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HMRC internal manual

Corporate Finance Manual

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Derivative contracts: underlying subject matter: contracts for differences examples

Examples of underlying subject matter of CFDs

Example 1

A company enters into an interest-rate swap whereby it swaps interest on a notional principal amount at a floating rate, for a fixed rate of interest on the same notional amount. It is possible to take two views on the application of CTA09/S583(4) to such a contract. The payments made under the contract will depend on the market rate of interest, which is equivalent to the price of the notional debt. The USM of the swap can therefore be seen as a notional loan relationship. Alternatively, interest rate(s) will be a factor designated by the contract, so the USM can be seen as being an interest rate or rates.

HMRC’s view is that nothing hinges on this point. For the purposes of Regulation 9(4) of the Disregard Regulations (SI 2004/3256), the subject matter of the contract will be, or will include, interest rates, so it will be an ‘interest rate contract’ as defined. The inclusion of ‘interest rates’ as a possible USM of a CFD in S583(5) is for the avoidance of doubt.

As with futures, the statute draws a distinction between the property described in the contract, and any property that might be used to make payments under the contract. Suppose, in this example, the notional principal amount of the swap was designated in euros, and the company was swapping floating-rate euro interest for fixed-rate euro interest. It would therefore be making payments in euros. This does not mean that currency is an USM of the swap.

Example 2

A company enters into an option contract based on a commercial property price index. If the index rises above a specified reference level, the company can exercise the option and will receive a payment based on the difference between the reference level and the actual level of the index at the exercise date.

For the purposes of Part 7 CTA09, the contract is a CFD because there is no property which is capable of being delivered when the option is exercised (see CFM50340). The index is compiled by taking a weighted average of the market values (excluding any rental income) of a defined basket of commercial properties. The matter by which the index is determined is therefore, ultimately, land - this is the USM of the option contract.