Warrants on composites
Although not explicitly mentioned by aosphere’s shareholding disclosure memoranda, warrants referencing baskets, indices or ETFs are now considered across all “Major” (rules with the Label “Major Shareholding”) Shareholding Disclosure rules.
If your firm does not hold (or expect to hold) warrants on composites, this article and any rule versions that relate only to warrants on composites should have no effect on your results.
Warrants on composites have not yet been considered in any Short Selling, SSR, or Takeover rules, and are not yet covered in our Sensitive Industries service.
In consultation with our clients who hold such assets and in consideration of other information outlined by aosphere, we’ve used the following method to determine if warrants on composites are in-scope for each rule and how calculations should be performed.
For a given rule/regime, equities and/or preferred equities held in indices, baskets, or ETFs (“composites") referenced by warrants will be included if all of the following are true:
- Securities held in composites referenced by cash-settled derivatives are in scope.
- Warrants (of any kind) are in scope.
The aosphere memoranda only explicitly cover the topic of warrants referencing either issued or unissued equity/shares. In various regimes, there are other conditions that must be satisfied related to warrant inclusion, such as if the conditions of conversion are in one’s control, if they are covered/uncovered, etc. These conditions (excluding cash settlement) will not be applied to warrants on composites as they cannot apply to them in principle.
In rules which satisfy the above criteria, we have included warrants along with other derivatives (i.e. options, futures, forwards, swaps, and CFDs) where they reference composites. When derivatives or warrants reference composites, shareholding disclosure obligations often require holders to calculate their “look-through” position, i.e. their position in components of the composite held via derivatives or warrants.
Where calculation nuances like delta adjustments apply to cash-settled warrants generally, they will also apply to warrants on composites.
The method of equivalent shares calculations for composite-referencing derivatives (outlined in our article on this topic) will apply to warrants on composites.
The determination of whether a look-through position from warrants on composites is long (IsLong) or short (IsShort) will take into account any adjustment from put warrants (PutAdjustment).
We have yet to fully assess the impact of warrants on composite look-through on document generation. In general, any shareholding exposure one holds through warrants on composites will be treated the same in forms as other exposure from derivatives on composites, but there may be exceptions where particular forms require more detail related to the warrant or the asset construction itself.