3.2.2.20 Confirmation with commentary

Following is a sample confirmation for a swaption, with commentary included in footnotes to the confirmation. A sample confirmation without commentary can be found in 3.2.2.30 "Confirmation without commentary". 

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Sample Confirmation for Option to enter into an Underlying Swap Transaction with commentary

 

 

 [Letterhead of Party A]

 

 [Date]

 

 

 Reference Number [ ]

 

[Name and Address of Party B]

 

 

Dear

 

Swaption

 

The purpose of this letter is to confirm the terms and conditions of the Option entered into between us on the Trade Date specified below (the "Swaption"). This letter constitutes a "Confirmation" as referred to in the Master Agreement specified below. 

 

The definitions and provisions contained in the 2006 ISDA Definitions (as published by the International Swap Dealers Association, Inc.) are incorporated into this Confirmation. In the event of any inconsistency between those definitions and provisions and this Confirmation, this Confirmation will govern.[1]

 

1. This Confirmation supplements, forms part of, and is subject to, the Master Agreement dated as of [date][2], as amended and supplemented from time to time (the "Agreement"), between you and us. All provisions contained in the Agreement govern this Confirmation except as expressly modified below. The Swaption is both an "Option" and a "Transaction" for the purpose of the Agreement.

2. The terms of the Swaption are as follows:-

Trade Date:[3] 

Seller:[4] 

Buyer:[5] 

[Premium:[6]] [ ] [payable in [ ] [equal] instalments on each Premium Payment Date] [as follows: ]

[Premium Payment Date[s]:[7]] [Specify date or dates]

[Physical Settlement:[8] Applicable]

[Cash Settlement

Provisions:[9]

[Cash Settlement: [10] Applicable]

[Cash Settlement

Payment Date:[11]]  [The first Business Day after the Notice of Exercise is delivered]

[Cash Settlement Amount:[12]]

Option Style:[13] [American/European] Option

Expiration Date:[14] 

Expiration Time:[15]  10.00 am [Sydney] time

[Business Days[16]]: 

[Business Day Convention:[17] [Following/Modified Following/Preceding]]

Calculation Agent: 

Cash Settlement Reference Banks: [           ]

3. The particular terms of the Underlying Transaction to which the Swaption relates are as follows:[18]

Notional Amount: 

Trade Date: 

Effective Date: 

Termination Date: [, subject to adjustment in accordance with
 the [Following/Modified Following/Preceding]
Business Day Convention][19]

Fixed Amounts:

Fixed Rate Payer: 

Fixed Rate Payer Payment Dates: [, subject to adjustment in accordance with the [Following/Modified Following/Preceding] Business Day Convention][20]

Fixed Rate: 

Fixed Rate Day Count Fraction: 

 

Floating Amounts:

 

Floating Rate Payer: 

Floating Rate Payer Payment Dates: [, subject to adjustment in accordance with the [Following/Modified Following/Preceding] Business Day Convention]131

Floating Rate Option: 

Designated Maturity: 

Spread: 

Floating Rate Day Count Fraction: 

Reset Dates: [, subject to adjustment in accordance with the [Following/Modified Following/Preceding] Business Day Convention][21]

[Business Days]: 

[Business Day Convention: [Following/Modified Following/ Preceding]][22]

Calculation Agent: 

 

4. Account Details[23]

 

Payments to Seller: 

Payments to Buyer: 

 

[5. Office:[24]

 

[25]Please confirm that the foregoing correctly sets forth the terms of our agreement by executing the copy of this Confirmation enclosed for that purpose and returning it to us.

 

Yours sincerely

[name of party preparing Confirmation]

By:

Name:

Title:

 

Confirmed as of the date first written:

[name of other party]

By: 

Name:

Title:

 

[1] Other conventions. There are a number of other conventions in the 2006 Definitions which are incorporated by reference. These include Section 7.6 (a) of the 2006 Definitions which provides that if a rate is determined from information obtained from the Reuters Monitor Service or Telerate, and any corrections to the relevant Reuters rate or Telerate rate are made within 1 hour of the time when the rate is first displayed, the rate will be amended in line with such corrections.

[2]  The date of the relevant ISDA Master Agreement is inserted in paragraph 1 of the Confirmation. When verifying the date, participants should check that Party A and Party B are the same as the parties to the ISDA Master Agreement. Ensure that the last sentence of paragraph 1 is included because it provides the link between the Option (defined as "Swaption" in the Confirmation) and the term "Transaction" which is used throughout the ISDA Master Agreement to refer to any type of transaction documented under it.

[3] This is the date on which the participants enter into the Swaption.

[4]  Insert the name of the seller of the Swaption.

[5]  Insert the name of the buyer of the Swaption.

[6]  Insert the amount of the option fee or premium, details of instalments, if any, and due dates for payment, if Premium Payment Dates are not specified in the Confirmation.

[7]  Insert dates for payment of premium. The Australian market convention is for the premium to be payable within 2 Business Days after the Trade Date unless otherwise agreed at the time the Option is dealt.

[8]  Physical Settlement means that the Seller grants to the Buyer the right to cause the Underlying Swap Transaction to become effective.

If applicable, insert "Applicable". If not applicable, delete the item.

In the Australian market physical settlement applies and cash settlement does not, unless otherwise agreed.

Participants may agree that the Buyer can elect either Physical Settlement or Cash Settlement. If so, then they should specify either in part 5 of the Schedule to the ISDA Master Agreement or in the Confirmation that the Buyer may only exercise one of these rights and when it does so, the other right terminates. To do this,

(a) in part 5 of the Schedule to the ISDA Master Agreement add the following paragraph:-

"(#) If the Confirmation for an Option specifies that both Physical Settlement and Cash Settlement are applicable to the Option and if the Buyer of the Option elects to exercise the Option, then the Buyer must specify in the Notice of Exercise whether Physical Settlement or Cash Settlement applies.  On delivery to the Seller of the Notice of Exercise specifying a method of settlement, the right granted under the Option to settle by the other method terminates."; or

(b) in the Confirmation add the following paragraph: -

"6. Settlement

Both Physical Settlement and Cash Settlement are applicable to the Option. If the Buyer elects to exercise the Option, then it must specify in the Notice of Exercise whether Physical Settlement or Cash Settlement applies. On delivery to the Seller of a Notice of Exercise specifying a method of settlement, the right granted by the Option to settle by the other method terminates.".

[9]        Do not insert anything alongside the bold heading "Cash Settlement Provisions". It is merely a sub heading for the items relating to Cash Settlement.

[10] Cash Settlement. Cash settlement means that the Seller grants to the Buyer the right to cause the Seller to pay the Buyer the Cash Settlement Amount, if any, in respect of the Underlying Swap Transaction on the Cash Settlement Payment Date.

If applicable, insert "Applicable".  If not applicable, delete the whole section dealing with Cash Settlement Provisions.

[11]  Insert the date for payment of the Cash Settlement Amount. The Australian market convention is for the Cash Settlement Payment Date to be the first Business Day after the Notice of Exercise is delivered. The wording in the sample Confirmation reflects this practice.

[12]  See Update 1 in 6.1.2 "Updates as at June 30 200 ".

[13] Specify American or European as appropriate. The Australian market convention is that the option will be European style, unless otherwise agreed.

[14]  Specify one date. For a European Option, it will be the date when the Notice of Exercise will be effective.  For an American Option, it will be the last day of the Exercise Period. The Exercise Period for an American Option is defined in Article 13.1 (a)(iii) of the 2006 Definitions.

[15]  The Australian market convention is that this time will be before 11.00  am unless otherwise agreed (ensure the city to which the time applies is specified). The Notice of Exercise must be delivered on or before that time.

[16]  Specify the place for each currency to be applicable for the Business Day definition.  See Section 1.4 of 2006 Definitions.  This item need not be included if the transaction is entirely A$ denominated and Sydney is the only centre which need be "open" (see Section 1.4 (a)(i) of the 2006 Definitions).

[17]  If a Business Day Convention is to apply to all dates that are stated in the 2006 Definitions to be adjusted in accordance with the applicable Business Day Convention, the Business Day Convention can be specified here.

[18] Terms of Underlying Swap Transaction. Include details of the terms agreed for the Transaction which will come into effect on exercise of the Option. See footnotes 80 to 108 in  3.2.1.20  "Interest Rate Swaps - Confirmation with commentary" for commentary on completing these details. The Australian market convention is that the Effective Date is one Business Day after the date of exercise.

[19] If the parties want to provide that the Termination Date will be adjusted in accordance with a Business Day Convention (and, accordingly, that the final Calculation Period will be shortened or lengthened), the appropriate Business Day Convention must be specified. Care! If a Business Day Convention is required for the Termination Date, it is not sufficient to simply state the convention at the item "Business Day Convention" (see Section 3.3 in the 2006 Definitions).

[20] Bracketed language is not necessary if Payment Dates and Period End Dates are to be adjusted in accordance with the Modified Following Business Day Convention, as provided in the 2006 Definitions.

[21]  Bracketed language is not necessary if Reset Dates are to be adjusted in accordance with the Business Day Convention applicable to Payment Dates.

[22]  If a Business Day Convention is to apply to all dates that are stated in the 2006 Definitions to be adjusted in accordance with the applicable Business Day Convention, the Business Day Convention can be specified here.

[23]  Insert particulars of the bank accounts into which payments to each party are to be made.

[24]  If a party intends to make and receive payments under different Transactions through different branches or offices, it should be specified in the Schedule to the ISDA Master Agreement as a Multibranch party. If a party is a Multibranch party, an item relating to Offices should be included in the Confirmation in which the relevant branch is identified.

[25]  Amendments to ISDA Master Agreement. If it is necessary to amend the ISDA Master Agreement, then amendments can be inserted before the closing paragraph which commences "Please confirm that the foregoing".


Last Update Date 29 Jun 2011