Equity derivatives—USA—Q&A guide

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

  • Equity derivatives—USA—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—USA—Q&A guide

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

Authors: Latham & Watkins LLP—Witold Balaban; Rafal Gawlowski; Catherine Lee; Reza Mojtabaee-Zamani; Yvette D. Valdez

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. accelerated share repurchase (ASR) products allow an issuer to accelerate the purchase of its shares by entering into a forward on its own stock with a dealer in connection with which the dealer borrows shares in the stock lending market, shorts them back to the issuer and covers its short position over a calculation period by buying shares in the open market; 

  2. bifurcated call spread and unitary capped call products allow an issuer of convertible debt to raise the effective strike price of the convertible debt’s embedded call option;

  3. bond hedge products allow an issuer of convertible debt to issue synthetic debt through the combination of the bond hedge and convertible debt;

  4. a variety of share repurchase products entered into at the time of pricing a convertible debt issuance, including all the above-listed products, allow the underwriter to facilitate hedging by convertible debt investors

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