STSM117040 - Derivatives: introduction to futures and forwards: Issue of a forwards contract that provides only for cash settlement

The terms of an equity forwards contract will specify the manner in which the contract will be settled

The term ‘forward’ is limited to contracts that actually provide for the underlying assets to be delivered.

Similar to options (see STSM112060), any contract that is described as a forward that can only be cash settled under its terms, is regarded as akin to a contract for difference (see STSM118010). As such no Stamp Suty or Stamp Duty Reserve Tax (SDRT) implications arise on issue, or on settlement.

The majority of equity forwards contracts are cash settled.

Cash Settlement Example

An investor buys 1 FTSE 100 Index forwards contract at 6150 points maturing on 1 July. Each contract size is £2 per point. On the 1 July delivery date, the FTSE 100 index has increased to 6175 points.

There is no physical delivery on 1 July as there are no underlying shares to transfer. On settlement of the future on 1 July, the investor receives 25 index points representing the difference between the ‘strike’/ fixed points set under the forwards contract and the current open market FTSE 100 index point (i.e. 6175 less 6150). The cash settlement that the investor receives is calculated by multiplying the points moved by the value of each point set in the contract. In this example, this will equate to £50 (£25 x £2).

No Stamp Duty charge arises as there is no underlying transfer of securities (i.e. stock or marketable securities’ within the meaning of section 122 Stamp Act 1891) at the date of settlement. Similarly, a forwards contract that is capable only of being settled in cash is not regarded as an ‘agreement to transfer chargeable securities’ for the purposes of a charge to SDRT.