Derivative contracts: bringing amounts into account: related transactions
Meaning of ‘related transaction’
A related transaction is any disposal or acquisition (in whole or part) of rights and liabilities under the derivative contract. It specifically includes:
- performance of the contract in accordance with its terms, either by delivering the underlying subject matter or by cash settlement;
- any sale, gift, surrender or release of rights and liabilities under the derivative contract.
It is not a related transaction where a contract, for example an exchange-traded future, is closed out by entering into a reciprocal contract with equal and opposite rights and liabilities. The company does not dispose of the first contract. It continues to hold the two contracts until both mature, at which point the company’s obligations under each of the two contracts are netted off and cancel out. But, from the point at which the company closes out its position, it will not bring any further debits or credits into its accounts in respect of either contract. (Futures are traded on margin - see CFM13160 - and the company will mark to market its overall position). So the fact the company has not disposed of the original contract will, in practice, make no difference to the tax treatment.