settlement of derivatives
Research Circular #RS04-559
October 26, 2004
Devon Energy Corporation (DVN/YQ/VVH) 2-for-1 Stock Split
Ex-Distribution Date: November 16, 2004
Devon Energy Corporation (‘DVN/YQ/VVH’) has announced a
2-;for-;1 common stock split, with a payable date of November 15,
2004, to shareholders of record October 29, 2004. The ex-date for
the stock split is Tuesday, November 16, 2004.
Contract Adjustment
Pursuant to OCC rules (Article VI, Section 11), all outstanding
DVN/YQ/VVH option series will be adjusted to reflect this 2-;for-1
stock split on Tuesday, November 16, 2004, at 8:30 A.M. Chicago
time. The OCC will issue one additional contract for each open
contract on the ex-date. Also on the ex-date, each DVN/YQ/VVH
series will have an adjusted exercise price equal to one-half of the
exercise price rounded to the nearest 1/8 of a point for each DVN/
YQ/VVH series existing on the business day immediately prior to
the ex-date. The option symbols will remain the same. Adjusted
exercise prices are shown below. [Any FLEX series that may exist
will be adjusted in a similar manner to the standardized option.]
The option adjustment will appear in the Daily Position Report of
the clearing member firms on the ex-date. After 8:30 A.M. Tuesday,
November 16, 2004, all trades, corrections, and exercises must be
submitted to the CBOE and OCC on an adjusted basis.
Adjusted Exercise Prices
On Tuesday, November 16, 2004, the ex-distribution date, trading
in DVN/YQ/VVH series will be on an adjusted basis. At 8:30 A.M.,
Chicago time, an opening rotation will be effected with the follow-
ing adjustments:
EXISTING SERIES ADJUSTED SERIES*
(100 Shares) (100 Shares)
MONTH/ STRIKE CALLS PUTS MONTH/ STRIKE CALLS PUTS
Nov 60 DVNKL DVNWL Nov 30 DVNKF DVNWF
Nov 65 DVNKM DVNWM Nov 32 1/2 DVNKZ DVNWZ
Nov 70 DVNKN DVNWN Nov 35 DVNKG DVNWG
Nov 75 DVNKO DVNWO Nov 37 1/2 DVNKU DVNWU
Nov 80 DVNKP DVNWP Nov 40 DVNKH DVNWH
Dec 60 DVNLL DVNXL Dec 30 DVNLF DVNXF
Dec 65 DVNLM DVNXM Dec 32 1/2 DVNLZ DVNXZ
Dec 70 DVNLN DVNXN Dec 35 DVNLG DVNXG
Dec 75 DVNLO DVNXO Dec 37 1/2 DVNLU DVNXU
Dec 80 DVNLP DVNXP Dec 40 DVNLH DVNXH
Dec 85 DVNLQ DVNXQ Dec 42 1/2 DVNLV DVNXV
Jan 40 DVNAH DVNMH Jan 20 DVNAD DVNMD
Jan 45 DVNAI DVNMI Jan 22 1/2 DVNAX DVNMX
Jan 50 DVNAJ DVNMJ Jan 25 DVNAE DVNME
Jan 55 DVNAK DVNMK Jan 27 1/2 DVNAY DVNMY
Jan 60 DVNAL DVNML Jan 30 DVNAF DVNMF
Jan 65 DVNAM DVNMM Jan 32 1/2 DVNAZ DVNMZ
Jan 70 DVNAN DVNMN Jan 35 DVNAG DVNMG
Jan 75 DVNAO DVNMO Jan 37 1/2 DVNAU DVNMU
Jan 80 DVNAP DVNMP Jan 40 DVNAH DVNMH
Jan 85 DVNAQ DVNMQ Jan 42 1/2 DVNAV DVNMV
Jan 90 DVNAR DVNMR Jan 45 DVNAI DVNMI
Jan 95 DVNAS DVNMS Jan 47 1/2 DVNAW DVNMW
Apr 55 DVNDK DVNPK Apr 27 1/2 DVNDY DVNPY
Apr 60 DVNDL DVNPL Apr 30 DVNDF DVNPF
Apr 65 DVNDM DVNPM Apr 32 1/2 DVNDZ DVNPZ
Apr 70 DVNDN DVNPN Apr 35 DVNDG DVNPG
Apr 75 DVNDO DVNPO Apr 37 1/2 DVNDU DVNPU
Apr 80 DVNDP DVNPP Apr 40 DVNDH DVNPH
2006
LEAPS
Jan 40 YQAH YQMH Jan 20 YQAD YQMD
Jan 45 YQAI YQMI Jan 22 1/2 YQAX YQMX
Impact of corporate actions 145
Continued
EXISTING SERIES ADJUSTED SERIES*
(100 Shares) (100 Shares)
Jan 50 YQAJ YQMJ Jan 25 YQAE YQME
Jan 55 YQAK YQMK Jan 27 1/2 YQAY YQMY
Jan 60 YQAL YQML Jan 30 YQAF YQMF
Jan 65 YQAM YQMM Jan 32 1/2 YQAZ YQMZ
Jan 70 YQAN YQMN Jan 35 YQAG YQMG
Jan 75 YQAO YQMO Jan 37 1/2 YQAU YQMU
Jan 80 YQAP YQMP Jan 40 YQAH YQMH
2007
LEAPS
Jan 40 VVHAH VVHMH Jan 20 VVHAD VVHMD
Jan 45 VVHAI VVHMI Jan 22 1/2 VVHAX VVHMX
Jan 50 VVHAJ VVHMJ Jan 25 VVHAE VVHME
Jan 55 VVHAK VVHMK Jan 27 1/2 VVHAY VVHMY
Jan 60 VVHAL VVHML Jan 30 VVHAF VVHMF
Jan 65 VVHAM VVHMM Jan 32 1/2 VVHAZ VVHMZ
Jan 70 VVHAN VVHMN Jan 35 VVHAG VVHMG
Jan 75 VVHAO VVHMO Jan 37 1/2 VVHAU VVHMU
Jan 80 VVHAP VVHMP Jan 40 VVHAH VVHMH
Any additional DVN/YQ/VVH series that are added prior to the
ex-date will also be adjusted in the manner described above.
The following series have non-standard strikes and price symbols
with respect to the OPRA exercise price symbol format:
Y (27–1/2) Z (32–1/2) U (37–1/2) V (42–1/2) W (47–1/2)
IMPORTANT Order Entry After Adjustment
Please note that at the time of the adjustment, the strike prices of
all DVN/YQ/VVH options will be reduced by one-half, and OCC
will issue one additional contract for each open contract on the
ex-date. At 8:30 A.M., Chicago time, on Tuesday, November 16,
2004, all outstanding DVN 40 options will become 20 options,
and DVN 80 options will become 40 options. Any DVN 40 posi-
tions opened prior to the ex-date that are closed out on or after
the ex-date must be closed out as 20 options. Negligence in this
matter could lead customers to establish new positions in the 40
options rather than closing out then-existing positions in the 20
options.
Strikes that will be affected by the adjustment in the manner
described above are included in the table below. Members should
146 Clearing and settlement of derivatives
be aware of the potential for confusion respecting any of the related
pairs of strikes shown below, and should be cautious in this regard.
Existing Adjusted & Existing Adjusted
40 20 80 40
45 22 1/2 90 45
GTC Order Conversion
On Monday, November 15, 2004, immediately after the CBOE
close, the system will convert or cancel all resting orders in the
DVN/YQ/VVH order books. If your firm has requested, all EBook
orders (phone, wire, and electronic) and all ORS orders residing
outside the book (booth or crowd routed) will be converted reflect-
ing the adjustments. If your firm has requested, all EBook orders
and ORS orders residing outside of the book will be canceled. If
your firm receives EBook CXL drops, the CXL confirms will print
at your booth at 3:15 p.m. ORS CXLs will also be transmitted
electronically to your branches.
Immediately after the close, the book staff will return a final
written report listing the orders that are converted or canceled to
all firms. If converted, this list will also show how the new orders
will be adjusted. This report will be available on request anytime
during the day prior to the night of the adjustment.
Position and Exercise Limits
The CBOE Department of Market Regulation has determined that:
‘The position and exercise limits following this stock split will be
any combination of DVN, YQ and VVH on the same side of the
market not to exceed 150,000 contracts (15,000,000 shares)
through January 20, 2007. Following the January 2007 expira-
tion, the position and exercise limits will revert to the standard
limit of 75,000 contracts (7,500,000 shares) of DVN.’
Source: CBOE.
Impact of corporate actions 147
We can see from the above how important it is to be aware of the
changes that the exchange has made as a result of this corporate
action related to a stock split and to ensure that the internal systems
and records are changed accordingly.
Any incorrect data held in systems will cause untold problems in
performing calculations related to delivery, etc. Clients must also be
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