Equity derivatives are used by a wide range of buy-side firms. For example, public companies use equity derivatives on their own shares for treasury management purposes (for example, share repurchase transactions and other stock buy-back programs). Also, investment managers and their clients use equity derivatives in pursuit of investment objectives and related strategies.
Given the unprecedented levels of market volatility, counterparties to equity derivatives should consider analyzing their trade confirmations to determine whether market events could result in:
- The termination of a particular transaction prior to its scheduled termination date; or
- An additional payment by one of the counterparties.
In addition, it is a good idea to make sure that any payment or pricing provisions that reference a particular rate (like the Fed Funds Effective Rate) will function as intended in the current low interest rate environment.