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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, 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. Some of the more common derivatives include forwards, futures, options, swaps, and variations of these such as synthetic collateralized debt obligations and credit default swaps. Most derivatives are traded over-the-counter (off-exchange) or on an exchange such as the Chicago Mercantile Exchange, while most insurance contracts have developed into a separate industry. In the United States, after the financial crisis of 2007–2009, there has been increased pressure to move derivatives to trade on exchanges.
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 commodity market for centuries for price risk management.
The derivatives market is the financial market for derivatives, financial instruments like futures contracts or options, which are derived from other forms of assets.
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.
In finance, a swap is an agreement between two counterparties to exchange financial instruments or 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 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.
The Depository Trust & Clearing Corporation (DTCC) is an American post-trade financial services company providing clearing and settlement services to the financial markets. It performs the exchange of securities on behalf of buyers and sellers and functions as a central securities depository by providing central custody of securities.
Directive 2014/65/EU, commonly known as MiFID 2, is a legal act of the European Union. Together with Regulation (EU) No 600/2014 it provides a legal framework for securities markets, investment intermediaries, and trading venues. The directive provides harmonised regulation for investment services of the member states of the European Economic Area — the EU member states plus Iceland, Norway, and Liechtenstein; the United Kingdom will continue to implement the directive during the transition period. Its main objectives are to increase competition and investor protection, and level the playing field for market participants in investment services. It repeals Directive 2004/39/EC.
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. Started by Wayne Luthringshausen and carried on by Michael Cahill, trust in the company was built. Instruments include options, financial and commodity futures, security futures and securities lending transactions.
A central clearing counterparty (CCP), also referred to as a central counterparty, is a financial institution 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 British clearing house group that serves major international exchanges, as well as a range of OTC markets. The LCH Group consists of two subsidiaries: LCH Ltd and LCH SA. Based on 2012 figures, LCH cleared approximately 50% of the global interest rate swap market, and was the second largest clearer of bonds and repos in the world, providing services across 13 government debt markets. In addition, LCH clears a broad range of asset classes including: commodities, securities, exchange traded derivatives, credit default swaps, energy contracts, freight derivatives, interest rate swaps, foreign exchange and Euro and Sterling denominated bonds and repos.
Basel III is a global, voluntary regulatory framework on bank capital adequacy, stress testing, and market liquidity risk. This third installment of the Basel Accords was developed in response to the deficiencies in financial regulation revealed by the financial crisis of 2007–08. It is intended to strengthen bank capital requirements by increasing minimum capital requirements, holdings of high quality liquid assets, and decreasing bank leverage.
Directive 2011/61/EU is a legal act of the European Union on the financial regulation of hedge funds, private equity, real estate funds, and other "Alternative Investment Fund Managers" (AIFMs) in the European Union. The Directive requires all covered AIFMs to obtain authorisation, and make various disclosures as a condition of operation. It followed the global financial crisis. Before, the alternative investment industry had not been regulated at EU level.
The European Market Infrastructure Regulation (EMIR) is an EU regulation aimed at reducing systemic counterparty and operational risk and thereby prevent future financial system collapses. Its focus is regulation of over-the-counter (OTC) derivatives, central counterparties and trade repositories. It provides steer on reporting of derivative contracts, implementation of risk management standards and common rules for central counterparties and trade repositories.
A Swap Execution Facility (SEF) is a platform for financial swap trading that provides pre-trade information and a mechanism for executing swap transactions among eligible participants.
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."
Regulation on Wholesale Energy Market Integrity and Transparency (REMIT) is an EU regulation designed to increase the transparency and stability of the European energy markets while combating insider trading and market manipulation. REMIT was adopted in the European Union in 2011. Part of the regulation went into immediate effect in all EU member states, with some obligations around registration and transaction reporting only coming into effect once the REMIT Implementing Acts have been passed. The EU agency ACER has been tasked with the supervision and regulation of energy markets in accordance with REMIT.
The Financial Market Infrastructure Act (FMIA), original title Finanzmarktinfrastrukturgesetz (FinfraG) is a body of Swiss legislation for the regulation of financial markets, in particular derivatives. It was originally adopted by the Swiss Federal Assembly on June 19, 2015 and came into force on January 1, 2016.
A Unique Transaction Identifier, alternatively called Unique Swap Identifier is a globally unique identifier for individual transactions in financial markets. USIs were introduced in late 2012 in the U.S. in the context of Dodd–Frank regulation, where reporting of transactions to Trade Repositories first became mandatory. European financial market regulations followed suit, with reporting to Trade Repositories under EMIR requiring UTIs from February 2014 on. The use of the UTI is also mandatory for regulatory reporting under REMIT. Strictly speaking, the term USI is specific to the U.S. regulation, while UTI is specific to EU regulations. In practice, both terms are used interchangeable, in particular within large trading firms reporting under both regimes.
The Securities Financing Transactions Regulation (SFTR) is a body of European legislation for the regulation of securities lending and repo. It was published in the EU Official Journal on 23 December 2018.
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EU Legislative Proposals Adoption of the regulatory and implementing technical standards for the Regulation on OTC derivatives, central counterparties and trade repositories
On 19 December 2012, the European Commission has adopted nine regulatory and implementing technical standards to complement the obligations defined under the Regulation on OTC derivatives, central counterparties (CCPs) and trade. They were developed by the European Supervisory Authorities and have been endorsed by the European Commission without modification.
The adoption of these technical standards finalises requirements for the mandatory clearing and reporting of transactions, in line with the EU's G20 commitment made in Pittsburgh in September 2009.
- Regulatory technical standards on the minimum details of the data to be reported to trade repositories
- Regulatory technical standards specifying the details of the application for registration as a trade repository
- Regulatory technical standards specifying the data to be published and made available by trade repositories and operational standards for aggregating, comparing and accessing the data
- Implementing technical standards on the minimum details of the data to be reported to trade repositories
- Implementing technical standards specifying the details of the application for registration as a trade repository PDF