Equity derivatives—United Kingdom—Q&A guide

The following Financial Services practice note provides comprehensive and up to date legal information covering:

  • Equity derivatives—United Kingdom—Q&A guide
  • 1. Other than transactions between dealers, what are the most typical types of over-the-counter (OTC) equity derivatives transactions and what are the common uses of these transactions?
  • 2. May market participants borrow shares and sell them short in the local market? If so, what rules govern short selling?
  • 3. Describe the primary laws and regulations surrounding OTC equity derivatives transactions between dealers. What regulatory authorities are primarily responsible for administering those rules?
  • 4. In addition to dealers, what types of entities may enter into OTC equity derivatives transactions?
  • 5. Describe the primary laws and regulations surrounding OTC equity derivatives transactions between a dealer and an eligible counterparty that is not the issuer of the underlying shares or an affiliate of the issuer? What regulatory authorities are primarily responsible for administering those rules?
  • 6. Do securities registration issues arise if the issuer of the underlying shares or an affiliate of the issuer sells the issuer’s shares via an OTC equity derivative?
  • 7. May issuers repurchase their shares directly or via a derivative?
  • 8. What types of risks do dealers face in the event of a bankruptcy or insolvency of the counterparty? Do any special bankruptcy or insolvency rules apply if the counterparty is the issuer or an affiliate of the issuer?
  • 9. What types of reporting obligations does an issuer or a shareholder face when entering into an OTC equity derivatives transaction on the issuer’s shares?
  • More...

Equity derivatives—United Kingdom—Q&A guide

This Practice Note contains a jurisdiction-specific Q&A guide to equity derivatives in United Kingdom published as part of the Lexology Getting the Deal Through series by Law Business Research (published: July 2020).

Authors: Latham & Watkins LLP—Shatha H. Ali; Jeremy Green; Dean Naumowicz; Sanjev D. Warna-kula-suriya

1. Other than transactions between dealers, what are the most typical types of over-the-counter (OTC) equity derivatives transactions and what are the common uses of these transactions?

Typical issuer equity derivatives products include the following:

  1. options and forwards pursuant to which an issuer repurchases its shares, by way of capital reduction or in order to hedge an employee share option programme; 

  2. call options purchased by the issuer of convertible debt, to create equity neutral or non-dilutive convertible debt; and

  3. convertible bonds allow an issuer to raise capital in the most effective way from the tax, accounting, cash flow, corporate or regulatory perspective.

Typical equity derivatives products that allow a shareholder to acquire a substantial position in a publicly traded equity or to monetise or hedge an existing equity position include the following:

  1. margin loans allow a borrower to finance an acquisition of shares or to monetise an existing shareholding;

  2. calls, puts, collars, funded collars and variable prepaid forwards allow a holder to both finance and hedge anacquisition of shares or to hedge and monetise an existing shareholding;

  3. put and call pairs, cash-settled or physically settled forwards and swaps allow a holder to acquire synthetic long exposure to the underlying shares, which may be transformed into physical ownership of the shares at settlement;

  4. reverse ASRs and other structured forwards allow shareholders to accelerate dispositions of shares in a manner that minimises its impact on the market price;

  5. sales of shares combined with a purchase of a capped call from the dealer allow a shareholder to dispose of its shareholding at a smaller discount to the market price and retain

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