148 Clearing and settlement of derivatives
made aware of the change so that they maintain the correct records
in their portfolios, particularly writers of options who have the deliv-
ery obligation.
Now look at the following notice published by the Euronext.liffe
market in respect of a Special Cash Dividend and Consolidation of
Share Capital:
Mitchells & Butlers plc
Special Cash Dividend and Consolidation of Share Capital
Mitchells & Butlers plc (‘M&B’) has announced its intention to pay
a special cash dividend of 68 pence per M&B Ordinary 5 pence
share.
In addition, existing holdings in M&B Ordinary 5 pence shares
will be consolidated on the basis of twelve new M&B Ordinary
71/12 pence shares for every seventeen M&B Ordinary 5 pence
shares currently held.
The proposed special dividend and consolidation of share capi-
tal are subject to shareholder approval at the M&B Extraordinary
General Meeting to be held on Monday 1 December 2003.
Dealings in the new M&B ex event shares are expected to
commence on Tuesday 2 December 2003.
Option Contract Adjustments
The Corporate Events Policy, www.liffe.com/trade/specs/
corpevents.pdf, detailed the methods for contract adjustments
to be employed by the Exchange to cater for Corporate Events.
Consistent with this policy, the Exchange has resolved that the
ratio approach be used in order to determine option contract
adjustments in M&B equity options.
The adjustment ratio will be based on the official closing price
of M&B Ordinary shares on Monday 1 December 2003 and will be
calculated as follows:
Exercise prices will be adjusted by being multiplied by this ratio.
The lot size will be adjusted by being multiplied by the inverse of
this ratio.
Ratio
(17 cum event share price) 1,156 pence
12 cum event share price
The M&B official closing share price on Monday 1 December 2003
was 235.5 pence and, as a consequence, the ratio used to deter-
mine contract adjustments is 1.0076.
With effect from Tuesday 2 December 2003 exercise prices will
be adjusted as follows:
Mitchells & Butlers plc Mitchells & Butlers plc
Exercise Prices: 1 December 2003 Exercise Prices: 2 December 2003
140 141
160 161
180 181
200 202
220 222
240 242
260 262
280 282
300 302
330 333
Exercise Notices submitted in respect of M&B equity options
on and from Tuesday 2 December 2003 will result in Delivery
Contracts for 992 M&B Ordinary 71/12 pence shares, ex event,
at the adjusted exercise prices.
New Series
Additional equity option series introduced for trading on M&B
Ordinary shares on and from Tuesday 2 December 2003 will be at
standard exercise prices and will have a standard contract size of
1,000 shares per lot.
Source: Euronext.liffe.
Impact of corporate actions 149
We can again see how the exchange has had to alter the contract
specifications and once again it is clear that the operations teams
within firms, the customer service teams and the client must be
aware of the changes.
The use of, access to and sharing of data in the organisation, for
instance between securities settlements teams and derivative settle-
ment teams, is fundamental to the safe handling of corporate action
events across the business. Likewise, good communication of data
between the two areas that is related to the delivery process of deriva-
tives, such as an option exercise or assignment resulting in a stock
bargain, is again vital for efficient and safe processing.
150 Clearing and settlement of derivatives
The kind of outcome associated with a corporate action is not
always identical and so it is important to ascertain exactly how an
exchange is dealing with each and every event that occurs.
We have already seen that Exchanges publish notices related to
corporate actions, trading calendars, etc. They also make other infor-
mation available; for instance, Euronext.liffe publish their Corporate
Actions Policy. This explains the Exchange’s policy on corporate
action events and a copy is included in Appendix 8.
It is, as we have said, important to know what contract specification
changes will take place and then to know when and for how long the
change applies. Euronext.liffe published a list of ‘Unusual Contract
Sizes’, an example of which is shown below:
Company LIFFE
TRS Expiry Strike Unusual
Code month prices contract
size
AstraZeneca plc AZA Dec 04 All 100
Jun 05 All 100
Centrica plc CTR Dec 04 119–298 1,006
Mar 05 119–298 1,006
Jun 05 199–298 1,006
International Power plc IPR Dec 04 80–178 1,123
Mar 05 80–178 1,123
London Stock Exchange plc LSE Dec 04 259–458 1,004
Mar 05 299–458 1,004
Prudential plc PRU Nov 04 346–577 1,040
Dec 04 231–625 1,040
Jan 05 375–529 1,040
Mar 05 346–577 1,040
Jun 05 250–625 1,040
Sep 05 375–577 1,040
Dec 05 288–625 1,040
Jun 06 346–625 1,040
Dec 06 346–577 1,040
Sainsbury (J) plc – Return SAN Dec 04 159–387 1,008
of Capital & Share Mar 05 198–387 1,008
Consolidation
As at October 25th 2004
Source: Euronext.liffe.
Impact of corporate actions 151
The contract changes are made to series only for the duration of
the series; for instance, Euronext.liffe’s standard contract size is
1000 shares and following a corporate action, new series and expiry
months are introduced with the standard contract size.
If any of these option series were still showing as 1000 shares in
the systems, the premium amounts calculated on trades will be wrong
and so too will the bargain be booked in the underlying, in the event
of an exercise or assignment.
For corporate actions like scrip issues, rights issues, etc. the con-
tract specification is altered; however, for other types of actions there
may be a change not to the strike price, number of shares or amount
of underlying but to the underlying itself.
An example of this would be a merger or takeover. Again the easiest
way to illustrate this is to look at an example of what an exchange
does and below is such an example.
RECOMMENDED OFFER BY WM MORRISON
SUPERMARKETS
Introduction
Wm Morrison Supermarkets plc (‘Morrisons’) and Safeway plc
have announced the terms of a recommended offer by Morrisons
for Safeway plc (the ‘Offer’). The Offer will be effected by means of
a Scheme of Arrangement. This General Notice describes the
adjustments to be made in respect of Safeway plc Equity Option
Contracts subject to the Offer becoming effective.
Details of the Offer
Under the terms of the Offer, shareholders in Safeway plc will have
their holdings replaced on the basis of one new Morrisons Ordinary
10 pence share and 60 pence in cash for each Safeway plc Ordinary
25 pence share held. The Offer is expected to become effective on
Monday 8 March 2004. The Offer is conditional on the sanction of
the Court being obtained at hearings on 1 March and 4 March 2004.
The suspension of listing and dealings in Safeway plc Ordinary 25
pence shares is expected to occur at the close of business on Friday
5 March 2004. Dealings in the new Morrisons Ordinary 10 pence
shares are expected to commence on Monday 8 March 2004.
Further details are available in the formal Offer document.
Contract Adjustments The Exchange’s Corporate Events Policy,
issued under cover of General Notice No. 2125 on 25 November
2002, detailed the methods for contract adjustments to be
employed by the Exchange to cater for Corporate Events. Consistent
with this policy, the Exchange has resolved that the package
approach be used in order to determine contract adjustments in
Safeway plc Equity Option Contracts.
Should the Offer become effective, on and from Monday 8 March
2004 Safeway plc Equity Option Contracts will become options on a
package of 1,000 Morrisons Ordinary 10 pence shares and £600 in
cash per lot. No changes will be made to exercise prices or lot size
(contract multiplier). The TRS code will remain unchanged as ‘AYL’
and the Contracts will be referred to by LIFFE as ‘Safeway plc ex
event’ Equity Options until they are delisted in September 2004.
Prior to the Offer becoming effective, contracts in respect of
equity shares created under Exchange Contract No. 211 (Equity
Shares Contract (Denominated in Sterling)) as part of a Stock
Contingent Trade will continue to reflect the delivery of Safeway plc
Ordinary 10 pence shares. Should the Offer become effective, on
and from Monday 8 March 2004 Safeway plc Ordinary 10 pence
shares will cease to be available under Exchange Contract No. 211
and Stock Contingent Trades will thus no longer be made available
in respect of Safeway plc Equity Options.
In respect of Safeway plc Equity Options, exercise notices
submitted:
(a) by 17.20 hours on Friday 5 March 2004 will be satisfied by
the delivery of 1,000 Safeway plc Ordinary 25 pence shares
per lot;
(b) on and from Monday 8 March 2004 will be satisfied by the
delivery of a package of 1,000 Morrisons Ordinary 10 pence
shares and £600 in cash per lot as described in paragraph
3.6, for a consideration of 1,000 multiplied by the relevant
exercise price. The Exchange will publish prices at which
each element of the package shall be entered into CREST.
In respect of Safeway plc Equity Options, members should note
that:
(a) Delivery Contracts arising as a result of exercise of Safeway plc
Equity Options prior to Friday 5 March 2004 should continue
to result in the delivery through CREST of 1,000 Safeway
Ordinary 25 pence shares per lot, in exchange for the settle-
ment amount; and
(b) Delivery Contracts arising as a result of exercise of Safeway
plc Equity Options on and from Monday 8 March 2004
should result in the transfer through CREST of a package of
152 Clearing and settlement of derivatives
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