CFM50810 - Derivative contracts: exclusions from regime: equity derivatives: condition E

Equity derivatives used to hedge convertible or share-linked securities

‘Condition E’ in CTA09/591(6) is an extension of ‘condition B’ (CFM50760). An equity derivative is outside Part 7 not only if it hedges shares, but also if it is in a hedging relationship (CFM50770) with a convertible, exchangeable or share-linked security.

The security must be an asset or for periods ending on or after 31 December 2005 only a liability within CTA09/S585(1), that is one bifurcated for accounting purposes into a financial asset or liability and an embedded derivative or equity component. Furthermore, the derivative or equity component must be within sections 645, 648, 653 to 655 or 658 of CTA09. Broadly, this covers both holders and issuers of convertible and exchangeable securities, and securities that exactly track price movements of shares or share indices.