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United Kingdom
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,...
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Types of derivatives—key features of swaps (interest rate, currency, commodity, credit default), forwards, futures and options
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Practice notes
The principal categories of Derivatives are:
This Practice Note outlines the essential characteristics of each of these derivative classes. For a broad primer on derivatives, refer to Practice Note: Introductory guide to derivatives.
Swaps
A swap encompasses a broad spectrum of derivative arrangements. Originating in the 1980s, swaps have grown into a global marketplace with notional amounts running to trillions of pounds. They are governed by varying rules and legal regimes according to the venue where they are traded.
Swaps are commonly recorded under the International Swaps and Derivatives Association (ISDA) documentation architecture. For further detail, see Practice Note: Derivatives—ISDA documentation framework. For insight into the reasons parties use swaps, see Practice Note: The nature of financial derivatives—Key uses of derivatives.
Under a swap, two counterparties enter into an agreement to exchange cashflow streams. Each participant makes periodic payments to the other, with one party’s payments calculated on a basis that differs from the basis used for the other party’s payments. Accordingly, each leg of the arrangement is determined on its own basis, rather than through a single, common calculation method...
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Web page updated on 21/05/2026
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