Derivatives In Review - January 2017

Orrick, Herrington & Sutcliffe LLP

Orrick, Herrington & Sutcliffe LLP

Regulation AT – An Update

From the time Regulation AT was initially proposed by the CFTC over a year ago, the CFTC has solicited and considered numerous comment letters, held a public roundtable, supplemented the proposed regulation, and, on January 23, 2017, extended the comment period for that supplemental proposal.  However, although the substance of the regulation has evolved in certain respects, its future remains uncertain.  Read more here.

An Overview of the Substantial Equivalence Test under Internal Revenue Code Section 871(m)

Internal Revenue Code Section 871(m) and the regulations thereunder treat "dividend equivalent payments" on certain equity derivatives as dividends from sources within the United States.  That is, federal withholding tax applies to such payments made to non-U.S. parties.  The definition of "dividend equivalent payments" is broad and generally includes any amount that references the payment of a dividend and is used to compute an amount transferred under the contract.

More specifically, the 871(m) regulations generally impose U.S. withholding tax on equity derivatives that reference one or more U.S. equities and that (i) have a delta greater than or equal to 0.8 (if the derivative is a "simple contract," as explained in the full article) or (ii) fail a "substantial equivalence test" (if the derivative is a "complex contract," as explained in the full article).  Read more here.

Recent Blockchain Regulatory Developments

Blockchain and distributed ledger technology applications outside of the bitcoin context are attracting the attention of financial entities, prompting regulators to become increasingly focused on these possible applications.  Recently, for example: (i) potential financial and securities applications of DLT were discussed in depth at a "FinTech Forum" held at the SEC: (ii) the Federal Reserve Board published a paper titled "Distributed Ledger Technology in Payments, Clearing, and Settlement"; and (iii) FINRA published a paper titled "Distributed Ledger Technology: Implications of Blockchain for the Securities Industry."  Read more here.

CFTC Proposes Amendments to Recordkeeping Requirements

On January 12, 2017, the CFTC unanimously approved the proposal of numerous amendments to CFTC Regulation 1.31, the regulation that sets forth the recordkeeping requirements for records required to be kept under the U.S. Commodity Exchange Act and the CFTC's regulations, including with respect to swaps.  The proposed amendments are largely intended to modernize and make technology-neutral the form and manner in which regulatory records are kept.  Read more here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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