SCHEDULE 26Derivative contracts
Part 2Derivative contracts
Definition of terms relating to derivative contracts
12
F1(1)
This paragraph defines the following expressions for the purposes of this Schedule—
(a)
a capital redemption policy (see sub-paragraph (2));
(b)
a contract for differences (see sub-paragraphs (3) to (5));
F2(bb)
designated (see sub-paragraph (13));
(c)
a future (see sub-paragraphs (6), (7) and (10));
F3(cc)
hedging relationship between a relevant contract and an asset, in the case of any company (see sub-paragraph (14));
(d)
intangible fixed assets (see sub-paragraph (11));
F4(dd)
Integrated Prudential Sourcebook (see sub-paragraph (15));
(de)
long-term insurance fund (see sub-paragraph (16));
(e)
an option (see sub-paragraphs (8) and (10));
(f)
shares in a company (see sub-paragraph (12));
(g)
a warrant (see sub-paragraph (9)).
(2)
A “capital redemption policy” is a contract effected in the course of capital redemption business (within the meaning of section 458 of the Taxes Act 1988).
(3)
A “contract for differences” is a contract the purpose or pretended purpose of which is to make a profit or avoid a loss by reference to fluctuations in—
(a)
the value or price of property described in the contract, or
(b)
an index or other factor designated in the contract.
(4)
For the purposes of sub-paragraph (3)(b) an index or factor may be determined by reference to any matter and, for those purposes, a numerical value may be attributed to any variation in a matter.
(5)
None of the following is a contract for differences—
(a)
a future;
(b)
an option;
(c)
a contract of insurance;
(d)
a capital redemption policy;
(e)
a contract of indemnity;
(f)
a guarantee;
(g)
a warranty;
(h)
a loan relationship.
(6)
A “future” is a contract for the sale of property under which delivery is to be made—
(a)
at a future date agreed when the contract is made, and
(b)
at a price so agreed.
(7)
For the purposes of sub-paragraph (6)(b) a price is to be taken to be agreed when the contract is made—
(a)
notwithstanding that it is left to be determined by reference to the price at which a contract is to be entered into on a market or exchange or could be entered into at a time and place specified in the contract; or
(b)
in a case where the contract is expressed to be by reference to a standard lot and quality, notwithstanding that provision is made for a variation in the price to take account of any variation in quantity or quality on delivery.
(8)
An “option” includes a warrant.
(9)
A “warrant” is an instrument which entitles the holder to subscribe for shares in a company or assets representing a loan relationship of a company; and for these purposes it is immaterial whether the shares or assets to which the warrant relates exist or are identifiable.
(10)
References to a future or option do not include references to a contract whose terms provide—
(a)
that, after setting off their obligations to each other under the contract, a cash payment is to be made by one party to the other in respect of the excess, if any, or
(b)
that each party is liable to make to the other party a cash payment in respect of all that party’s obligations to the other under the contract,
and do not provide for the delivery of any property.
Nothing in this sub-paragraph has effect to exclude, from references to a future or option, references to a future or option whose underlying subject matter is currency.
F5(11)
“Intangible fixed assets” has the same meaning as in Schedule 29 to this Act; and paragraphs 73 to 76 of that Schedule (and paragraph 72 of that Schedule so far as it relates to those paragraphs) have effect for the purposes of this Part as they have effect for the purposes of that Schedule.
(12)
“”, in relation to a company, means any share in the company under which an entitlement to receive distributions may arise.
F6(13)
“Designated” has the same meaning as for accounting purposes.
(14)
A company has a hedging relationship between a relevant contract on the one hand (“the hedging instrument”) and an asset on the other (“the hedged item”) if and to the extent that—
(a)
the hedging instrument and the hedged item are designated by the company as a hedge; or
(b)
in any other case the hedging instrument is intended to act as a hedge of the exposure to changes in fair value of a hedged item which is a recognised asset or an identified portion of such an asset that is attributable to a particular risk and could affect profit or loss of the company.
(15)
“Integrated Prudential Sourcebook” means the Integrated Prudential Sourcebook made by the Financial Services Authority under the Financial Services and Markets Act 2000.
(16)
“Long-term insurance fund” has the meaning given in section 431(2) of the Taxes Act 1988.