3.3.2.20 Australian Addendum and the 1998 FX and Currency Option Definitions

Set out below are the following:

  • "What is Australian Addendum No. 4 - Currency Options and is it relevant?";
  • "Important changes in 1998";
  • "Non Deliverable FX Transactions"; and
  • "Disruption Events".

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What is Australian Addendum No. 4 - Currency Options and is it relevant?

Until 1 January 2002 AFMA recommended using Australian Addendum No. 4 - Currency Options.  This is no longer recommended. The reasons for this together with a copy of the Addendum and commentary on it are in 6 "History" (see pre-February 2005 version of the Guide). See also Update 1 in 6.1.2 "Updates as at June 30 2007".

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Important changes in 1998

In 1998 ISDA published the "1998 FX and Currency Option Definitions". The definitions are designed for use by participants in the markets for foreign exchange transactions and currency options and may be used for these purposes without reference to the 2006 ISDA Definitions.

Note that the 1998 FX and Currency Option Definitions now come in two parts; the Definitions and Annex A to the Definitions. It is anticipated that Annex A will be updated from time to time by ISDA. Participants may wish to state which version of Annex A applies to the transaction in the Confirmation. The first page of the Definitions gives participants instructions how to do so.  If the version of Annex A applying to the currency option is not expressly stated in the Confirmation, the Definitions provide that the parties will be deemed to have incorporated Annex A as amended at the date on which parties enter into the relevant transaction.

Previously, in June 1992 ISDA published the "1992 ISDA FX and Currency Option Definitions".

Care! Participants should ensure that they refer to the 1998 FX and Currency Option Definitions in their Confirmations and not the 1991 or 2006 Definitions or 1992 ISDA FX and Currency Option Definitions.

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Non Deliverable FX Transactions

The 1998 FX and Currency Option Definitions include the possibility of Non-Deliverable Currency Options. At the time of updating the Guide in September 1998, this product was not widely used in the Australian market and clear market conventions had not been adopted.  While a suggested form of confirmation is included in 3.3.2.30 "Confirmation for Deliverable Currency Option with commentary" AFMA makes no recommendations in respect of clauses for such products. Market participants intending to trade in this product should carefully review the 1998 FX and Currency Option Definitions in order to document their transactions. Note in particular the warning in respect to "Electing Disruption Events and Disruption Fallbacks". AFMA will update the Guide as the Australian market develops conventions. 

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Disruption Events

  • General Explanation. The 1998 FX and Currency Option Definitions include Disruption Events and Disruption Fallbacks which enable parties to agree alternative methods for settling Currency Options and FX Transactions on the occurrence of certain events. 

    The Disruption Events specified in Section 5.1 of the 1998 FX and Currency Option Definitions are events which, if they occur, may affect the Settlement Rate or settlement of a Transaction. The parties may nominate a Calculation Agent to determine whether a Disruption Event has occurred[1] or the parties themselves may decide.  Where after a Trade Date, a Disruption Event has occurred and is continuing, the applicable Disruption Fallbacks are then applied on the relevant date[2] in the order specified until an alternative basis for determining the Settlement Rate or settlement of the Transaction is achieved. If none of the Disruption Fallbacks succeed in doing this, the Transaction(s) will terminate in accordance with the provisions of "No Fault Termination" unless specified otherwise.[3].
  • Electing Disruption Events and Disruption Fallbacks. Counterparties may elect that one or more of the Disruption Events and Disruption Fallbacks apply by specifying this in:
    • a Confirmation (see Exhibit II-E of the 1998 FX and Currency Option Definitions), in which case the Disruption Events and Disruption Fallbacks will only apply to that particular Transaction; or
    • the Schedule, in which case the Disruption Events and Disruption Fallbacks will apply to any transaction which is an FX Transaction or Currency Option Transaction as defined in the 1998 FX and Currency Option Definitions unless specified otherwise in a Confirmation.

A number of different elections can be made as follows:

  • If the parties do not elect that any Disruption Events and Disruption Fallbacks apply, then for:
    • Deliverable Transactions, no Disruption Events and Disruption Fallbacks will apply; and
    • Non-Deliverable Transactions, Price Source Disruption will apply as a Disruption Event and Fallback Reference Price and Calculation Agent Determination of Settlement Rate will apply as the Disruption Fallbacks.
  • Parties may specify that particular Disruption Events and Disruption Fallbacks will apply by either specifying:
    • that particular categories will apply[4]; or
    • each individual Disruption Event and Disruption Fallback that will apply.
  • Parties may specify that certain Disruption Events will apply but not specify any Disruption Fallbacks in which case Section 5.2 (e) of the 1998 FX and Currency Option Definitions will deem certain Disruption Fallbacks to apply depending on the Disruption Events specified.

Care!  If the 1998 FX and Currency Option Definitions apply to a Transaction, even where no election is made of any Disruption Events or Disruption Fallbacks, certain Disruption Events and Disruption Fallbacks will be deemed to apply in the case of Non-Deliverable Transactions. If parties do not wish any Disruption Events or Disruption Fallbacks to apply, this must be expressly stated in either Part 5 of the Schedule to the ISDA Master Agreement or in Confirmations.

Disruption Events

  • The following Disruption Events are defined in the 1998 FX and Currency Option Definitions:

    1 Benchmark Obligation Default

    2 Dual Exchange Rate

    3 General Inconvertibility

    4 General Non-Transferability

    5 Governmental Authority Default

    6 Illiquidity

    7 Inconvertibility/Non-Transferability

    8 Material Change in Circumstance

    9 Nationalization

    10 Price Materiality

    11 Price Source Disruption

    12 Specific Inconvertibility

    13 Specific Non-Transferability
  • Groups of Disruption Events may be included by specifying:
    • "General Inconvertibility/Non Transferability", in which case numbers 3 and 4 above will apply; or
    • "Party Specific Events", in which case numbers 12 and 13 above will apply.
  • Price Source Disruption is deemed to apply to Non-Deliverable Transactions regardless of what election is or is not made unless the parties expressly provide that it does not apply.
  • If an event would constitute or give rise to:
    • an Illegality or Impossibility under an ISDA Master Agreement or 1987 Interest Rate or Currency Exchange Agreement; or
    • a force majeure, act of state, illegality or impossibility under a FEOMA, IFEMA or ICOM,
  • as well as a Disruption Event, it will be treated as a Disruption Event only[5].

Disruption Fallbacks

  • The following Disruption Fallbacks are defined in the Definitions:

    1 Assignment of Claim

    2 Calculation Agent Determination of Settlement Rate

    3 Deliverable Substitute

    4 Escrow Arrangement

    5 Fallback Reference Price

    6 Local Asset Substitute-Gross

    7 Local Asset Substitute-Net

    8 Local Currency Substitute

    9 No Fault Termination

    10 Non-Deliverable Substitute

    11 Settlement Postponement
  • Parties may include their own Disruption Fallbacks although the 1998 FX and Currency Option Definitions do not anticipate this being done for Disruption Events.
  • If the parties do not specify Disruption Fallbacks but specify "Conversion", then the first Disruption Fallback will be, in the case of Deliverable Transactions, "Non-Deliverable Substitute" and in the case of Non-Deliverable Transactions, "Deliverable Substitute", and then the Disruption Fallbacks specified in Section 5.2 (i) paragraphs (A) to (G) apply.
  • Unless specified otherwise, if none of the Disruption Fallbacks specified succeed, the Transaction will Terminate in accordance with "No Fault Termination".
  • Unless specified otherwise, if more than one Disruption Event occurs and is continuing, all Disruption Events must be remedied in the order specified in Section 5.2 (g) which in some instances will deem certain events remedied.
 

[1]  This may be done by specifying "Calculation Agent Determination of Disruption Event" (Section 5.1 (g)). A Calculation Agent's determinations are binding in the absence of manifest error (Section 1.3 ).

[2]  This will be either the Settlement Date or Valuation Date as determined under Section 5.1 (f).

[3]  See Section 5.2 (f).

[4]  This is only possible in respect of Disruption Events. There are no categories of Disruption Fallbacks.

[5]  See Section 5.1 (c). Parties should consider whether they want to specify that Force Majeure under the ISDA Master Agreement should be treated in the same way. This would require a clause to that effect to be inserted in a Confirmation or Part 5 of the Schedule to the ISDA Master Agreement.


Last Update Date 29 Jun 2011