Central Counterparty for Equities
Guidance Note
November 2000 02/00
UK Stamp Duty Reserve Tax
1 Introduction
The introduction of the central counterparty will, in certain cases, create additional contracts in the post trade contractual chain. UK SDRT legislation is based on an SDRT charge arising each time there is a contractual change in beneficial ownership of shares as the result of an “agreement to transfer” securities. In certain cases, a change in beneficial ownership is relieved by the legislation. In those instances no charge arises.
The central counterparty will settle transactions with CREST account holders. In some cases the settlement chain will not reflect the contractual chain, in that the number of actual beneficial changes as reflected in CREST is fewer than the number of contractual beneficial changes.
For example, the following contractual chain could arise as the result of a SETS trade:
NCM – GCM – CCP – GCM – NCM
However, the actual settlement chain might look as follows
NCM – CCP – NCM
In such an instance, market users were concerned that an SDRT charge could arise that would not be automatically calculated and collected within the CREST mechanism. Further, the interposition of the central counterparty and other intermediaries in the contractual chain may have given rise to additional charge(s).
LCH, CRESTCo and the London Stock Exchange (the Exchange) have been discussing these issues with the Inland Revenue and the following paragraphs seek to explain the arrangements that will be put in place to ensure there is no increase to the overall stamp burden post introduction of the central counterparty.
2 Legislative Enhancement
The Inland Revenue has agreed to ask for approval for regulations to be made to provide for exemptions in respect of transactions presented to the central counterparty by the Exchange. Regulations of this type already exist in respect of transactions carried out on the Tradepoint Exchange (see Statutory Instrument No. (SI) 2051, headed the Stamp Duty Reserve Tax (Tradepoint) Regulations 1995) and provide exemptions specifically for beneficial ownership transfers from[1]:
(i) a clearing participant or its nominee to another clearing participant or its nominee;
(ii) a non-clearing participant or client to a clearing participant or its nominee;
(iii) a clearing participant or its nominee to the central counterparty or its nominee;
(iv) the central counterparty or its nominee to a clearing participant or its nominee.
In each case the securities transferred are required to be transferred to another person in order to qualify for the relief.
Where the actual transfer represents the performance of more than one contract, typically due to the introduction of a general clearing member into the contractual chain but not the settlement chain, there is no requirement to report to the Inland Revenue the additional exempt contractual change in beneficial ownership. However, the Inland Revenue reserves the right to inspect, at any time, the records of a GCM to ensure that the conditions for SDRT exemption etc are being applied correctly. GCMs and other contractual intermediaries should therefore ensure that appropriate internal records are maintained for audit purposes.
The Inland Revenue has confirmed that Regulations along similar lines will be made to ensure that the introduction of the central counterparty will be neutral from a Stamp Duty Reserve Tax perspective.
Questions pertaining to this section should be directed to:
Name / Number / E-mailRobert Fair / 020 7849 0115 /
Paul Swann / 020 7426 7104 /
List of guidance notes
The project has published a number of guidance notes. The others published to date, or in production, are listed below, please contact the project for any later guidance notes.
01/00 Disclosure of shareholdings
02/00 UK Stamp Duty Reserve Tax
03/00 Agency and riskless principal trading (to be published)
04/00 Irish Stamp Duty
05/00 Impact of late settlement
Contact points
The CCP for Equities project can be contacted on 020 7849 0510 or via email at . Members of the Exchange, LCH or CRESTCo can also make use of their usual contacts in these organisations.
Information about the service is also available on the following websites:
www.crestco.co.uk
www.lch.co.uk
www.londonstockexchange.com
2
[1] Certain other reliefs exist which are only relevant to the central counterparty and are not reproduced here.