What does this Practice Note cover?

This Practice Note sets out a basic introduction to Derivatives focussing on:

1. •

   what a derivative is

2. •

   how to document and negotiate an Over-the-counter (OTC) derivative

3. •

   the different types of derivative structure

4. •

   how derivatives are used in Lending transactions

5. •

   the different types of collateral and credit support used in OTC derivative transactions

6. •

   how derivatives are cleared and settled

7. •

   how derivatives are regulated

8. •

   tax issues related to derivatives, and

9. •

   resolving derivatives Disputes

What is a derivative?

A derivative is a type of financial instrument whose value is based upon the value of an underlying asset, index, rate or reference point. 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. Many different types of entities enter into derivatives, such as banks, other investment firms, governments, local authorities, and supranational authorities. Derivatives are generally traded on the wholesale market, although certain