IRS Finalizes Regulations on Transfers of Derivative Contracts
The IRS has issued final regulations on the transfer or assignment of certain derivative contracts. A derivative is a financial instrument that is priced upon a derivation of the value of one or several underlying assets, liabilities, or indices. In general, there are two types of derivatives: privately negotiated contracts, which are known as over-the-counter derivatives, and standardized derivatives that are often traded on exchanges.
The regulations issued today provide:
(1) Guidance to the non-assigning counterparty to a derivative contract and an assignee on certain notional principal contracts that are derivative contracts; and
(2) Instruction that the non-assigning counterparty does not have an exchange for purposes of §1.1001-1(a) when certain derivative contracts are transferred or assigned, and clarifification that the embedded loan rules of §1.446-3(g)(4) do not apply to such transactions.
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