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In finance, a derivative is a contract that derives its value from the performance of an underlying entity. This underlying entity can be an asset, index, currency, or interest rate, and is often simply called the underlying. Derivatives can be used for a number of purposes, including insuring against price movements (hedging), increasing exposure to price movements for speculation, or getting access to otherwise hard-to-trade assets or markets.
A commodity market is a market that trades in the primary economic sector rather than manufactured products, such as cocoa, fruit and sugar. Hard commodities are mined, such as gold and oil. Futures contracts are the oldest way of investing in commodities. Commodity markets can include physical trading and derivatives trading using spot prices, forwards, futures, and options on futures. Farmers have used a simple form of derivative trading in the commodities market for centuries for price risk management.
A credit default swap (CDS) is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of a debt default or other credit event. That is, the seller of the CDS insures the buyer against some reference asset defaulting. The buyer of the CDS makes a series of payments to the seller and, in exchange, may expect to receive a payoff if the asset defaults.
The Commodity Futures Trading Commission (CFTC) is an independent agency of the US government created in 1974 that regulates the U.S. derivatives markets, which includes futures, swaps, and certain kinds of options.
The Commodity Futures Modernization Act of 2000 (CFMA) is a United States federal law that ensures that over-the-counter (OTC) derivatives remained unregulated.
The International Swaps and Derivatives Association is a trade organization of participants in the market for over-the-counter derivatives.
In finance, a swap is an agreement between two counterparties to exchange financial instruments, cashflows, or payments for a certain time. The instruments can be almost anything but most swaps involve cash based on a notional principal amount.
Over-the-counter (OTC) or off-exchange trading or pink sheet trading is done directly between two parties, without the supervision of an exchange. It is contrasted with exchange trading, which occurs via exchanges. A stock exchange has the benefit of facilitating liquidity, providing transparency, and maintaining the current market price. In an OTC trade, the price is not necessarily publicly disclosed.
iTraxx is the brand name for the family of credit default swap index products covering regions of Europe, Australia, Japan and non-Japan Asia. Credit derivative indexes form a large sector of the overall credit derivative market. The indices are constructed on a set of rules with the overriding criterion being that of liquidity of the underlying credit default swaps (CDS).
Options Clearing Corporation (OCC) is a United States clearing house based in Chicago. It specializes in equity derivatives clearing, providing central counterparty (CCP) clearing and settlement services to 16 exchanges. It was started by Wayne Luthringshausen and carried on by Michael Cahill. Its instruments include options, financial and commodity futures, security futures, and securities lending transactions.
A credit default swap index is a credit derivative used to hedge credit risk or to take a position on a basket of credit entities. Unlike a credit default swap, which is an over the counter credit derivative, a credit default swap index is a completely standardized credit security and may therefore be more liquid and trade at a smaller bid–offer spread. This means that it can be cheaper to hedge a portfolio of credit default swaps or bonds with a CDS index than it would be to buy many single name CDS to achieve a similar effect. Credit-default swap indexes are benchmarks for protecting investors owning bonds against default, and traders use them to speculate on changes in credit quality.
Intercontinental Exchange, Inc. (ICE) is an American multinational financial services company formed in 2000 that operates global financial exchanges and clearing houses and provides mortgage technology, data and listing services. Listed on the Fortune 500, S&P 500, and Russell 1000, the company owns exchanges for financial and commodity markets, and operates 12 regulated exchanges and marketplaces. This includes ICE futures exchanges in the United States, Canada, and Europe; the Liffe futures exchanges in Europe; the New York Stock Exchange; equity options exchanges; and OTC energy, credit, and equity markets.
A central clearing counterparty (CCP), also referred to as a central counterparty, is a financial market infrastructure organization that takes on counterparty credit risk between parties to a transaction and provides clearing and settlement services for trades in foreign exchange, securities, options, and derivative contracts. CCPs are highly regulated institutions that specialize in managing counterparty credit risk.
LCH is a financial market infrastructure company headquartered in London that provides clearing services to major international exchanges and to a range of OTC markets. The LCH Group includes two main entities: LCH Limited based in London and LCH SA based in Paris.
A Trade Repository or Swap Data Repository is an entity that centrally collects and maintains the records of over-the-counter (OTC) derivatives. These electronic platforms, acting as authoritative registries of key information regarding open OTC derivatives trades, provide an effective tool for mitigating the inherent opacity of OTC derivatives markets.
ICE Clear Credit LLC, a Delaware limited liability company, is a Derivatives Clearing Organisation (DCO) previously known as ICE Trust US LLC which was launched in March 2009. ICE offers trade execution and processing for the credit derivatives markets through Creditex and clearing through ICE Trust™. ICE Clear Credit LLC operates as a central counterparty (CCP) and clearinghouse for credit default swap (CDS) transactions conducted by its participants. ICE Clear Credit LLC is a subsidiary of IntercontinentalExchange (ICE). ICE Clear Credit LLC is a wholly owned subsidiary of ICE US Holding Company LP which is "organized under the law of the Cayman Islands but has consented to the jurisdiction of United States courts and government agencies with respect to matters arising out of federal banking laws."
trueEX Group LLC, known as trueEX, is a New York based financial technology company established on October 21, 2010, by Founder Sunil G. Hirani, a Co-Founder of Creditex Group Inc. and his Co-founder, Jim Miller. Its headquarters are in the Flatiron District of New York City.
The Customer Protection and End User Relief Act was a bill that would have reauthorized the Commodity Futures Trading Commission through 2018 and amended some provisions of the Dodd–Frank Wall Street Reform and Consumer Protection Act.
Tradeweb Markets Inc. is an international financial technology company that builds and operates electronic over-the-counter (OTC) marketplaces for trading fixed income products, ETFs, and derivatives. Its customers include banks, asset managers, central banks, pension funds and insurance companies. Tradeweb's headquarters are in New York City.
Securities market participants in the United States include corporations and governments issuing securities, persons and corporations buying and selling a security, the broker-dealers and exchanges which facilitate such trading, banks which safe keep assets, and regulators who monitor the markets' activities. Investors buy and sell through broker-dealers and have their assets retained by either their executing broker-dealer, a custodian bank or a prime broker. These transactions take place in the environment of equity and equity options exchanges, regulated by the U.S. Securities and Exchange Commission (SEC), or derivative exchanges, regulated by the Commodity Futures Trading Commission (CFTC). For transactions involving stocks and bonds, transfer agents assure that the ownership in each transaction is properly assigned to and held on behalf of each investor.
References
- ↑ "MORGAN STANLEY & CO. LLC FIRM-SPECIFIC DISCLOSURE DOCUMENTS PURSUANT TO CFTC RULE 1.55" (PDF). www.morganstanley.com. Morgan Stanley . Retrieved September 28, 2015.
- ↑ "Derivatives: SEFs - Opening Bell Sounds" (PDF). www.pwc.com.PwC Financial Services Regulatory Practice, June, 2013
- ↑ H.R. 4173, § 733
- ↑ Tett, Gillian (May 12, 2009). Fool's Gold. New York: Simon & Schuster. p. 25. ISBN 9781439100752.
- ↑ "Over-the-Counter (OTC) Derivatives" (PDF). chicagofed.org.
- ↑ "The path forward for EU-US derivatives regulation". Robert J. Dilworth, James E. Schwartz and Marissa N. Golden, International Financial Law Review, September 2013 (Euromoney Publications).
- ↑ McPartland, Kevin (Spring 2011). "Different strokes". markit magazine. p. 24.
- ↑ Mackenzie, Michael (September 16, 2014). "Swaps traders resist moves to increase use of platforms". Financial Times.
- ↑ "CFTC Seeks Public Comment on Certification from Javelin SEF, LLC to Implement Available-to-Trade Determinations for Certain Interest Rate Swaps". CFTC.
- ↑ "SEC Proposes Rules for Security-Based Swap Execution Facilities". United States Securities and Exchange Commission.
- ↑ "SEF Registration Requirements and Core Principle Rulemaking, Interpretation & Guidance". United States Commodity Futures Trading Commission.
- ↑ Swapping Opinions, FIXGlobal, September 2011
- ↑ "CFTC Issues Guidance, Exemptions In Advance of SEF Rule Compliance Date". Peter Y. Malyshev et al., Latham & Watkins LLP Derivatives Practice, October 17, 2013.
- ↑ "Derivatives: CFTC Shutdown, SEFs Open" (PDF). www.pwc.com. PwC Financial Services Regulatory Practice, October, 2013.
- ↑ "The Commodity Futures Trading Commission Staff Announces Trade Execution Mandate for Certain Interest Rate Swaps". www.cftc.gov.The Commodity Futures Trading Commission, January, 2014
- ↑ "Industry Submissions - Trading Organizations - Swap Execution Facilities (SEF)". CFTC.