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2 Colum. J. Tax L. 1 (2011)

handle is hein.journals/colujoutl2 and id is 1 raw text is: ARTICLES
New Tax Issues Arising From the Dodd-
Frank Act and Related Changes to Market
Practice for Derivatives
Erika W. Nijenhuis*
OVERVIEW OF PRODUCTS AND TAX RULES                                              6
A. Description of Certain Common Derivative Financial Instruments .............. 6
1.        Interest Rate  Sw aps ........................................................................  6
2.        Options, Including  Swaptions ........................................................  8
3.        Credit D efault Swaps ......................................................................  9
4.        F utures  C ontracts  ........................................................................   12
B. Overview of Taxation of Common OTC Derivatives ................................. 12
1.        Notional Principal Contracts  .....................................................   12
2.        Taxation  of  Options  .....................................................................  15
3.        Taxation  of  CD S  ..........................................................................   16
C .  O verview   of  Section  1256  ..........................................................................   19
D. Overview of Other Special Tax Rules for Derivatives ............................... 21
1.        H edging  Transactions .................................................................   21
2.        M ark-to-M arket Rules  ................................................................   23
II.     DEVELOPMENTS IN THE MARKETS AND THE LAW ....................... 23
A .  The  C learing  Process ...................................................................................  24
1.        Clearing  Futures  Contracts ........................................................   25
By Erika W. Nijenhuis, a partner in the New York office of Cleary Gottlieb
Steen & Hamilton LLP. A prior version of this article, written before the amendment to §
1256 described herein, was published at 127 TAXNOTES 1235 (June 14. 2010). based on a
version presented at the Tax Forum on April 5, 2010 (Paper No. 623), and will be
republished in THE CORPORATE TAX PRACTICE SERIES (Practising Law Institute 2010). ©
Erika W. Nijenhuis. All rights reserved.
Many thanks to Biswarup Chatterjee for his assistance with Section II.C of the
article, and to Donald Bendernagel, Adrienne Browning, Michael Farber. Silas J. Findley,
Viva Hammer. Laura Klimpel, Andrea S. Kramer, Jeffrey Maddrey, William Paul, Larry
Salva, David H. Shapiro. Diane G. Simons, Jonathan Silver and Michael Yaghmour for their
comments on earlier drafts of the article.
The author advised one of the U.S. CDS clearinghouses described below on tax
issues in connection with clearing CDS, and has represented the Securities Industry and
Financial Markets Association and members thereof regarding the tax issues discussed in
this article.
The manner in which the derivatives markets operate is complex and evolving.
Every effort has been made to describe them correctly as of December 2010 by consulting
with experts. but it is possible that some aspect of either market practice or the legal rules
governing those instruments described herein is inaccurate, as the author is a not a banker or
an expert in the non-tax rules governing these markets and instruments. Any errors are those
of the author.

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