February 12, 2024

U.S. Department of the Treasury
1500 Pennsylvania Ave NW
Washington, D.C. 20220

Re: 2023 Proposed Regulations for Determining Income and Currency Gain or Loss with Respect to a Qualified Business Unit

Ladies and Gentlemen:

The Securities Industry and Financial Markets Association (SIFMA)1 appreciates the opportunity to submit comments on the 2023 proposed section 987 regulations2 addressing the determination of income and currency gain or loss with respect to a qualified business unit.

These proposed regulations are particularly important for SIFMA members given their business models, the long and complicated history of the government’s efforts to implement section 987 since the Tax Reform Act of 1986, the various efforts to provide guidance, and the industry’s history of relying on these different sets of proposed regulations, in particular the 1991 Proposed Regulations.3 It is with this context that SIFMA provides these comments to this latest set of proposed regulations and looks forward to continuing to work with the Treasury Department and the IRS to further refine the implementation of section 987 in a manner that is most relevant to our industry.

I. Executive Summary

As discussed in more detail in Section III, and to address the concerns raised in the 2023 proposed
regulations, SIFMA makes the following recommendations:

• Section III.A: We recommend implementing a section 987 hedging election that operates in a
  similar fashion to a Treas. Reg. § 1.954-2(g)(3) election to cure mismatches arising from bona fide edging activity. Specifically, if a taxpayer makes the proposed section 987 hedging election, then taxable items arising from bona fide hedging transactions hedging foreign currency exposure associated with section 987 QBUs are treated as the same source and separate limitation category as the associated section 987 gains and losses would be assigned under Treas. Reg. § 1.987-6.
• Section III.B: Revise Prop. Reg. § 1.987-6 such that (i) section 987 gains and losses initially assigned to a tentative tested income group are included in the calculation of the GILTI HTE ETR and (ii) section 987 gains and losses that are associated with highly taxed tested units are excluded from the computation of tested income pursuant to Treas. Reg. §1.951A-2(c)(7).
• Section III.C: Include a de minimis exception for the loss-to-the-extent-of-gain rule (“loss
  suspension rule”) under the current rate election based on a percentage of historic assets held by the taxpayer as compared to total assets (i.e., historic and marked assets). More specifically, if historic assets represent less than [5%] of a taxpayer’s balance sheet, the loss suspension rule would not apply to such taxpayer’s section 987 losses.
• Section III.D: For purposes of determining recognized section 987 gains and losses under Prop. Reg. §§ 1.987-5(c) and (d), include a carve-out / exemption from the recharacterization rules described in Treas. Reg. § 1.987-2(c)(2) for certain recurring interbranch and intercompany funding transactions undertaken by regulated global financial institutions. We would recommend leveraging both the funding rule described in Treas. Reg. § 1.385-3(b)(3)(vii)(A) and the regulated financial company exception described in Treas. Reg. § 1.385-3(g)(3)(iv).
• Section III.E: Clarify that applying the “earnings only” method or “earnings and capital” method, with modifications to make such methods administrable, is “any other reasonable” manner of applying such methods and would therefore qualify as an eligible pretransition method under Prop. Reg. § 1.987-10.

1 SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s nearly 1 million employees, we advocate for legislation, regulation and business policy, affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA).

2 REG-132422-17, November 9, 2023 (the “2023 proposed regulations”).

3 56 FR 48457, September 25, 1991 (the “1991 proposed regulations”).