Section 871(m) amendment - ISDA Provision: Difference between revisions
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The new regulations will establish up to a 30% [[withholding tax]] on foreign investors on dividend-equivalent payments under [[equity derivative|equity derivatives]]. There are a wide range of products that fall into this camp including [[swap]]s, [[option]]s, [[future]]s, [[convertible bond|convertible debt]], [[structured note|structured notes]] and other customised derivative where the ... | The new regulations will establish up to a 30% [[withholding tax]] on foreign investors on dividend-equivalent payments under [[equity derivative|equity derivatives]]. There are a wide range of products that fall into this camp including [[swap]]s, [[option]]s, [[future]]s, [[convertible bond|convertible debt]], [[structured note|structured notes]] and other customised derivative where the ... | ||
===Beware of {{tag|Greeks}}=== | ====Beware of {{tag|Greeks}}==== | ||
... [[delta]] (see what I did there?) against the underlying stock is .08 or greater. | ... [[delta]] (see what I did there?) against the underlying stock is .08 or greater. | ||
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It applies from 1 January 2017. | It applies from 1 January 2017. | ||
===So does that mean I can bin all this [[hypothetical broker-dealer]] nonsense?=== | |||
Since {{tag|WHT}} is now applied on [[high-delta equity derivative]]s in the same way it applies to physical cash trades, the [[recharacterisation]] risk is surely less fraught now, isn't it? do we really care whether the counterparty is seen to control the hedge? Can we therefore get rid of that tiresome “[[hypothetical broker-dealer]]” language, which so mightily confuses many counterparties, and just reference the actual hedge liquidation price as the closing price of the derivative? | |||
No, because 871(m) does not apply to all underliers that might feature in a [[synthetic equity]] transaction. and also because there are [[WHT]] and [[stamp duty]] regimes in other jurisdictions ([[SDRT]] on UK equities for example) where a derivative acheives preferential tax treatment over a cash equity trade. | |||
But you’re right: the [[hypothetical broker-dealer]] business ''is'' [[Don’t take a piece of paper to a knife fight|ridiculous]]. | |||
{{seealso}} | {{seealso}} | ||
*[[ISDA 2015 Section 871(m) Protocol]] | *[[ISDA 2015 Section 871(m) Protocol]] | ||
*[[Synthetic prime brokerage]] | |||
*[[Don’t take a piece of paper to a knife fight]] | |||
{{c|tax}} | {{c|tax}} |
Revision as of 08:33, 30 August 2018
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Section 871(m) of the Internal Revenue Code clamps down on foreigners avoiding withholding tax for dividends on US equities. Previously, US dividend withholding did not apply to returns on notional principal contracts and instruments linked to underlying US equities.
That’s all changed now.
The new regulations will establish up to a 30% withholding tax on foreign investors on dividend-equivalent payments under equity derivatives. There are a wide range of products that fall into this camp including swaps, options, futures, convertible debt, structured notes and other customised derivative where the ...
Beware of Greeks
... delta (see what I did there?) against the underlying stock is .08 or greater.
Delta
A delta of 1 gives a one-for-one correlation with the return of the underlying. A delta of -1 does the exact opposite of what the underlier is doing: If underlier goes up, swap necessarily goes down by the same amount. A delta of 0 means the return on the two products is completely unconnected.
The calculation is cumulative so even if the delta threshold isn’t met in one transaction, it may be as a result a connected transaction.
It applies from 1 January 2017.
So does that mean I can bin all this hypothetical broker-dealer nonsense?
Since WHT is now applied on high-delta equity derivatives in the same way it applies to physical cash trades, the recharacterisation risk is surely less fraught now, isn't it? do we really care whether the counterparty is seen to control the hedge? Can we therefore get rid of that tiresome “hypothetical broker-dealer” language, which so mightily confuses many counterparties, and just reference the actual hedge liquidation price as the closing price of the derivative?
No, because 871(m) does not apply to all underliers that might feature in a synthetic equity transaction. and also because there are WHT and stamp duty regimes in other jurisdictions (SDRT on UK equities for example) where a derivative acheives preferential tax treatment over a cash equity trade.
But you’re right: the hypothetical broker-dealer business is ridiculous.