ASX Participants and ASX Clear (ASXCL) Participants were advised in ASX Notice #1137.20.09 dated 18 September 2020 of the rights-style adjustment method that ASX will apply to the Iluka Resources Limited (ASX Code: ILU) ETOs under the spin-off by way of a 1 for 1 in-specie distribution of Deterra Royalties Limited (ASX code: DRR). For ease of reference, the adjustment method is set out again below:

New contract size is calculated as follows:

TC = OC + n*r/S

Where

TC    = theoretical new contract size (prior to any rounding) which is used in intermediate calculations

OC   = old contract size (currently 100)

n      = the number of Deterra Royalties shares attributed to each OC determined by the issue ratio applied to the old contract size, (issue ratio is 1 DRR share: 1 ILU share, n=1/1*100=100)

r      = the market value of the each of the new shares as determined by ASX, using VWAP of ‘Deterra Royalties’ on 23 October 2020 from the period 'Deterra Royalties' commences trading

S     = VWAP of Iluka on the first day of ex-Entitlement trading, 23 October 2020 matching the 'Deterra Royalties' VWAP period

The new strikes are calculated as follows:

New Strike = Old Strike * OC/TC 

For the strike calculations, the new contract size used by ASX is rounded to 4 decimal places, and the strike factor (OC/TC) is rounded to 6 decimal places. The strike factor for all contract sizes will be based on the result calculated for the standard 100 contract size.

The ex-entitlement VWAP on ILU for ETO purposes on 23 October 2020 matching the DRR VWAP period was $5.1793. The VWAP for DRR on 23 October 2020 was $4.7846

This is used in the calculation of new contract size (TC) and new strike (NS) using

TC = OC + n*r/S and NS = OS * OC/TC

Thus, for an existing contract size of 100, the new contract size was adjusted to 192 and the strike factor is 100/192.3793= 0.519806 (rounded to 6 decimal places), using TMC threshold truncation.

OTC series (where any)

Clearing Participants are reminded that any OTC series cleared by ASXCL under the ASX Equity FlexClear^TM will be adjusted, including cash adjustments where any, using the same formula to the ETOs as shown in the Derivatives Notice.

Due to anonymity, the adjusted OTC series details will not be published in the Derivatives Notice. The OTC series will be adjusted along with ETOs adjustments on the night, and will be available to CP the following morning via their own clearing systems.

Specific Cover

Participants are reminded that, as the contract size is changing arrangements may need to be made for additional lodgement of underlying securities to account for any collateral denoted as specific cover.

What do I need to do by when?

ETO Cash Equalisation Adjustment Payments for Contract Size Roundings

Participants are reminded that ETO cash equalisation adjustments for contract size roundings are effective.

The cash adjustment payments will be posted by ASXCL as close as practicable to the effective adjustment date. For clarity, ETOs are LEPOs and non-LEPOs (ordinary options, American or European). Takers will be credited and writers debited a cash equalization payment for any contract size rounding calculations. (For share consolidations, it is possible for a LEPO taker to be debited if the LEPO strike is standardized back to 1 cent after initial rounding).

Where the old contract size of a series before an adjustment is 100, ASX will apply a standardizing “TMC threshold” so that if the calculated new contract size falls between 100 and to up to but not including 102, the new contract size will be truncated to the standard 100, and a cash equalisation adjustment payment made. If the theoretical new contract size falls above 102, then the new contract size will be truncated down to the nearest whole number.

For the purpose of the cash equalisation adjustment payment, the percentage of the calculated contract size that was truncated was determined by ASX to be:

(TC-NC)/TC = (192.3793-192)/192.3793 = 0.197163% to six decimal places in the percentage figure.

This was applied to the old daily settlement price.

Autoexercise Caution

As a reminder, participants are advised that they will need to check carefully whether the adjusted ILU series are in-the-money or out-of-the-money in determining whether to exercise or lapse the option series.

As strike adjustments are made under UA trading ASXCL does not accept responsibility for any exercises resulting from reliance on the Autoexercise facility.

Adjustment Effective on 23 October 2020 under “UA” Trading Basis

Participants are reminded that the adjustment was effective on 23 October 2020 when the ETO class resumed trading on an under adjustment basis (“UA” flag).  All trades were on an adjusted basis, notwithstanding that the extent of the adjustment was officially published by ASX only after the end of the day.  This is similar to any rights-style adjustment to ETOs

Please refer to table of adjusted series below:

DCS Cash Adjustment Calculation Methodology

Where a cash adjustment is applicable, DCS will apply the methodology described in this section.

The cash adjustment is calculated by taking the difference between the contract value of the option before and after the adjustment.  Variants to the formula apply for rights style adjustments and when the adjustment occurs on the day of the option’s expiry.

Cash adjustment = (BOP * BUV) – (AOP * AUV)

Where

BUV =Before (adjustment) Unit Value = BP * BU rounded to nearest cent

AUV =After (adjustment) Unit Value = AP * AU rounded to nearest cent

BU = units per lot (multiplier) before the adjustment (old traded entity)

AU = units per lot (multiplier) after the adjustment (old traded entity)

BP = for rights style, =SP/Adjustment Factor, for non-rights style=SP.

AP = for rights style, =SP, for non-rights style=SP * Adjustment Factor.

SP = settlement price of the option if not the options expiry day, otherwise the intrinsic price (underlying price-strike price for calls, strike-underlying price for puts) if on expiry date.  Refer Notes 1 and 2 below

BOP =pre-adjusted open position Refer Notes 1 and 3 below

AOP =post-adjusted open position Refer Notes 1 and 3 below

Note:

1. Cash adjustments on expiry will apply to exercised positions only.

2. The intrinsic price used for exercised positions on expiry is based on the adjusted strike price for rights style adjustments and the pre-adjusted strike price for non-rights style adjustments.  Set negative intrinsic prices to zero i.e. if an out of the money is exercised, the intrinsic price and hence cash adjustment is zero.

3. Pre and post adjusted positions will be the same unless there is a position adjustment factor applied to the open position associated with the adjustment.  For rights style use the start of day position (i.e. exclude any UA trading activity), for non-rights style use the (end-of-day) position prior to the adjustment.

4. Cash adjustments will also apply to LEPO positions.

5. For short positions, the result of the cash adjustment formula should have its sign reversed (multiply by -1). For non-LEPO positions the truncation approach ensures that the seller (writer) is always debited and the buyer (taker) is credited.  Because the LEPO strike is usually returned to 1c after the adjustment, the holder of a short LEPO position may be credited and long position may be debited.

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Issued by

Brendan Laird, Senior Manager, Settlement Operations

Contact information

Eldon Hernando
1800 623 571
chesshelp@asx.com.au

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