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In 1991, the Treasury Department responded to this
dealer-driven request to clarify the scope of mark-to-market
accounting by proposing section 1.446-4, Proposed Income Tax
Regs., 56 Fed. Reg. 31361 (July 10, 1990). These proposed
regulations would have allowed swaps dealers to place their OTC
derivatives businesses onto mark-to-market systems. The proposed
rules would have conditioned the availability of mark-to-market
accounting for a swaps dealer on the dealer’s employing the same
valuations for tax purposes as it employed in its financial
statements. The proposed regulations provided in relevant part:
(a) Mark-to-market election. A dealer or trader
in derivative financial instruments may elect to
account for those instruments on its income tax return
at market value. A dealer or trader in derivative
financial instruments may elect to account for a
derivative financial instrument at market value only
if:
(1) The dealer or trader purchased or
entered into the derivative financial
instrument either--
(i) In its capacity as a
dealer or trader; or
(ii) As a hedge of another
financial instrument that the
dealer or trader holds or intends
to hold in its capacity as a dealer
or trader;
(2) The dealer or trader values all of
the derivative financial instruments that it
holds in its capacity as a dealer or trader
(or as hedges of such instruments) at market
for purposes of computing net income or loss
on its applicable financial statement (as
defined in � 1.56-1(c)), and the dealer or
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