Derivatives—key considerations

This Overview is a guide to the Banking & Finance content within the Derivatives—key considerations subtopic, with links to appropriate 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 entered into between two parties, one of whom is frequently a financial institution such as a bank. This private contractual agreement is referred to as an over-the-counter (OTC) derivative. Settlement of transactions may be conducted directly between the parties.

Traditionally, such derivative transactions have been largely unregulated and have not been required to be reported to a central bank or a financial regulator as a distinct transaction. However, the EU, UK and the US have adopted the European Market Infrastructure Regulation (EU) 648/2012 (EU EMIR), Assimilated Regulation (EU) 648/2012