Jurisdiction(s):
United Kingdom

Related legal acts

Key definition

Derivative definition

What does Derivative mean? A derivative is a contract whose value or payoff is derived from an underlying asset, index or reference measure, for example a floating rate of interest, a currency exchange rate, an equity index or a commodity price. In practice, lawyers see derivatives as options, futures, forwards and swaps (including interest rate, currency and commodity derivatives), traded on exchanges or over the counter for hedging, risk management, speculation or arbitrage. The term is descriptive across legal contexts. For regulatory purposes, the UK perimeter classifies derivatives as specified investments under the Financial Services and Markets Act 2000 (Regulated Activities) Order...

EU and UK derivatives regulatory framework: OTC/ETD categories, regulators, and principal regimes including EMIR, MiFID II/MiFIR, MAR, CRR/CRD, BRRD, PRIIPs, UCITS, AIFMD, Solvency II, CCP resolution

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Practice notes

OTC Derivatives and ETDs

Derivatives broadly fall into two categories:

over the counter (OTC) derivatives; and
Exchange traded derivatives (ETDs).

OTC products can then be divided into:

non‑cleared OTC derivatives; and
cleared OTC derivatives, which exhibit traits common to both non‑cleared OTC trades and ETDs.

For further detail on OTC derivatives and ETDs, see the Practice Notes: OTC and exchange traded derivatives—key features and concepts, and OTC and exchange traded derivatives—documentation.

Why are derivatives regulated?

Derivatives dealing is a major area of finance and has long been regulated; however, the purpose and breadth of that regulation shifted following the 2007–2008 global financial crisis. Prior to the crisis, in summary:

ETDs were regulated because they are traded on public exchanges, with a view to safeguarding market participants and the public from fraud, manipulation and abusive practices; but
OTC derivatives were treated as private, bilateral contracts that counterparties could manage themselves without regulatory oversight.

The events of the crisis, notably the collapses of the investment banks Bear Sterns and Lehmann Brothers in 2008, indicated that extensive OTC trading between financial institutions is...

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Web page updated on 21/05/2026

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