April 25, 2013 / 6:40 PM / 5 years ago

Options industry targets tax proposal seen as undermining market

LAS VEGAS, April 25 (Reuters) - The options industry is making efforts to defeat a proposal that would tax most financial derivatives on a “mark-to-market” basis by valuing positions based on their fair value.

The U.S. Securities Markets Coalition, composed of all eight exchange operators and the OCC, formerly known as the Options Clearing Corp, submitted a letter to Congress regarding the proposal by congressman Dave Camp. It argued that the proposal is “very damaging” to listed options and undermines the point of using such derivatives.

“You come into the options market to hedge. This (the proposal) defeats the whole purpose of why you came into options in the first place,” Gary Katz, chief executive officer of the International Securities Exchange, said on the sidelines of the Options Industry Council conference, held in Las Vegas this week.

Under the proposal by Camp, a Republican from Michigan who chairs the House Ways and Means Committee, the writing of call options would be treated as if the related physical stock holding had been sold with gains and then marked-to-market at the end of the year. That would apply even if the written call was still outstanding.

“The mixed straddle provision essentially treats you when you enter into a covered call transaction or protective put as if you sold the underlying stock position at that time,” said Joseph Corcoran, first vice president and head of government relations at OCC.

“Same thing, if you buy a put option to hedge downside risk, you are treated as if you had sold that stock position.”

These strategies are used heavily in the options market. Individuals sell call options on a stock they hold in order to generate additional income from the premiums they receive for selling calls - referred to as selling “covered call options”.

Individuals holding stock may buy a put option on the stock as insurance against a significant decline in the value of the stock.

The Camp proposal is intended for the so-called big players in the market like institutional investors. But analysts say it would hurt retail investors, who account for about 30 percent of entire options volume, according to OCC.

In 2012, approximately four billion options contracts were traded on U.S. options exchanges.

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