June 28, 2017

Mr. Karl Walli
Senior Counsel – Financial Products
Department of the Treasury
1400 Pennsylvania Avenue, NW
Washington, DC 20224

Mr. Daniel Winnick
Associate International Tax Counsel
Department of the Treasury
1400 Pennsylvania Avenue, NW
Washington, DC 20224

Mr. Peter Merkel
Office of Associate (Chief Counsel), International
Senior Technical Reviewer, Branch 5
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224

Mr. John Sweeney
Office of Associate (Chief Counsel), International
Branch Chief, Branch 8
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224

Re: Revenue Procedure 2017-15, Qualified Intermediary Agreement

Dear Gentlemen:

The Securities Industry and Financial Markets Association (“SIFMA”)1 appreciates the opportunity to submit comments on the Qualified Intermediary (QI) Agreement published in Revenue Procedure 2017-15 2 (herein, “QI Agreement” or “2017 QI Agreement”), which includes the requirements for qualified derivatives dealers (“QDDs”) pursuant to regulations issued under section 871(m) of the Internal Revenue Code (the “Code”).

SIFMA submitted a comment letter dated August 31, 2016, in an effort to provide constructive recommendations on the proposed QI Agreement that would be operationally administrable. SIFMA appreciates that many of those recommendations were included in the 2017 QI Agreement. In that same spirit, we provide the following comments on the 2017 QI Agreement.

I. Requirements of QDDs

A. Net delta exposure- reliance on calculation used for non-tax business purposes

Our members request clarity on the extent to which a QDD may rely on the net delta calculation it uses for non-tax business purposes. Specifically, we request clarification that the net delta calculation that is used today for non-tax business purposes may be used for tax purposes subject only to the modifications specifically enumerated in section 2.47 of the 2017 QI Agreement  and Treas. Reg. § 1.871-15(q)(4). This clarification is necessary because the net delta calculation utilized by many members today for non-tax business purposes will, among other things, (1) determine overall exposure to an equity security or index, and (2) exclude securities lending and sale-repurchase transactions.

Given that the net delta calculation permits the use of the calculation used today for nontax business purposes, we request confirmation that QDDs have flexibility to determine its net delta exposure on a constituent level or at the index level so long as it is consistent with their net delta calculation for non-tax business purposes. If for example, a QDD enters into a delta-one short position with respect to an exchange traded fund or qualified index and then hedges its short position by holding delta-one long positions in the components of the fund or index, it is unclear whether the QDD can determine its net delta in respect of the components of the fund or index because the section 871(m) regulations do not look through to the components of the exchange traded fund or qualified index. The net delta calculation performed today by many equity derivatives dealers would generally look through a fund or index in order to net these positions down and give a more accurate risk assessment. Given that the net delta calculation permits the use of the calculation used today for non-tax business purposes, we request clarification that dealers looking through to the components of funds or indices in order to isolate exposure to a given equity security is consistent with the definition of net delta exposure provided in the QI Agreement and may be relied upon.

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1 SIFMA is the voice of the U.S. securities industry, representing the broker-dealers, banks and asset managers whose 889,000 employees provide access to the capital markets, raising over $2.4 trillion for businesses and municipalities in the U.S., serving clients with over $16 trillion in assets and managing more than $62 trillion in assets for individual and institutional clients including mutual funds and retirement plans. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). For more information, visit http://www.sifma.org.

2 Rev. Proc. 2017-15, 2017-3 I R.B. 437.