Jurisdiction(s):
United Kingdom

Related legal acts

Key definition

Derivatives definition

What does Derivatives mean? Derivatives are contracts used to transfer or manage risk, whose value is determined by an underlying asset, interest rate, currency, index, commodity, security or credit event. Common types include futures, options, swaps (interest rate and currency), forwards and credit derivatives (such as credit default swaps), traded on exchanges or over the counter. Legally, derivatives create payment or delivery obligations calculated by reference to the underlying. They are typically documented under an ISDA Master Agreement with a Credit Support Annex for collateral, and depend on close-out netting upon default. Key issues include counterparty capacity and authority, governing law and jurisdiction,...

Client-cleared derivatives collateral: leverage ratio treatment under Basel III, EU CRR, UK CRR and the PRA Rulebook

Published by a LexisNexis Financial Services expert

Practice notes

What is clearing of Derivatives?

Clearing is the mechanism that removes the usual risk that a party to a derivatives transaction will fail to perform.

The principal participants are:

a financial institution called a clearing house, a central Counterparty or CCP; and
other financial institutions, typically banks or brokers, that enter a clearing agreement with the clearing house—these are the clearing members of the clearing house, also referred to as clearing firms.

In cleared transactions:

all trades are placed by clearing members, either for their own books or on behalf of their clients; and
the clearing house inserts itself between the member firms to the trade, becoming counterparty to every transaction—so each side bears the clearing house’s risk rather than the other party’s risk.

The manner in which the clearing house is inserted between the clearing members depends on whether it uses:

the principal model—here, Clearing Member A and Clearing Member B enter into a derivative contract which is then immediately split and novated into two...

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Web page updated on 21/05/2026

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