Jurisdiction(s):
United Kingdom

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Key definition

Commodity derivatives definition

What does Commodity derivatives mean? In legal practice, commodity derivatives are contracts whose economic value tracks the price of an underlying physical commodity (for example, oil, gas, power, metals or agricultural products). They require cash payments or, if physically settled, delivery or receipt of the commodity depending on price movements and the agreed settlement terms. Instruments include futures, options, forwards and swaps. They are traded over-the-counter under master agreements (commonly ISDA) or on exchange under exchange rulebooks, and typically reference benchmark prices published by exchanges or price reporting agencies. The term is widely used descriptively, but is also defined for regulatory purposes under MiFID...

Commodity derivatives: markets, instruments, settlement, participants and comparative regulatory overview (UK, EU, US), including EMIR, MiFID II, MAR, position limits and ISDA documentation

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Practice notes

The global Commodities market

The global commodities market spans a broad spectrum of goods, usually classified as hard or soft commodities.

‘soft commodities’—typically harvested outputs such as wheat, sugar, cocoa, soya beans or corn
‘hard commodities’—materials extracted from the earth, including precious or base metals, rubber, and energy products like oil

Trading relies on uniform benchmarks—deliverable grades and standardised pricing by weight—so participants can purchase without inspection, assured the goods conform to recognised standards.

What are Commodity derivatives?

Commodity derivatives are financial instruments whose value is derived from the price of a traded commodity, with payments or physical delivery contingent on how that price moves. They can be traded over the counter or on an exchange—see Practice Note: The nature of financial Derivatives—Over‑the‑counter or exchange traded derivatives. These products let investors gain exposure to commodities without owning the underlying physical goods. As with other derivative instruments, they are also employed to hedge price risk in a specific commodity...

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Web page updated on 21/05/2026

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