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HMRC internal manual

Corporate Finance Manual

Derivative contracts: underlying subject matter: subordinate or small value: example

Example of how CTA09/S590 operates

Plarwright Ltd is an investment company which, as part of its hedging strategy, buys a number of futures contracts over the German DAX share index. The DAX (Deutsche Aktien Index) is determined by the market capitalisation of 30 top German companies. Unlike such indices as the FTSE100, it is assumed in constructing the index that dividends are reinvested, and the value of the index is adjusted accordingly. This means that the value of the index reflects the total return - capital growth plus income - which someone holding the underlying basket of shares would receive.

The index is determined by reference both to a basket of shares, and to the income from those shares, so under CTA09/S583(4), both could be thought of as the USM of the contracts. HMRC, however, would regard the dividend element as being subordinate to the shares. (It might also be ‘small’ in relation to the value of the USM as a whole.) Thus the contracts are treated as though their USM was wholly shares, and are excluded from the derivative contract regime.