section 871(m) tools and accelerators - ey - united...
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Section 871(m) tools and acceleratorsLocal knowledge. Global delivery.
Are you prepared for the challenge?The global implementation of Section 871(m) creates both operational and technological challenges for financial institutions. These challenges include identifying in-scope transactions, determining delta, aggregating connected transactions, calculating dividend equivalent amounts, monitoring underlying corporate actions, communicating to clients and related parties, and performing the appropriate withholding and reporting to the IRS. These new requirements will introduce additional risks and increased operating costs related to issuing and holding derivative contracts.
Given the complexity of the Section 871(m) requirements, it is critical that firms have the appropriate system architecture and processes in place to comply with the regulations. Failure to do so could result in regulatory fines and penalties, and expose financial institutions to reputational risk.
With Ernst & Young LLP’s suite of tools and accelerators, financial institutions can address these complex functional requirements and expedite their implementation timeline in order to be compliant by January 1, 2017.
Our toolsErnst & Young LLP’s tools meet the needs of financial institutions that engage in equity derivatives by addressing specific functions impacted by Section 871(m). These tools leverage our tax technical knowledge to come to efficient industry-wide decisions.
Phases of the transaction life cycle where our tools can be leveraged
Pre-trade identification Trade execution Calculate DEA Withholding and reporting
QuIS
DES
SET Calc
The Dividend Equivalent Suite (DES) is an online web tool, with bulk upload or Application Programming Interface functionality that will address specific functionality throughout the Section 871(m) transaction life cycle. This includes the ability to identify simple and complex contracts that are Section 871(m) eligible, identify if transactions are potentially connected, provide the aggregated delta or substantial equivalent test values and provide coordinated withholding calculations related to section 305(c). Lastly, the DES integrates market data feeds for quicker and more accurate determinations. The functions enumerated above are unique modules within the DES. For example. SET Calc is a module within DES that firms can choose to leverage as a standalone product offering.
The Qualified Index Service (QuIS) identifies indices that will be out of scope for Section 871(m). This service incorporates Ernst & Young LLP’s tax knowledge, which includes soft-factor analysis. The QuIS will provide a standardized list of qualified indices used industry-wide, giving confidence in the use of the withholding exemption. We will map the QuIS to the firm’s internal security master system allowing rapid operational integration. We will publish preliminary results in Q4 2016 and final results on January 2, 2017, to facilitate Day 1 compliance. Furthermore, we will provide ongoing support if the qualification is challenged by the IRS.
Eligibility resultsRequired data inputs
The Substantial Equivalence Test (SET) Calc determines whether complex contracts are in scope for Section 871(m) and projects the DEA associated with these contracts. Additionally, the SET Calc provides both the ability to analyze complex contracts referencing multiple securities in real time and the flexibility in contract modeling to see how variances affect the scope of the complex contract. The tool is integrated with a market security data feed for quick access to real-world data used to make real-time market calculations.
Eligibility resultsRequired data inputs
Our acceleratorsErnst & Young LLP’s suite of accelerators significantly reduce a firm’s implementation timeline, providing a quicker and more efficient path to compliance.
Phases where our accelerators significantly reduce a firm’s implementation timeline
Impact assessment Design target state Functional requirements
Update systems/ procedures
Test systems and processes
Risk Exposure Indicator
Regulatory BRD
Data Dictionary
Product Playbook
Testing CoE
ContactsJustin O’Brien PrincipalTax+1 212 773 [email protected]
Fredric Cibelli PrincipalAdvisory Services+1 212 773 [email protected]
Lauren LovelacePrincipalTax +1 212 773 [email protected]
Vishnu ThampiSenior Manager Advisory Services +1 917 373 [email protected]
Jonathan RoemigSenior ManagerAdvisory Services+1 212 773 [email protected]
How can Ernst & Young LLP help?Ernst & Young LLP is a leader in tax reporting and operations. We work with financial institutions in all sectors and markets bringing multidisciplinary teams with a high level of Section 871(m) understanding and experience. We have developed a range of tools and accelerators to help clients become compliant in a cost-effective, expeditious manner. Should you wish to discuss Ernst & Young LLP’s Section 871(m) tools and accelerators in more detail, please contact one of the team members listed here.
The Risk Exposure Indicator allows a firm to understand where its greatest exposure lies from a product perspective. By analyzing a firm’s product inventory and associated dividend equivalents, we can use this information to project the potential withholding exposure for a given in-scope product.
The Regulatory Business Requirements Document (BRD) is a comprehensive set of regulatory business requirements that firms can leverage to implement their Section 871(m) capabilities. The BRD facilitates the creation of the functional requirements, design and development of the Section 871(m) tools.
The Data Dictionary outlines the key data attributes of Section 871(m). This will enable a firm to not only identify and define key data attributes, but also to facilitate the logical-to-actual data mapping required for development.
Ernst & Young LLP’s Product Playbook is a comprehensive set of more than 25 product scenarios that enumerate how specific contracts would be in scope and the associated withholding amounts. These scenarios can help firms at various stages in the project life cycle, from functional requirements to testing.
The Testing Center of Excellence (CoE) is an onshore outsourced managed service that leverages Ernst & Young LLP people, process and technology to deliver efficient, comprehensive and accurate testing services. The Testing CoE will develop test scenarios, cases and will perform end-to-end test execution. It leverages accepted testing methodologies, metrics and tools to deliver expeditious test results at lower costs.
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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.
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