CFM50750 | Derivative contracts: exclusions from regime: equity derivatives: condition A

Contracts held for life assurance business

The first condition (condition A) in CTA09/S591 is relevant only to life assurance companies. A contract whose underlying subject matter consists wholly of shares will not be a derivative contract if it satisfies three conditions.

• The contract must be a ‘plain vanilla contract’ held by a company carrying on life assurance business. ‘Plain vanilla contract’ is a defined term in the legislation (CTA09/S708). It means a derivative that is not embedded into a loan relationship, another derivative, or some other contract.

• The contract must be an approved derivative for the purposes of Rule 3.2.5 of the Insurance Prudential Sourcebook. This rule specifies conditions about the purpose for which the company holds the derivative, how the risk is managed, and the circumstances in which the company enters into or acquires the derivative.

• It must not be a contract that that satisfies the ‘alternative accounting condition’ in CTA09/S579(1)(b), in other words a contract (like a prepaid forward) which is not treated as a derivative for accounting purposes because of a substantial upfront payment, but does form part of a financial asset or liability.