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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Derivative contracts: hedging: Regulation 7A: hedging proceeds from certain share issues: connected parties

This guidance applies to certain derivative contracts entered into on or after 1 January 2009

Connected Parties

Regulation 7A(4) ensures that the currency derivative entered into must be a genuine hedge where there is a true economic hedge when viewed at both a company and a group basis. Consequently, the currency derivative contract entered into must be

  • with an unconnected party, or
  • where the relevant hedging contract is with a connected party, the hedge must, ultimately, be passed on to an unconnected party.

Where the latter position applies, this should cover the situation where there is a ‘mirror-derivative’. This would involve a matching back-to-back position held with a third party. For any ‘mirror derivative’ to fully transfer the hedging position to the third party it is essential that the ‘mirror derivative’ confers exactly the same rights and imposes exactly the same liabilities.