Section 871(m) amendment - ISDA Provision
Template:Fisdaanat 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.