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Qualified Indices Service for 871 (m) Compliance

Amendments to the US Internal Revenue Service (IRS) regulations 871(m) announced in September 2015 are due to come into effect on January 1, 2017. These changes require dealers to withhold US federal taxes on certain equity linked instruments, including those which reference indices.

To comply with these changes, dealers must be able to identify which equity linked instruments are in scope. The criteria below outline which indices qualify:

  • Reference 25 or more securities
  • Reference primarily long positions
  • No underlying security can represent more than 15% of the weighting
  • Five or fewer underlying securities cannot represent more than 40% of the weighting
  • Dividend yield < 1.5x the dividend yield of last years S&P 500 Index
  • Traded though futures or option contracts on SEC or CFTC approved exchanges

As dealers require accurate data to meet the January 1, 2017 implementation of the new 871 (m) regulations, Exchange Data International has reviewed the universe of underlying indices for derivatives traded on the full list of exchanges recognised by the IRS. The following are all analysed against the IRS 871 (m) qualified indices:

  • Index Composition
  • Weightings
  • Dividend Yields
  • Re-balancing Methodologies

Data fields to support 871 (m) provided by EDI:

Reference Data Qualification of 871 (US Content)
Symbol >=25 components # components CFTC/FBOT <50% US
ISIN No US comp >15% #US compenents Trading Venues
Top 5 US comp <=40% Largest component Futures Options, Both
BBG Dividend Yield US Comp <=1.5 x S&P Annual Dividend Yield Index Ticker
Index Name Long only Weight of top 5 components Index Provider
Public, pre-defined Rebalancing Weight of top 10 components

Other EDI data to support 871 (m) provided by EDI:

  • Dividend Data
  • Convertible Bond Data
  • Corporate Actions Data
  • Derivative Data - Pricing and Reference Data
For more information, download EDI's presentation on 871 (m) Compliance or product sheet for 871 (m) Delta File and 871 (m) Qualified Indices.
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