Derivative contracts: exclusions from regime: introduction
Derivatives excluded because of underlying subject matter
Certain derivatives are excluded from the regime in Part 7 CTA09 because of their underlying subject matter. CFM50500+ tells you how to identify the underlying subject matter of a relevant contract.
There are substantially fewer such exclusions than in 2002 when the legislation was first brought in. There are now only three types of underlying subject matter where the point is relevant. They are:
- intangible fixed assets (CFM50720),
- shares, but only where certain conditions are met; and
- the rights of unit holders under a unit trust (again, where certain conditions are met).
Guidance on the last two of these categories is at CFM50730.
These are referred to as ‘excluded subject matters’. Where the underlying subject matter of a relevant contract consists wholly of one or more excluded subject matters, it may not be within the Part 7 rules. But the exclusion cannot apply if the derivative has some subject matter that is excluded, and some that is not.
If the relevant contract is an option or future, and has both excluded and non-excluded subject matters, CTA09/S593 provides for it to be split into two notional contracts. More detailed guidance is at CFM50860.
Kabcon Ltd is an investment company which enters into an equity index swap with a bank. If the FTSE 100 index rises in a particular period, Kabcon Ltd receives a payment from the bank based on the percentage rise in the index. If the FTSE 100 falls, the company pays the bank. At the same time, Kabcon Ltd makes a payment to the bank equal to interest, calculated at LIBOR less 0.75%, on a notional principal amount.
The contract has two underlying subject matters, shares and an interest rate. Interest rates can never be an excluded subject matter. The contract therefore must be within the Part 7 CTA09 regime.
When deciding what underlying subject matter, or matters, a relevant contract has, you must ignore any subject matter that is subordinate or of small value. CFM50580 explains what this means.