Hedging Activities - UBS Settlement and Market Price Movements as a Result of Hedging Activities by the Issuer
This article was originally published in the Investment Funds Practitioner in September 2016.
Staff are aware that some issuers may hedge the liability under their notes sold by purchasing and/or selling the reference asset in the market. Staff are concerned that such hedging activity, if conducted prior to the notes notionally buying/selling those same reference assets, could, in some instances, materially affect the notional purchase or selling price that is used in calculating the return on the notes. This could be of particular concern when the reference asset is thinly traded or illiquid.
We encourage issuers to review the settlement agreement entered into between UBS and the SEC1 and consider whether they have adequate systems and procedures in place to help ensure:
- their hedging activities do not have a material adverse impact on the value of the note's return,
- the value of the different inputs that comprise the return on the note are derived as objectively as possible, and
- all relevant costs associated with the note are adequately disclosed.