Volume 6 Issue 4 2007

Current Federal Tax Developments By William R. Pomierski

Code Sec. 1256 Considerations for ICE Futures and Beyond

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William Pomierski is a partner in the international law firm of McDermott Will & Emery LLP, resident in the Chicago office. He is a former editor-in-chief of the JOURNAL OF TAXATION OF FINANCIAL PRODUCTS.

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limited number of derivative (financial) transactions are classified as “Section 1256 Contracts” for federal income tax purposes. Section 1256 Contracts are defined in Code Sec. 1256(b) as the following: (1) regulated futures contracts; (2) foreign currency contracts; (3) nonequity options; (4) dealer equity options; and (5) dealer securities futures contracts.1 If a derivative transaction meets the definition of a Section 1256 Contract, a number of special tax rules potentially apply, including the “Mark-to-Market Rule” and the “60/40 Rule.” Under the Mark-to-Market Rule, all Section 1256 Contracts held by a taxpayer at the close of the tax year are treated as if sold at their fair market value on the last business day of the year.2 Mark-to-market tax accounting is imposed on Section 1256 Contracts regardless of the taxpayer’s general method of tax accounting. Section 1256 Contracts are also marked to market (at fair value) if terminated or transferred during the tax year by one of the following methods: offsetting the position, taking or making delivery, exercising or being exercised, assigning or being assigned, lapse or otherwise.3 Under the 60/40 Rule, gains and losses from all Section 1256 Contracts held by the taxpayer during the year are netted. Sixty percent of the net gain or loss on a taxpayer’s Section 1256 Contracts that are capital assets is then characterized as long-term, and 40 percent as short-term, regardless of the taxpayer’s actual holding period for these positions.4 For individual taxpayers and passthrough entities with individual owners, the 60/40 Rule is beneficial in that it allows for long-term capital gains potential for transactions that are held for less than one year. From the perspective of a corporate taxpayer, the distinction between long-term and short-term capital gains is not significant since corporate long-term capital gains

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Current Federal Tax Developments are taxed at the same rate as short-term capital gains and ordinary income. However, the fact that Section 1256 Contract losses may be capital by reason of the 60/40 Rule is often viewed as a negative consequence by corporate taxpayers that have difficulty utilizing net capital losses. This is particularly the case if a Section 1256 Contract is entered into as part of an overall risk management transaction where losses from a Section 1256 Contract are capital and income or gains from offsetting non-Section 1256 Contract positions are ordinary. Notwithstanding the general Mark-to-Market Rule and the 60/40 Rule, the timing and/or character of gains and losses from Section 1256 Contracts may be altered by other provisions of the Code. For example, certain (but not all) Section 1256 Contracts involving foreign currencies are considered “section 988 transactions,” resulting in ordinary gains and losses under Code Sec. 988.5 Taxpayers can also elect under Code Sec. 988 to treat gains and losses from regulated futures contracts and nonequity options that otherwise meet the definition of a section 988 transaction as ordinary.6 In addition, to the extent a Section 1256 Contract meets the definition of a qualified hedging transaction under Code Sec. 1221(b)(2), the ordinary gain or loss treatment extended to hedging transactions tio onss under unde Code Sec. 1221(a)(7) ( ) would override the 60/40 60 0/4 40 Rule. Rule l There Th heree are a e also lso exceptions except ons to t the Mark-to-Market Rule. For example, mark-to-market losses from ule e . Fo Section 1256 Contracts Co ractss may m ma ay bee subject su ect to deferral deferra under Code Sec. c 1092 092 if the the e contract ccont act is is part part of a tax straddle.7 Mark-to-market losses may also be deferred by reason of Code Sec. 1211, which limits the deductibility of capital losses in any year to the amount of capital gains (or against not more than $3,000 of ordinary income in the case of taxpayers other than corporations). Finally, if a Section 1256 Contract meets the definition of a qualified hedging transaction for purposes of Code Sec. 1221(a)(7), the hedge timing rules of Reg. §1.446-4 will generally trump the Mark-to-Market Rule.8 Section 1256 Contracts are also subject to special tax rules outside of Code Sec. 1256 itself. For example, a special capital loss carryback is provided for certain Section 1256 Contract losses.9 Specifically, individual taxpayers with “net section 1256 contract losses” can elect to carry these losses back to the three preceding years to offset “net section 1256 contract gains” in such years.10 Section 1256 Contract losses that are carried back under this rule continue to be

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subject to the 60/40 Rule.11 This carryback rule does not apply, however, to corporate taxpayers, who are otherwise entitled to a three-year capital loss carryback, or to estates or trusts.12 Other special rules that apply to Section 1256 Contracts include, by way of example: Code Sec. 475(c)(2), which excludes Section 1256 Contracts from the definition of a “security” for purposes of the securities dealer and trader rules of Code Sec. 475(a) and Code Sec. 475(f);13 by contrast, Section 1256 Contracts are included in the definition of a “commodity” for purposes of the commodities dealer and trader elections under Code Sec. 475(e) and Code Sec. 475(f);14 Code Sec. 1092(b), which provides special rules for “mixed straddles” involving Section 1256 Contracts and non-section 1256 Contracts;15 Code Sec. 1092(d)(5), which exempts straddles comprised entirely of Section 1256 Contracts from the loss deferral and related consequences under Code Sec. 1092; Code Sec. 1221(b)(1)(B)(i), which excludes Section 1256 Contracts from the definition of a “commodities derivative financial instrument” for purposes of the ordinary income or loss assurances extended to “commodities derivatives dealers” under Code Sec. 1221(a)(6).

Qualified Board or E Exchange Requirement With W ith h thee exception exccep of “foreign currency contracts,” to be classified as a Section 1256 Contract a derivative transaction must, in addition to meeting other requirements, be traded on or subject to the rules of a qualified board or exchange.16 This requires more than simply being traded on or subject to the rules of an exchange. The exchange itself must be a qualified board or exchange, which is limited to: a national securities exchange registered with the Securities and Exchange Commission (Category 1), a domestic board of trade designated as a “contract market” by the Commodities Futures Trading Commission (Category 2), or any other exchange, board of trade, or other market that the Treasury Secretary determines has rules adequate to carry out the purposes of Code Sec. 1256 (Category 3).17 An exchange or board of trade that falls within Category 1 or Category 2, above, is automatically treated as a “qualified board or exchange.” As such,

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Volume 6 Issue 4 2007 any futures contract (other than a “securities futures contract”) that is traded on (or subject to the rules of) a Category 1 or a Category 2 exchange will be a “regulated futures contract,” provided that the amount required to be deposited and the amount that may be withdrawn with respect to such contract is based on a system of marking to market.18 Similarly, any “nonequity option” that is traded on (or subject to the rules of) a Category 1 or a Category 2 exchange will be considered a Section 1256 Contract.19 In the case of a “securities futures contract” or an “equity option,” however, being traded on (or subject to the rules of) a Category 1 or a Category 2 exchange will not, by itself, be sufficient to cause the position to be classified as a Section 1256 Contract. Each of these two categories of Section 1256 Contracts also require that the position be held or entered into by the taxpayer as a “dealer” in such contracts.20 An exchange that is not a Category 1 or a Category 2 exchange is not a qualified board or exchange unless the Treasury Secretary issues a determination letter that the particular board of trade or exchange has rules adequate to carry out the purposes of Code Sec. 1256. Prior to the ICE Futures ruling described below, the IRS had designated two exchanges—the International Futures Exchange (Bermuda) and the Mercantile M can Merc ntille Division of the Montreal Exchange—as qualifi boards qu uallifi l ed ed b rds or or exchanges exchange under Category 3.21 Although the issued ruling addressing the Code Alth l hough h th h IRS he RS is sued a rulin Sec. of a mutual offset arrangeec 1256 12 256 implications i ment between th the Chi Chicago Mercantile Exchange cago M erc ntile Ex xcha ange (CME), and thee Singapore S gapore International In nterna ona al Monetary Monetar Exchange Limited (SIMEX), the IRS did not designate the SIMEX as a Category 3 exchange.22 Instead, the IRS ruled that futures contracts and options on futures initially executed on the SIMEX that were assumed by the CME (which is a Category 2 exchange) were Section 1256 Contracts because they were “subject to” the CME’s rules. Contracts executed on the CME and assumed by the SIMEX under this arrangement, however, were not considered Section 1256 Contracts because the SIMEX was not a Category 1 or a Category 2 exchange in its own right, and the SIMEX had not been designated as a Category 3 exchange pursuant to this ruling or otherwise.23

Rev. Rul. 2007-26 The IntercontinentalExchange® (ICE) operates a global, electronic marketplace for trading in energy derivatives through its over-the-counter (OTC) elec-

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tronic trading platform. According to its webpage, ICE operates its OTC trading platform as an “exempt commercial market” under the Commodity Exchange Act (the “CEA”) and regulations of the Commodities Futures Trading Commission (CFTC). As an exempt commercial market, ICE’s OTC trading platform is required to comply with the access, reporting and record-keeping requirements of the CFTC, but is not otherwise subject to substantive regulation by the CFTC or other U.S. regulatory authorities.24 ICE’s OTC trading platform has not been designated as a contract market by the CFTC. ICE also operates a separate futures contract market (“ICE Futures”) through its regulated London-based subsidiary. ICE Futures is a Recognized Investment Exchange in the United Kingdom, supervised by the Financial Services Authority under the terms of the Financial Services and Markets Act of 2000. ICE Futures offers trading in futures contracts (and options on futures) based on certain crude oil benchmarks, such as Brent Crude futures and West Texas Intermediate (WTI) Crude futures, along with heating oil futures contracts. ICE Futures has not been designated as a contract market by the CFTC.25 Pursuant to Rev. Rul. 2007-26,26 the IRS designated ICE Futures as a qualified board or exchange under Code Sec. 1256(g)(7)(C) (a Category 3 exchange).27 This revenue ruling applies to “ICE Futures Contracts,” defined as ICE commodity futures contracts and futures contract options. As a result, ICE Futures Contracts Con o tract tr s eentered nter into on or after April 1, 2007, which is the the effective effecctive date of Rev. Rul. 2007-26, are Section 1256 Contracts.28 ICE Futures Contracts entered into prior to April 1, 2007, however, are not Section 1256 Contracts. By its terms, Rev. Rul. 2007-26 is limited to ICE Futures Contracts, which are futures contracts and futures contract options that trade on ICE’s United Kingdom futures contract market. By contrast, contracts entered into on ICE’s OTC trading platform are not Section 1256 Contracts notwithstanding Rev. Rul. 2007-26. To the extent any such ICE OTC contract meets the definition of a “notional principal contract” pursuant to Reg. §1.446-3, periodic and nonperiodic payments with respect to such contract should be considered ordinary and would be subject to the accrual principles of Reg. §1.446-3.29 Termination payments with respect to any such notional principal contract (NPC), as well as payments made in connection with ICE OTC options and cash-settled forwards (including bullet swaps), would generally

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Current Federal Tax Developments be taken into account on a when-realized basis, and the tax character of such payments should, pursuant to Code Sec. 1234 or Code Sec. 1234A, be capital if the asset underlying the contract is or would be a capital asset in the taxpayer’s hands. Conversely, if the property underlying an ICE OTC position is itself ordinary (e.g., the taxpayer is a dealer in the underlying property or the underlying property qualifies as a Code Sec. 1221(a)(8) supply), Code Sec. 1234 and Code Sec. 1234A should not apply and, under the general case law for executory contracts, gain or loss on the lapse or expiration of the contract (including a “termination payment” made or received with respect to an NPC), should result in ordinary income or an ordinary deduction.30 Unfortunately, Rev. Rul. 2007-26 does not address the potential application of Code Sec. 1256 to ICE’s “cleared” OTC contracts. According to the ICE Clearing Guide dated October 13, 2005, which is available on ICE’s web page, “OTC Clearing offers the benefits of credit enhancement, cross-margining opportunities, and increased market liquidity.” ICE's Clearing Guide describes the OTC Clearing process as occupying “the niche between bilateral and futures trading.”31 As a result of ICE’s OTC clearing process, it appears that a bilateral OTC transaction is effecp pp tively as between the original parties to tiv vely terminated t m term the th h bilateral he b bilaate bil tera transaction, ransaction, and is reconstituted as two separate transactions, with se epaaratte ttra an action ns, wit h the clearing house becoming to each of the new transactions. ng a counterparty ccou Unfortunately itt is i not clear cclear whether wh heth or or not not an n ICE IC CE cleared OTC position sit n is effectively effeective y replaced re laced by by an an ICE IC C Futures Contract. If the clearing process does result in the exchange of an OTC position for an ICE Futures Contract, the resulting futures contract, if entered into on or after April 1, 2007, would be considered a Section 1256 Contract. If, however, the ICE OTC clearing process is indeed somewhere between a bilateral OTC position and an ICE Futures Contract, then it would appear that the resulting cleared OTC position would not be a Section 1256 Contract unless it were considered by the IRS to be a futures contract or a nonequity option on a futures contract traded on or subjected to the rules of ICE Futures. Hopefully this question will be clarified in the near future.

Implications of Rev. Rul. 2007-26 Beyond ICE Futures Finally, the implications of Rev. Rul. 2007-26 for non-U.S. futures exchanges that are allowed to offer

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futures contracts (and options on futures) in the U.S. under the “Rule 30” exemption from registration with the CFTC need to be considered. CFTC Rule 30.10 permits a foreign regulatory or self-regulatory organization to petition the CFTC for an order allowing member firms to conduct business from locations outside of the United States for United States persons without registering under the CEA.32 In light of the fact that ICE Futures had previously received a no-action letter from the CFTC allowing it to offer futures contracts (and options thereon) in the U.S. under Rule 30.10, the IRS seems to have made it clear in Rev. Rul. 2007-26 that Rule 30.10 status does not result in an exchange being considered a qualified board or exchange for Code Sec. 1256 purposes under Category 1 or Category 2. As such, financial positions that trade on a foreign exchange operating in the U.S. under Rule 30.10 should not be considered Section 1256 Contracts absent a ruling or other determination letter from the IRS specifically designating any such exchange as a Category 3 exchange. It will be interesting to see whether or not Rev. Rul. 2007-26 encourages other foreign exchanges operating in the U.S. under Rule 30.10 to seek Category 3 designation from the IRS in the future. Any exchange contemplating Category 3 status would need to consider the fact that the IRS would be expected to condition such status on the exchange’s willingness to make certain customer and/or transaction information available avai able to to the IRS. For example, in the determination underlying Rev. Rul. 2007-26, among tio on letter etter u nd other representations, ICE Futures agreed that under Article 27 of the United States–United Kingdom Income Tax Treaty (2001), the IRS would have access to information held by ICE Futures with respect to U.S. taxpayers.33 ICE Futures also agreed to collect from all exchange members their U.S. taxpayer identification numbers and to provide such information to the IRS on request. In addition, ICE Futures represented to the IRS that it would amend its member rules to require members effecting transactions on ICE Futures on behalf of persons (other than exempt foreign persons) to identify such persons and to file returns in the manner prescribed by Code Sec. 6045, and such other provisions of the Code and regulations that are pertinent thereto; failure of an exchange member to comply with this provision will result in immediate suspension of such member’s privileges on ICE Futures until the member complies with these reporting requirements. Finally, ICE Futures agreed to require

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Volume 6 Issue 4 2007 exchange members, upon request, to supply books, papers, records or other data relating to transactions occurring on ICE Futures as described in Code Sec. 7602 and the regulations thereunder. Any futures exchange operating in the U.S. under Rule 30.10 that is considering seeking Category 3 designation from the IRS would ultimately need to weigh the perceived advantages of Section 1256 Contract status (which is principally the application of the 60/40 Rule to gains) against the disadvantages (such as the capital loss results under the 60/40 Rule, application of the Mark-to-Market Rule, and the mixed straddle rules), along with the information and other recordkeeping burdens that are likely to be imposed by the IRS as a condition to granting Category 3 designation.

Conclusion Whether Rev. Rul. 2007-26 will be viewed positively or negatively will obviously vary depending on the type of taxpayer entering into ICE Futures Contracts, as well as the taxpayer’s reasons for entering into the positions. For corporate taxpayers engaging in ICE Futures Contracts, Rev. Rul. 2007-26 may be viewed negatively by some since losses on post-March 31, 2007, ICE Futures Contracts will be capital unless such positions qualify as tax hedges under Code Sec. 1221(a)(7),34 or are entitled to ordinary gain or loss under Code Sec. 988.35 For trading firms and individual investors, ICE Futures Contracts entered into on or after April 1, 2007, now offer the benefit of long-term capital gain potential under the 60/40 Rule, but are also subject to all of the negative attributes of Section 1256 Contracts, including the Mark-to-Market Rule and the rules for mixed straddles.36

ENDNOTES 1

2 3 4 5

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All references to the Code are to the Internal Revenue Code of 1986, as amended. Each category of Section 1256 Contract is separately defined in Code Sec. 1256(g). Code Sec. 1256(a)(1). Code Sec. 1256(c)(1). Code Cod de Sec. S 1256(a)(3). Code Cod de SSec. ec. 9 98 988(a)(1)(A) A) an and Code ode Sec. 988(b)(3). ( N Not Note t that te th h t Section hat SSec 1256 Contracts Contracts that are conside sidered ered d sec section ctio 988 88 transactions ac will continue con to b bee su subject ubjec ct to tthe Mark-t Mark-to-Market o-Mark t Rule (u (unless trumped mped by some other provision of Code), notwithstanding the ord ordinary ary gai gain no orr loss oss ch chararacterization resulting g fro from Code Sec Sec.. 988 988. 8 See, Code Sec. 988(c)(1)(D)(ii). Pursuant to Code Sec. 988(c)(1)(D)(i), absent an election, the definition of a section 988 transaction does not extend to “any regulated futures contract or nonequity option which would be marked to market under section 1256 if held on the last day of the taxable year.” Under Code Sec. 1092, losses from a position that is part of a tax straddle will be deferred to the extent of unrecognized gain on any offsetting positions that are part of the same tax straddle. If a straddle is comprised of Section 1256 Contracts and non-Section 1256 Contracts, resulting in a so-called “mixed straddle,” absent taking advantage of some of the special rules for mixed straddles under Code Sec. 1092, the Mark-to-Market Rule can result in timing mismatches to the extent that mark-tomarket gains on the Section 1256 Contracts are required to be recognized currently, whereas unrealized losses on the non-Section 1256 Contract positions are not marked-to-market; conversely, mark-to-market losses on the Section 1256 Contract component of a tax straddle may be deferred by reason of an unrecognized

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9 10 11 12

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gain on the non-Section 1256 Contract positions that are part of a mixed straddle. Depending on the timing of the gain or loss resulting from the ordinary asset, ordinary obligation, or borrowing being hedged by a Section 1256 Contract that qualifies as a Code Sec. 1221(a)(7) hedge, the hedge timing rules of Reg. §1.446-4 may provide for recognition of gain and loss on the particular Section 1256 Contract other than on a mark-to-market basis. Code Sec. 1212(c). As A defined iin nC Code od Sec Sec. 1212(c)(4) 1212 c) 4) and (c)(5). (c) 5). Code C de SSec. Co ec 1 1212(c)(6)(A). 212( )(A) Code Sec. 1212(c)(7)(B). See Code Sec. 475(c)(2)(flush language)(“Subparagraph (E) shall not include any contract to which section 1256(a) applies.”). See Prop. Reg. §1.475(f)-2(e)(2)(“Coordination with section 1256. -- If a trader in commodities makes an election under section 475(f)(2) and trades section 1256 contracts that are commodities as defined in section 475(e)(2), then the rules of section 475(f) and paragraph (e)(1) of this section apply to those contracts, and not the capital character rules of section 1256.”). Mixed straddles are defined as Code Sec. 1092 straddle positions where some – but not all – of the positions comprising the straddle consist of Section 1256 Contracts. Note that under Code Sec. 1256(d), a taxpayer may elect to have Code Sec. 1256 not apply to all Section 1256 Contracts that are part of a mixed straddle. Foreign currency contracts are defined in Code Sec. 1256(g)(2) as a contract that requires delivery of, or its settlement depends on the value of, a foreign currency in which regulated futures contracts are traded. A foreign currency

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17 18 19

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contract must also be (1) traded in the interbank market and (2) entered into at arm’s length at a price determined by reference to the price in the interbank market. Code Sec. 1256(g)(7). Code Sec. 1256(g)(1). A “nonequity option” is defined in Code Sec. 1256(g)(3) as any listed option that is not an equity option (i.e., an option on a single stock or a narrow-based stock index). A listed option is defined in Code Sec. 1256(g)(5) as an option that is traded on (or subject to the rules of) a qualified board or exchange. A “dealer equity option” is defined in Code Sec. 1256(g)(4) as a listed option that is also (1) an equity option (i.e., an option on a single stock or a narrow-based stock index) and that is (2) purchased or granted by an options dealer in the normal course of his activity of dealing in options. The equity options must be listed on the qualified board or exchange on which the options dealer is registered. Special rules apply to limited partners and limited entrepreneurs of dealers in equity options. An “options dealer” is defined in Code Sec. 1256(g)(8) as “any person registered with an appropriate national securities exchange as a market maker or specialist in listed options.” The term “options dealer” also includes any person whom the Secretary determines performs functions similar to the persons described in the preceding sentence. A “dealer securities futures contract” is defined in Code Sec. 1256(g)(9) as (1) a securities futures contract (as defined in Code Sec. 1234B) or an option on a securities futures contract, that is (2) entered into by such dealer (or, in the case of an option, is purchased or granted by such dealer) in the normal course of his activity of dealing in such contracts or options, and that

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(3) is traded on a qualified board or exchange. A “dealer” in securities futures contracts is defined in Code Sec. 1256(g)(9) as a person that the Secretary determines “performs, with respect to such contracts or options, as the case may be, functions similar to the functions performed by persons described in paragraph (8)(A).” See Rev. Rul. 2004-94, IRB 2004-38, 491, 2004-2 CB 491 (designating certain members of NQLX “dealers” in securities futures contracts) and Rev. Rul. 2004-95, IRB 2004-38, 492 (designating certain members of OneChicago “dealers” in securities futures contracts). See, Rev. Rul. 85-72, 1985-1 CB 286 (International Monetary Exchange Limited) and Rev. Rul. 86-7, 1986-1 CB 295 (the Mercantile Division of the Montreal Exchange). Rev. Rul. 87-43, 1987-22 IRB 13, 1987-1 CB 252. See also LTR 8739051 (Jun. 30, 1987). According to Rev. Rul. 87-43, the mutual offset agreement between the CME and the SIMEX allowed customers to establish new positions or offset existing positions on one exchange, during hours in which that exchange was closed for trading, by executing a contract on the other exchange. Under the arrangement, a customer initially placed an order to execute a futures or option contract with a clearing member of the exchange to which the contract was ultimately to be transferred (the “Origination Exchange”). The clearing member for the Origination Exchange then transferred the customer’s cusstom mer’ss order to a clearing member of the mer exchange excchan nge g where w the trade trade was to executed exec (thee “Ex “Execution xecu utio Exchange”). xc e”) After the contract con wass cle cleared eared do on the e Execu Execution tion Exchange, Exchange, it i was automatically auttoma atica ti y ttransferred f tto th the Origination Oi i Exchange through an inter-exchange e clearing process, usually before ore the e next trad trading ing day of the Execution Exchange. Once O a contract t t was assumed by the Origination Exchange, it was thereafter “subject to and treated under the rules of the Origination Exchange as if it had been originally executed on that exchange” without using the mutual offset system. According to the CFTC’s webpage (www.cftc. gov/dea/deaxcombackground.htm), electronic trading facilities providing for the execution of principal-to-principal transactions between eligible commercial entities in exempt com-

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modities may operate as “exempt commercial markets” under the Commodity Exchange Act. A facility that elects to operate as an exempt commercial market (ECM) must give notice to the CFTC and must comply with certain informational, record keeping and other requirements. An ECM is prohibited from claiming that the facility is registered with, or recognized, designated, licensed or approved by, the CFTC. A facility operating as an ECM must also limit trading to persons that are “eligible commercial entities.” Only “exempt commodities” (defined as any commodity other than an “excluded commodity” or an agricultural commodity) are eligible to be traded on an ECM in reliance on this exemption. Exempt commodities include, among others, energy products and metals. By letter dated December 27, 2001, ICE provided notice to the CFTC that it was operating as an ECM. See, www.cftc.gov/dea/dea_ecm_table. htm. ICE Futures received a no-action letter from the CFTC allowing it to offer futures contracts (and options thereon) in the U.S. By letter dated November 12, 1999, the CFTC granted to the International Petroleum Exchange (IPE), the predecessor to ICE Futures, permission to make its electronic trading and order matching system available to IPE members in the United States. Rev. Rul. 2007-26, IRB 2007-16, 970. The determination letter underlying Rev. Rul. 2007-26 is LTR 200726006 (Mar. 28, 2007). It should be noted that the determination letter conditions ICE Futures’ Category 3 status on its “continued compliance with all CFTC conditions necessary to retain its no-action relief permitting it to make its electronic trading and ma matching system available i in the e United States, notwithstanding o withstand ding th that Exchange Excchange [ICE [ CE Futures] is nott d designated d as a contractt market k pursuantt tto Section 5 and 5a of the Commodity Exchange Act.” Rev. Rul. 2007-26 also provides that a taxpayer’s change in its tax accounting treatment of ICE Futures Contracts to the Mark-to-Market Rule is a change in accounting method within the meaning of Code Sec. 446 and 481. However, Rev. Rul. 2007-26 grants automatic consent allowing taxpayers to adopt the Mark-to-Market Rule for ICE Futures Contracts for the first taxable

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31 32

33 34

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year during which the taxpayer holds an ICE Futures Contract that was entered into on or after April 1, 2007. The IRS also provided that affected taxpayers need not file a Form 3115, Application for Change in Accounting Method. See TAM 9730007 (Apr. 10, 1997). See also, Proposed Reg. §1.162-30 and §1.1234A. See Proposed Reg. §1.1234A. See also, TAM 200049009 (Aug. 9, 2000) and TAM 200427025 (Dec. 9, 2003). See, www.theice.com/homepage.jhtml. Interpretative Statement with Respect to the Commission’s Exemptive Authority Under §30.10 of its Rules, 17 C.F.R. Part 30, Appendix A (2006). Among the issues considered by the CFTC in determining whether to grant Rule 30.10 relief to a foreign regulatory or selfregulatory organization are the organization’s: (i) requirements relating to the registration, authorization, or other form of licensing, fitness review or qualification of persons through whom customer orders are solicited and accepted; (ii) minimum financial requirements for those persons that accept customer funds; (iii) minimum sales practice standards, including risk disclosures, and the risk of transactions undertaken outside of the United States; (iv) procedures for auditing compliance with the requirements of the regulatory program, including recordkeeping and reporting requirements; (v) standards for the protection of customer funds from misapplication; and (vi) arrangements for the sharing of information with the United States. LTR 200726006 (Mar. 28, 2007). Code Sec. 1221(b)(2); Reg. §1.1221-2(b) (2002). A hedging transaction is defined for purposes of Code Sec.1221(a)(7) as a transaction that a taxpayer enters into in the normal course of its trade or business primarily to manage (1) the risk of price changes or currency fluctuations with respect to ordinary property that is held or to be held by the taxpayer, or (2) the risk of interest rate or price changes or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, by the taxpayer. See supra note 5, and the surrounding discussion. See supra note 7, above.

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