New Regulations Governing Assignments of Certain Derivative Contracts |
On July 21, 2011, the IRS issued new temporary and proposed Treasury Regulations expanding the safe harbor for certain derivative assignments.
The US Income Tax Rules generally provide that gain or loss is realized upon an exchange of property for other property differing materially either in kind or in extent. Case law provides that exchanged properties are “materially different” if they embody legally distinct entitlements—which could include change in obligor or counterparty. A limited exception to this rule applied to non-assigning parties in cases where a notional principal contract was assigned between two swap dealers and the contract permitted such assignment.
There was some concern that this exception was too limited including in cases where the contract required the non-assigning party’s consent to effect the transfer. With the effective date of the derivatives regulation—including the swaps “push-out” rule and mandatory use of clearinghouses—enacted as part of the 2010 Dodd-Frank legislation approaching, Treasury and the IRS issued Temporary and Proposed Regulations effective July 22, 2011 that replace and expand the swap exception. The new exception applies to transfers of securities derivatives contracts (including swaps) between securities dealers and/or clearinghouses whether or not the consent of the non-assigning counterparty is required to effect the transfer.
Notably absent in this expanded guidance is the application to commodities derivatives. Industry would welcome additional guidance relating to commodities derivatives. A possible explanation, though, for the exclusion could be the recent temporary relief granted by the SEC and CFTC. The SEC’s order discussed which of the Dodd-Frank requirements would be effective as scheduled in July 2011 and those for which temporary relief was being granted. The CFTC’s order, however, extended the status quo until the earlier of December 31, 2011 or the repeal or replacement of the existing rules until they clarify which contracts will be covered under Title VII of Dodd-Frank.
For more information please click on the PDF or contact Miriam Klein at +1 212 436 6157.
Ted Dougherty
Hedge Fund Tax Leader
Deloitte Tax LLP
+1 212 436 2165
New regulations governing assignments of certain derivative contracts
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