STSM116040 - Derivatives: introduction to covered warrants: secondary trading of a covered warrant

Stamp Duty

Where the rights under a covered warrant in respect of underlying securities are transferred and purchased before expiry no 0.5% Stamp Duty charge will normally arise.

This is because no instrument or other document of transfer will be required to be executed where the rights to a covered warrant (rather than a transfer of the underlying stocks and shares), are acquired by the purchaser.

Stamp Duty Reserve Tax (SDRT)

Whether or not a SDRT charge under section 87 Finance Act 1986 arises whenever rights to a covered warrant in respect of underlying securities are agreed to be transferred before expiry is dependent on how settlement will occur upon exercise of the warrant:

The terms of a covered warrant provide only for a cash settlement upon exercise of the warrant:

Here the transfer of rights to a covered warrant underlying securities (before warrant exercise) is not subject to a SDRT charge as no ‘rights to acquire’ chargeable securities (as defined in s99(3)(c) FA86) have been transferred.

The terms of the covered warrant give the issuer of the covered warrant the discretion upon exercise to deliver (or acquire) the underlying securities, or to arrange for a cash settlement:

Here the situation, the transfer of rights to a covered warrant underlying securities before warrant exercise is not subject to a SDRT charge as no rights to acquire ‘chargeable securities’ as (defined in s99 FA89) has been transferred.

The terms of the covered warrant give the holder of the covered warrant the discretion upon exercise to acquire the underlying securities, or to arrange for a cash settlement:

The transfer of rights to a covered warrant (which gives the holder the right, but not the obligation, to purchase the underlying securities) before warrant exercise will be subject to a SDRT charge if the underlying security is regarded as a ‘chargeable security’ per s99 (3)(c) FA86.

The terms of the covered warrant only allow for delivery of the underlying security on exercise and settlement:

An agreement to transfer the rights to a covered warrant (before expiry of the warrant) which gives the holder the right to purchase the underlying securities will be subject to a SDRT charge if the ‘rights to acquire’ are in respect of an underlying ‘chargeable security’ per s99 (3) FA86.