Section 871(m) amendment - ISDA Provision

ISDA Anatomy™ incorporating our exclusive ISDA in a Nutshell™ Go Premium In a Nutshell™ Section 871(m) amendment: Section 871(m) (i) This Agreement is a “Covered Master Agreement” under the ISDA 2015 Section 871(m) Protocol, published on November 2, 2015. The Implementation Date is the effective date of this Agreement. (ii) “Dividend Equivalent Tax” includes any tax imposed on payments treated as from US-sourced dividends under Section 871(m). view template 2002 ISDA full text of Section 871(m) amendment: Section 871(m) (i) The amendments set out in the Attachment to the ISDA 2015 Section 871(m) Protocol published by ISDA on November 2, 2015, as published on the ISDA website (www.isda.org) apply to this Agreement. (ii) “Dividend Equivalent Tax” includes any tax imposed on deemed payments treated as dividends from sources within the United States under Section 871(m) or any Applicable Rules issued thereunder. (iii) This Agreement will be deemed to be a Covered Master Agreement and the Implementation Date will be the effective date of this Agreement for the purposes of such protocol. view template Click here for the text of Section 871(m) amendment in the 1992 ISDA Index: Click ᐅ to expand: ISDA Navigation The Varieties of ISDA Experience Subject 2002 (wikitext) 1992 (wikitext) 1987 (wikitext) Preamble Pre Pre Pre Interpretation 1 1 1 Obligns/Payment 2 2 2 Representations 3 3 3 Agreements 4 4 4 EODs & Term Events 5 Events of Default FTPD • Breach • CSD • Misrep • DUST • Cross Default • Bankruptcy • MWA Termination Events Illegality • Tax Event • TEUM • CEUM • ATE • 5 Events of Default FTPD • Breach • CSD • Misrep • DUST • Cross Default • Bankruptcy • MWA Termination Events Illegality • Tax Event • TEUM • CEUM • ATE • 5 Events of Default FTPD • Breach • CSD • Misrep • DUST • Cross Default • Bankruptcy • MWA Termination Events Illegality • FM • Tax Event • TEUM • CEUM • ATE • Early Termination 6 Early Termination ET right on EOD • ET right on TE • Effect of Designation • Calculations 6 Early Termination ET right on EOD • ET right on TE • Effect of Designation • Calculations • Set-off 6 Early Termination ET right on EOD • ET right on TE • Effect of Designation • Calculations • Set-off Transfer 7 7 7 Contractual Currency 8 8 8 Miscellaneous 9 9 9 Offices; Multibranch Parties 10 10 10 Expenses 11 11 11 Notices 12 12 12 Governing Law 13 13 13 Definitions 14 14 14 Schedule Schedule Schedule Schedule Termination Provisions Part 1 Part 1 Part 1 Tax Representations Part 2 Part 2 Part 2 Documents for Delivery Part 3 Part 3 Part 3 Miscellaneous Part 4 Part 4 Part 4 Other Provisions Part 5 Part 5 Part 5 Comments? Questions? Suggestions? Requests? Insults? We’d love to 📧 hear from you. Sign up for our newsletter.

Section 871(m) of the Internal Revenue Code clamps down on dirty 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?

There’s no bright line test, obviously.

Since 871(m) means that 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 controls 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.

See also

• ISDA 2015 Section 871(m) Protocol
• Synthetic prime brokerage
• Don’t take a piece of paper to a knife fight