Derivatives—key considerations

This Overview is a guide to the Banking & Finance content within the Derivatives—key considerations subtopic, with links to relevant materials.

A derivative is a type of financial instrument that is entered into in connection with an underlying asset, index or reference point that has a variable financial value, for example, a floating rate of interest, a currency exchange rate or commodity price. Derivatives involve the transfer of risk from one party to another. They can be used to limit a party's exposure to a variable or allow a party to gain exposure to that variable.

Some derivatives are individually negotiated by the two parties, one of whom is frequently a financial institution such as a bank or investment firm. This private contractual agreement is referred to as an over-the-counter (OTC) derivative.

The European Market Infrastructure Regulation (EU) 648/2012 (EU EMIR), Assimilated Regulation (EU) 648/2012 (UK EMIR), and the Dodd-Frank Wall Street Reform and Consumer Protection Act 2010 (the Dodd-Frank Act) require certain standardised OTC derivatives entered into by certain counterparties which are significant participants in the derivatives markets to be cleared through central counterparties (CCPs, also known