CFM50270 - Derivative contracts: accounting conditions: contracts for differences

CTA09/S579(2)

The definition of a derivative contract requires that it is a relevant contract, meets the accounting conditions and does not have excluded underlying subject matter.

Contracts for differences deemed to satisfy the accounting conditions

The third leg of the accounting conditions deals with contracts that are deemed to satisfy the accounting conditions, even though they are not accounted for as derivatives. The third alternative of the accounting conditions will be satisfied by a contract for differences whose underlying subject matter is:

  • land
  • tangible movable property assets (other than commodities; any relevant contract whose underlying subject matter is commodities is deemed to satisfy the accounting condition)
  • intangible fixed assets
  • weather conditions
  • creditworthiness

This is to ensure that certain sorts of derivative, particularly those with non-financial subject matters, come within the Part 7 CTA09 regime even though there may be doubt about whether they would be treated as derivatives for accounting purposes.

For example, many property derivatives, such as those based on an index of property values, will be treated as derivatives for accounting purposes, and will therefore satisfy the main test at S579(1)(a). But the inclusion of land (and tangible moveable property, to take account of chattels within buildings) in S579(2)(b) puts the position of property derivatives beyond doubt.

S579(2)(b) will cover some contracts which are often called futures (or, more rarely, options), such as the weather futures. A contract whose underlying subject matter is not capable of being delivered cannot be an option or a future for the purposes of CTA09/PT7 - see CFM50340 and CFM50360. It must therefore be a CFD.

On the other hand, relevant contracts that are options or futures as defined in the legislation (S580 and S581) are not covered by S579(2)(b). For example, suppose that a building company holds an option to purchase a tract of land to develop as housing. Since the contract may result in an actual conveyance of land (even if it contains a clause allowing cash settlement in particular circumstances) it will be an option for PT7, and not a CFD. It is unlikely that such a contract will be accounted for as a derivative financial instrument nor does it come within S579(2)(b) so it is excluded from PT7.

Further guidance

Any relevant contract, not just a contract for differences, whose underlying subject matter is commodities falls to be treated as a derivative contract, see CFM50240.

Note, however that special treatment may apply to some relevant contracts deemed to satisfy the accounting conditions, for instance the capital gains type treatment afforded to certain derivative contracts whose underlying subject matter is land, see CFM55000.

Note also that S587 bypasses the accounting conditions, as regards relevant contracts whose underlying subject matter is a holding in an OEIC, unit trust or offshore fund. This has much the same effect as deeming such a contract to satisfy the accounting conditions, see CFM54040.