CFM62945 - Foreign exchange: matching: derivative contracts used to hedge share transactions: interaction with other Disregard Regulations

REG 4(4C), REG 7(5) and REG 7A(7A) S.I. 2004/3256

In the case of an anticipated disposal of a relevant shareholding, a derivative contract might be suitable as a hedge of either the anticipated foreign currency proceeds of a disposal or a hedge of foreign exchange risk in respect of the relevant value of the shares to be disposed of, to which REG 4 might apply.

REG 7 could apply to any of the possible hedging relationships which are a forecast transaction or firm commitment in REG 5ZA. Were amounts to be disregarded under REG 7, they would be brought into account on settlement of the hedging transaction, by REG 10(2), so a tax mismatch would not be prevented.

It is also conceivable that a derivative contract might be capable of hedging either a risk connected with an acquisition of shares within the ambit of REG 5ZA or a risk relating to the foreign currency proceeds of an anticipated share issue intended to fund that acquisition, to which REG 7A might apply.

Each of REG 4, 7 and 7A contain a priority rule to deal with such scenarios. As a result, to the extent that REG 5ZA applies to derivative contracts used to hedge foreign exchange risks on a forecast transaction or firm commitment relating to an anticipated future acquisition or disposal of shares, REGS 4, 7, or 7A do not apply.

The existing regulations will continue to apply unchanged as regards hedging of foreign exchange risks arising from other underlying assets, such as existing holdings of shares, where the new rules are not in point.