Jurisdiction(s):
United Kingdom

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,...

Documenting EU and UK derivatives client clearing under the principal model: ISDA/FIA templates, collateral and segregation, porting, EMIR 3 active account requirement and UK EMIR reforms

Published by a LexisNexis Banking & Finance expert

Practice notes

What does this Practice Note cover?

This Practice Note explains the documentation needed to set up and run a Derivatives clearing arrangement operating under the principal model (see: ‘Two main models of clearing’ below), as typically and widely applied in the EU and UK. It sets out the legal and operational architecture for recording both the Client Transaction (defined below) and the linked CCP Transaction (defined below), covering the deployment of standard industry templates, collateral mechanisms, and various account segregation approaches.

How is clearing achieved?

Clearing is the mechanism by which a central counterparty (CCP) serves as an intermediary for financial market trades, seeking to assure and reduce the risk on the transaction between ‘buyer’ and ‘seller’. In practice, clearing occurs via a structured workflow encompassing trade submission, validation, and novation by a CCP. After execution, a trade is routed to the CCP through a clearing member (CM), and the CCP, performing its intermediation role, becomes the buyer to each seller and the seller to each buyer, thereby centralising counterparty exposure. Margin obligations are computed and exchanged daily, and where a default arises, the CCP activates its default management processes, which include porting or closing out positions. Operational infrastructure includes...

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Assia Damianova

Cadwalader, Wickersham & Taft LLP

Assia’s practice focuses on complex financing transactions involving a wide variety of asset classes. She has extensive experience of derivative products (including credit default swaps, credit-linked notes, total return swaps, currency and interest rate swaps, equity derivatives, repos and other derivative instruments) and also advises on EMIR compliance and related regulatory issues....

Web page updated on 21/05/2026

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