Final regulations - Transfers, assignments of derivative contracts not “an exchange” to non-assigning counterparty 

November 5: The Treasury Department and IRS today released for publication in the Federal Register final regulations (T.D. 9639) providing that the transfer or assignment of a derivative contract in certain situations is not “an exchange” to the non-assigning counterparty for purposes of Reg. section 1.1001-1(a).

Today’s final regulations [PDF 99 KB] in general adopt regulations that were proposed in July 2011—with certain clarifications—and remove corresponding temporary regulations.


According to the preamble, the final regulations adopt a general rule contained in the 2011 temporary regulations—that a transfer or assignment of a derivative contract that satisfies the conditions specified in the regulations is generally not treated by the non-assigning counterparty as a deemed exchange of the original contract under Reg. section 1.1001-1(a).

Read an initial report on the July 2011 temporary regulations: TaxNewsFlash-United States [PDF 74 KB]

Moreover, the final regulations contain a new sentence intended to clarify that a payment between the parties to the assignment or transfer does not result in an “embedded loan” under Reg. section 1.446-3(g)(4) if a notional principal contract (NPC) is transferred or assigned under the conditions specified in today’s final regulations.


As explained in the preamble to today’s final regulations—

  • Reg. section 1.446-3(h) provides the rules for the treatment a termination payment made or received by the assignor or assignee pursuant to an assignment of an NPC.
  • The consequences to the non-assigning counterparty are governed by section 1001.
  • A termination payment made or received on an NPC is treated by the assignee as a nonperiodic payment under Reg. section 1.446-3(h)(3).
  • Reg. section 1.446-3(h)(3) also provides that the special rules of Reg. section 1.446-3(g)(4) apply to such a termination payment made pursuant to an NPC.
  • Reg. section 1.446-3(g)(4) generally provides that a swap with significant nonperiodic payments is treated as two transactions—an on-market, level payment swap and a loan.

Final regulations

In addition to providing that certain transfers or assignments of derivative contracts will not result in the recognition of gain or loss to the non-assigning party, today’s final regulations expressly provide that a payment between (1) the party transferring or assigning its rights and obligations under the contract and (2) the party to which the rights and obligations are transferred or assigned pursuant to the transfer or assignment of an NPC that meets the conditions specified in these final regulations is not subject to the embedded loan rules in Reg. section 1.446-3(g)(4).

The preamble clarifies that neither the assignee nor the non-assigning counterparty is treated as having an embedded loan under Reg. section 1.446-3(g)(4) as a result of a payment made between the assignor and the assignee of an NPC pursuant to a transfer or assignment that satisfies the requirements of Reg. section 1.1001-4(a).

As further stated in the preamble, Treasury and the IRS took this action because of a belief that it would be inconsistent for an embedded loan to result from such a payment in circumstances in which the general rule in Reg. section 1.1001-4(a) treats the transfer or assignment of an NPC as not creating a taxable event for the non-assigning counterparty.

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