An equity security that is embedded with certain derivative features such as exchangeability and convertibility into underlying equity, etc. Examples of such securities include trust automatic common exchanges securities (TRACES), that represents a hybrid equity security (equity linked security, ELS), that constitutes a trust-originated preferred stock convertible to common equity (common stock).
The issuers of these securities generally purchase and hold a portfolio of stripped treasury securities maturing on a quarterly basis through the conversion date, while concurrently entering into a forward purchase contract with an existing shareholder of the common stock of the issuer.
Other examples of derivative equity securities are mandatory convertibles such as TAPS (threshold appreciation price securities), PEPS (premium equity participating security), PIES (premium income equity securities), PRIDES (preferred redemption increased dividend equity securities), among others.
