taxud/2414/08 - European Commission - Europa

In the case of Equity SWAPS these are services where the underlying asset is a stock, a
basket of stocks, or a stock index. Compared to actually owning the stock, in this case
there is no obligation to pay anything up front, but there are also no voting or other rights
that stock holders do have. A total return swap is a swap in which party A pays the total
return of an asset, and party B makes periodic interest payments. The total return is the
capital gain or loss, plus any interest or dividend payments. If the total return is negative,
then party A receives this amount from party B. The parties have exposure to the return
of the underlying stock or index, without having to hold the underlying assets. The profit
or loss of party B is the same for him as actually owning the underlying asset.
Total return swap (also known as total rate of return swap, or TRORS) is a contract in
which one party receives interest payments on a reference asset plus any capital gains
and losses over the payment period, while the other receives a specified fixed or floating
cash flow unrelated to the credit worthiness of the reference asset, especially where the
payments are based on the same notional amount. The reference asset may be any asset,
index, or basket of assets. The TRORS, then, allows one party to derive the economic
benefit of owning an asset without putting that asset on its balance sheet, and allows the
other (which does retain that asset on its balance sheet) to buy protection against a
potential decline in its value;
(3) the issuance of tradable debt derivatives, including interest rate swaps;
These are services supplying a financial contract whose payoffs over a period of time are
derived from the performance of one or more tradable debt contracts. This performance
can determine both, the amount and the timing of the payoffs; these payoffs can be in
cash or in becoming the debtor or the creditor of the underlying securities, currency
exchange contracts, deposits, credits or insurances; such services include the supply of
commodity derivatives and indices derivatives which are not excluded by the Regulation;
(4) performance measurement, rating, prediction and control of securities;
Performance measurement, prediction and control of securities are essentially services
for managing the investment risk involved in the supply of securities; they determine the
quality of a security over a specified period in time and determine its market value and –
possibly – its share in an investment portfolio; it is an essential element of supplying a
security and it relates to securities only. It also allows optimising investments by
eliminating less performing securities from the portfolio and replacing them by acquiring
better performing securities. We think that these elements reflect the specific and
essential character of an exempt supply of a security. (Some lawyers in the Commission's
Legal Service were sceptic about this approach.)
(5) arrangement and monitoring of transactions under the security agreement,
including possible voting rights.
Such services enable the client to exercise his rights in the company or association in
which he holds an equity share; they change the legal situation by reducing the legal
liability of the supplier and establish the financial situation.
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