CFM50360 - Derivative contracts: relevant contracts: futures
CTA09/S581
Definition of ‘future’
A future is defined as a contract for the sale of property under which delivery is to be made
- at a future date, which is agreed when the contract is made, and
- at a price which is also agreed when the contract is made.
The price need not be a single price; the definition is refined by S581(2). The price may be determined not as a specific stated price at the time of entry into the contract, but instead by a price determined by reference to prices on an exchange or for a specified standard lot.
Some contracts, such as exchange-traded commodity futures, or gilt or US Treasury bond futures, provide for the delivery of alternatives to the property actually specified in the contract. Indeed, in some cases, such as Treasury bond futures, the property specified in the contract may not exist in reality. There may be provision for the price to be varied accordingly. Under S581(2)(b), the price is nonetheless taken as agreed when the contract is made.
You may also see futures where the price is dependent on a market value at a specified time and place. For example, a company might enter into a forward currency contract on 2 January to buy dollars, for delivery on 31 March, at the rate at which those dollars could be purchased in the London Forex markets on 3 January. S581(2)(a) also provides that in such cases the price is taken as agreed when the contract is made.
Physical delivery
The term ‘future’ in Part 7 CTA09 is limited to contracts that actually provide for property to be delivered. As with options (see CFM50340), CTA09/S581(3) provides that a contract described as a future, which can only be cash settled, is a contract for differences for the purposes of CTA09/PT7.
As an exception to the general rule, a currency contract which is settled by one or both parties paying an amount of foreign currency is not debarred from being a ‘future’ for the purposes of CTA09/PT7. The currency is in this case the property that is delivered.
Examples
There are examples at CFM50370.
Commentary
Even with the restriction imposed by S581(3), the definition of a future is very wide. It will catch any purchase contract where the price is agreed at the time that the contract is signed, but delivery is to be made at a later date. For example, if a company signs a contract under which it will pay £500,000 for plant and machinery to be delivered in six months’ time, this would be a relevant contract because it falls within the definition of a future. But most commercial contracts of this nature are not derivative contracts because they do not pass the accounting test in CTA09/S579 - see CFM50210+.
It would be very unusual for the property to be delivered under a future to itself be a derivative contract; this might perhaps happen if the underlying subject matter is exchange-traded share options or warrants. A contract to enter into a derivative contract, is much more likely to be a contract for differences, for example in the case of a forward-starting swap (CFM50360 )