Mimicking Shares: The Nature and Regulation of Equity Swaps

Posted: 13 Apr 2001

See all articles by Paul Ali

Paul Ali

University of Melbourne - Law School

Abstract

Equity swaps are routinely used by fund managers and other investors to obtain economic exposure to shares and equity indices, as an alternative to acquiring the shares or index securities.

The principal issue facing equity swaps - and other derivatives - in Australia is whether they are "futures contracts" under the Australian Corporations Law. The Corporations Law imposes licensing requirements on parties who deal in or advise on futures contracts, and requires futures contracts to be transacted on a futures exchange or in a specifically exempted futures market. Contravention of these requirements attracts civil as well as criminal penalties. This definitional issue is also critical, in the context of the statutory safe harbour for futures contracts from the Australian gaming and wagering legislation.

The regulation of equity swaps in Australia reveals flaws in the "securities/futures contract" dichotomy under the Corporations Law. Dealers in equity swaps typically hedge their exposure via transactions in the underlying shares. The dealer's hedging activities may, however, have unintended consequences for the end-user of the swap. Notwithstanding that equity swaps are likely to be "futures contracts", an end-user, may as a result of the dealer's hedging activities, find itself subject to the provisions of the Corporations Law regulating "securities" (including the takeovers, insider trading and unlawful market conduct provisions). There is thus a real risk that the shares acquired by a swap dealer for hedging purposes will be aggregated with an existing entitlement of the end-user and its related entities, leading to a breach of the takeovers provisions by both the dealer and the end-user. In addition, a recent Australian case has established the jurisdiction of the Corporations and Securities Panel to make declarations of unacceptable conduct in securities, in respect of equity swaps, and consequently issue orders requiring the disposal, or prohibiting the voting, of any of the shares underlying the swap held by the dealer or end-user.

Note: This is a description of the article and not the actual abstract.

Keywords: Derivatives, Equity Swaps, Regulation of Derivatives, Futures Contracts, Securities, Gaming and Wagering Contracts

JEL Classification: K22, G18, G24

Suggested Citation

Ali, Paul, Mimicking Shares: The Nature and Regulation of Equity Swaps. Company and Securities Law Journal, Vol. 17, Pp. 436-452, October 1999. Available at SSRN: https://ssrn.com/abstract=263611

Paul Ali (Contact Author)

University of Melbourne - Law School ( email )

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