FpML Issues Tracker

1308: Autocallable Equity Derivatives

June 21, 2023

feedback

Minor

N/A

Equity Derivatives

XAPWG

JasonPolis

None

Summary

Mei Chen of Barclays asks if there is wider interest in standardising Autocallable and Autocallable OTC equity exotic as a product on their own. ISDA has drafted standard confirmation templates, but has received limited feedback so far.

For autocallable (OTC) , though it is not compulsory to have a put in it,  put is the core of the product to enhance the yield. Investors typically will include a put in the deal so majority of the deals have the put.

There are some exceptions - should it be a fully principal protected autocall, then there is no Put involved. The deal will be structured based on investor’s preference.

It is common to see both Knock-Out and Knock-In options in the autocallable OTC deals, as well as periodic floating amount payments from buyer  .  So it is a bit of combo of swap +  barrier option when it comes to cashflows.

The product seem to gain popularity in times of low interest rate, with some standout markets.

 

Notes:

  • JasonPolis

    07/05/23 8:14 am

    Below is part of the first draft of the ISDA Equity Autocallable template.

    This draft was not finalised – it only captures the most basic economic features of an Autocallable and it is not utilised by the industry.

    If we purse this initiative again, the final document is likely to look a lot different than the attached, yet the economic features included herein should be similar.

    We would leverage the terminology already in place in FpML.

    Term Election Required?
    Buyer: [person] Required
    Underliers [shares and/or indices] Required
    Equity Notional Amount [amount, in currency] Required
    Trade Date [date] Required
    Valuation Dates [dates] Required
    Specified Coupon Amount[1] [Valuation Date 1:  amount, in currency

    Valuation Date 2:  amount, in currency

    …]

    		 Required
    Option Settlement Type [Cash]

    [Physical]

    		 Required
    Financing Effective Date [date] Required
    Floating Cash Settlement Dates [dates] Required
    Floating Rate Option [benchmark rate from 2006 Definitions] Required
    Option KO Percent [percentage] Required
    Memory Payout [Applicable / Not Applicable] Required
    Number Of Units [number] Required
    Premium Amount [amount, in currency] Required
    Premium Payment Date [date] Required
    Securities Exchange [Underlier 1:  name of exchange

    Underlier 2:  name of exchange

    …]

    		 Required
    Derivatives Exchange [Underlier 1:  name of exchange

    Underlier 2:  name of exchange

    …]

    		 Optional
    Settlement Currency [currency] Required
    Specified Initial Price [Underlier 1:  price

    Underlier 2:  price

    …]

    		 Required
    Spread [number of basis points] Required
    Coupon KO Percent [percentage] Required
    Underlier Strike Price [Underlier 1:  price

    Underlier 2:  price

    …]

    		 Required
    Option KO Testing Period [Any Day]

    [Scheduled Final Valuation Date]

    		 Required

     

  • JasonPolis

    08/17/23 3:43 pm

    Discussions are taking place with firms of the ISDA Equity Steering Committee aimed at understanding what the equity derivatives documentation framework should look like in the future. These discussions will determine how ISDA confirmations for new equity derivatives products will be produced. Members’ feedback indicated otc equity autocallable transactions as their #1 priority so the documentation for such product is expected to be addressed first.

  • Mei Chen

    12/18/23 4:45 am

    Post further reviews, Barclays now no longer look to create a product specific schema for autocallable in 2024.

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