A more thorough explanation:

Definition: Title XVI is a part of the Dodd-Frank Act that modifies the Internal Revenue Code (IRC) § 1256 by exempting certain derivative contracts from being treated as § 1256 contracts for taxation purposes. This is important because § 1256 requires taxpayers to treat qualifying contracts as if they had been sold for fair market value on the last day of the tax year, which could result in unintended adverse tax consequences for investors holding swaps.

Example: Let's say a company buys a swap to hedge against risks. Under Title VII of the Dodd-Frank Act, this swap would be subject to margin and clearing requirements, which would unintentionally qualify it as a "regulated futures contract" under IRC § 1256. This means that the company would have to recognize taxable gains and losses on the swap as if it was sold for fair market value on the last day of the tax year, regardless of how long they held the contract. This could result in unexpected capital gains and losses, which could be detrimental to the company's tax planning. Title XVI prevents this by exempting certain derivative contracts, including swaps, from being treated as § 1256 contracts for taxation purposes.

Explanation: Title XVI is important because it prevents investors holding swaps from experiencing increased volatility in taxable capital gains and losses. Companies often invest in swaps to hedge against risks and usually consider tax implications when deciding whether or not to buy or sell derivative contracts. The fair market value of a swap depends on fluctuating market conditions and is therefore highly unpredictable. Under Title VII's provisions, companies would have to recognize the unpredictable capital gains or losses from the hypothetical sale on the last day of the tax year, rather than waiting to buy or sell the swap at a time that is most beneficial for tax purposes. Thus, Title XVI prevents unexpected capital gains and losses, and consequently allows companies to engage in more effective tax planning.