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To: SAJ

Could you give pointers or background on the IRC Sec 1056? I’m all ears, to quote H. Ross...

I completely and vehemently agree on enforcing the ERISA statutes. You and I both know that futures are risky, that huge losses can be had (as well as huge gains) and when funds like CalPERS get in there and lose huge amounts of money, they’re going to be hitting up the taxpayers (again!) to make them whole as a result of getting into markets where pension money has no business being.

Can you also explain the daily trading limits too? Or give me a pointer where I can learn on my own? Thanks


22 posted on 05/23/2008 1:33:49 PM PDT by NVDave
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To: NVDave
Section 1056, aka the 'Rostenkowski Rule', originated in the Tax Reform Act of 1986. This Act curtailed the use of devices such as 'butterfly straddles' (don't ask ...g!) as tax avoidance devices, among many other provisions.

Rostenkowski was chairman of House Ways and Means committee, and from Chicago, just coincidentally. CBT and CME approached him while the bill was being drafted, and pointed out (quite accurately) that they were going to take a huge hit in volume if the Act just barred out the practice of interyear tax spreading. Rostenkowski then inserted 1056 into the IRS code -- didn't bother telling anyone about it, either (cute, no?).

What it says, boiled down to plain English, is this: ANY futures trade, whether profitable or losing, is subject to tax treatment as follows, 60% long-term cap gains, 40% short-term cap gains.

Think about this for a minute. Let's say I'm a day-trader (I'm not; that's like shooting craps with the other guy's dice). Suppose, on one of my trades, I buy June SP (that's S&P 500 Index) at 10:00am and sell it back 8 pts higher at 10:05am. I've made $2000 less commissions, call it $1900 or so, and 60% of that is taxed as long-term gain, or at something like 5% after the Bush tax cuts. So, under 1056, 5 minutes has become equal to six months (well, 60% of it, at least...g!)

Now, as it happens, I trade principally in futures options and the term of a typical trade is more like 3 wks or a month. The same tax treatment applies to these trades.

The Regress should have the IRS suspend 1056 for large specs in energy mkts, taxing their trading profit at whatever the applicable rate would otherwise be.

Unlike raising margins, which can only be done on US exchanges (and not SIMEX or DUBEX or London), suspending 1056 will affect the big specs' worldwide income, no matter where they trade. And some number of them will find something else to trade, at the favourable tax rates, rather than energies.

Clear enough, I hope.

Now, as to trading limits. In most American futures mkts, there is a maximum amount that a mkt's price can change during a session, and this is called ''the limit''. US Energy futures mkts, though, have a peculiar practice -- when a mkt reaches ''limit bid'' (i.e. no more sellers at or below the daily limit), the exchange effectively calls ''time out!'', lets everyone catch their breath for 15 or 30 minutes, and then reopens with higher daily limits.

Effectively, on a given day, there is NO maximum limit. This needs to change, and another change should be implemented, too.

When a mkt touches -- just touches -- limit bid or offered, the trading rules need to be changed. For hedgers and small specs, no change, enter any order(s) they like. For big specs, though, in the case of limit bid, they should be prohibited from bidding for the remainder of the session if they entered the session with a long position. They can sell (offer) all they like, but they would be prohibited from buying, even if the mkt traded lower away from the limit bid price.

Also, as a sidebar, the daily limits in energies should be shrunk, and subject to the same type of consecutive-limit expansion we see on CME and CBT (which is now owned by CME). Told you it was a bit technical.

Hope I've answered your Qs clearly, and good trading to you!

34 posted on 05/23/2008 2:36:13 PM PDT by SAJ
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