CFM13118 - Taxing derivative contracts: underlying subject matter: splitting contracts

Subject matter of more than one type

You will sometimes come across contracts with underlying subject matter (USM) of more than one type. For example, an equity swap may swap movements on a share index for an interest rate.

In most of these cases, none of the types of subject matter will fall within the Para 4(2) exclusions. For example, a contract might have both currency and an interest rate as its USM. This type of contract poses no problems - provided it satisfies the accounting test, it will be a derivative contract.

There is, however, provision in the legislation to split certain options and futures (but not contracts for differences) into two notional contracts. This applies where either

• the option or future has subject matter of an excluded type and subject matter of a non- excluded type (for example, it might have shares and foreign currency as its subject matter); or
• it has subject matter of more than one excluded type. This applies only to contracts entered into before 1 August 2004, or on or after that date but in an accounting period ending before 17 September 2004.

These “splitting” provisions are at FA02/SCH26/PARA46 and FA02/SCH26/PARA47, and CFM13118a gives more detail about their application. Circumstances in which either Para 46 or Para 47 apply are likely to be uncommon, but CFM13118b gives an example of where Para 46 would apply.