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Providing Stability for the U.S. Listed Equity Options Market

Traders Magazine Online News, June 8, 2017

Craig Donohue

Over the past two years, OCC, in its role as a Systemically Important Financial Market Utility, has taken on a leadership role in advocating for the U.S. listed equity options market  with global policymakers on key legislative and regulatory issues.

It was in that context that during the recent 35th Annual Options Industry Conference, I was asked by a member of the media if there was anything that kept me up at night. My answer: financial tax reform.

Both the Trump Administration and certain Members of the U.S. Congress leading the respective tax committees have indicated that tax reform is a priority this year, and proposals are being drafted to ensure introductions of bills to comprehensively reform the tax code. House Ways and Means Committee Chairman Kevin Brady (R-TX) and Senate Finance Committee Chairman Orrin Hatch (R-UT) are leading congressional consideration of tax proposals in the 115th Congress.

Craig Donohue

These comprehensives tax reform proposals may include a financial products tax reform proposal that is based on prior legislation introduced by former House Ways and Means Committee Chairman Dave Camp (R-MI). Such a proposal, if enacted, and others like it could make the use of listed equity options much less attractive to market participants than under current law. In this respect, the proposals would treat all listed equity options as sold at the end of the year, treat appreciated stock as sold if a taxpayer enters into an option to manage risk associated with owning the stock, and radically alter the tax treatment of stock while a related option position is outstanding.

Enacting these proposals would adversely affect individuals and other taxpayers using listed equity options to manage the risks associated with their investments in publicly traded stocks. It would discourage the use of options by distorting rational economic and risk management decision-making and replacing the well-established and relatively simple tax rules for listed equity options with a burdensome and overly complicated regime.

In addition to the broader efforts outlined above by Chairmen Brady and Hatch, Congressman Tom Reed (R-NY), a member of the House Ways and Means Committee, is leading efforts to develop a financial products tax reform draft that is intended to be more refined than the proposals noted above. OCC and the U.S. Securities Markets Coalition (Coalition) have been meeting with the Congressman and his staff to explain the issues raised by previous financial product tax proposals and to advocate for a different approach in the forthcoming legislative package.

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