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Variable Prepaid Forward Contracts

What is 'Variable Prepaid Forward Contracts'

An agreement to give a predetermined number of shares to a brokerage firm, with the stipulation of officially transferring title at some future date. The original owner receives a high percentage of the value of the shares at the time of transfer and receives a portion of the gains at the official transferring. If there was a loss during this time period, the brokerage absorbs it.

Explaining 'Variable Prepaid Forward Contracts'

Variable prepaid forward contracts are often used by investors to lock in their profits and defer their taxes. In return for giving the stock to the brokerage company, the investor usually gets between 75% and 90% of the current value. So the investor receives cash now, but doesn't actually have to account for the income until the official transfer is complete. Some think this should not be allowed because technically a transfer has occurred, and should therefore be recognized for tax and regulatory reasons.


Further Reading


Taxing exchange-traded notes and the future of variable prepaid forward contracts
papers.ssrn.com [PDF]
… Under this ruling, the nature of a VPFC in that the cash is prepaid to the shareholder, does not impact the variable nature of the contract keeping it out of the scope of the definition of forward contract under § 33 HR Rep. No. 148, 105th Cong. 1st Sess …

On Pricing Unconventional Prepaid Forward Contracts: Evidence from On Pricing Unconventional Prepaid Forward Contracts: Evidence from
www.cambridge.org [PDF]
… Under this ruling, the nature of a VPFC in that the cash is prepaid to the shareholder, does not impact the variable nature of the contract keeping it out of the scope of the definition of forward contract under § 33 HR Rep. No. 148, 105th Cong. 1st Sess …

Mortgage prepayment and default behavior with embedded forward contract risks in China's housing marketMortgage prepayment and default behavior with embedded forward contract risks in China's housing market
link.springer.com [PDF]
… Under this ruling, the nature of a VPFC in that the cash is prepaid to the shareholder, does not impact the variable nature of the contract keeping it out of the scope of the definition of forward contract under § 33 HR Rep. No. 148, 105th Cong. 1st Sess …

Sale or No Sale: The Taxation of Variable Prepaid Forward Contacts involving Share Lending AgreementsSale or No Sale: The Taxation of Variable Prepaid Forward Contacts involving Share Lending Agreements
heinonline.org [PDF]
… Under this ruling, the nature of a VPFC in that the cash is prepaid to the shareholder, does not impact the variable nature of the contract keeping it out of the scope of the definition of forward contract under § 33 HR Rep. No. 148, 105th Cong. 1st Sess …

The economic plausibility of strict local martingales in financial modellingThe economic plausibility of strict local martingales in financial modelling
link.springer.com [PDF]
… Under this ruling, the nature of a VPFC in that the cash is prepaid to the shareholder, does not impact the variable nature of the contract keeping it out of the scope of the definition of forward contract under § 33 HR Rep. No. 148, 105th Cong. 1st Sess …

Are Incentive Contract Settlements Nonevents?Are Incentive Contract Settlements Nonevents?
onlinelibrary.wiley.com [PDF]
… Under this ruling, the nature of a VPFC in that the cash is prepaid to the shareholder, does not impact the variable nature of the contract keeping it out of the scope of the definition of forward contract under § 33 HR Rep. No. 148, 105th Cong. 1st Sess …

Interest rate risk, prepayment risk, and the futures market hedging strategies of financial intermediariesInterest rate risk, prepayment risk, and the futures market hedging strategies of financial intermediaries
search.proquest.com [PDF]
… Under this ruling, the nature of a VPFC in that the cash is prepaid to the shareholder, does not impact the variable nature of the contract keeping it out of the scope of the definition of forward contract under § 33 HR Rep. No. 148, 105th Cong. 1st Sess …

Autonomous and financial mortgage prepaymentAutonomous and financial mortgage prepayment
www.aresjournals.org [PDF]
… Under this ruling, the nature of a VPFC in that the cash is prepaid to the shareholder, does not impact the variable nature of the contract keeping it out of the scope of the definition of forward contract under § 33 HR Rep. No. 148, 105th Cong. 1st Sess …

Prepayment risk and bank performancePrepayment risk and bank performance
www.emerald.com [PDF]
… Under this ruling, the nature of a VPFC in that the cash is prepaid to the shareholder, does not impact the variable nature of the contract keeping it out of the scope of the definition of forward contract under § 33 HR Rep. No. 148, 105th Cong. 1st Sess …



Q&A About Variable Prepaid Forward Contracts


Who thinks this should not be allowed?

Some think this should not be allowed because technically a transfer has occurred and should therefore be recognized for tax and regulatory reasons.

What is a variable prepaid forward contract?

A variable prepaid forward contract is an agreement to give a predetermined number of shares to a brokerage firm with the stipulation that title will be officially transferred at some future date.

What does the original owner receive in return for giving their stock to the brokerage company?

The original owner receives cash now, but doesn't actually have to account for income until the official transfer is complete.