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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 10: events not treated as termination events

This guidance applies to periods of account starting on or after 1 January 2015 where the company has elected for regulation 7 or 8 to apply. 

Events not treated as termination events

The rule described in CFM57210 (that if a company ceases to be a party to a regulation 7 or regulation 8 contract the gains and losses previously excluded are brought into account), does not apply if the hedging contract is immediately rolled over into a new contract and there is still a hedging relationship between the new contract and the original hedged item.

Example

  • A company is committed to buying an asset, denominated in US dollars, in 9 months’ time. It decides to hedge the currency risk from this firm commitment by buying exchange-traded US dollar futures, each contract having a term of three months. As each contract matures, the hedge is rolled over into a fresh contract. The maturity of each contract is not a termination event for the purposes of regulation 10. Fair value changes in the contracts, which are deferred under regulation 7, are brought into account when the purchase of the asset occurs.
  • The hedging contract is assigned or novated to a company in the same group and CTA09/S625 (see CFM53020) applies to treat the transfer as being at no gain/no loss, or would do but for CTA09/S628. The contract acquired or entered into by the transferee company must continue to be in a hedging relationship with the same hedged item as the old contract was with the transferor. This means that the hedged item will have to have been assigned to the same transferee.

In either of these cases, where the new contract or the assigned or novated contract is terminated, the gains and losses to be brought into account under regulation 10 will include the gains and losses arising on the old contract or to the transferor company.