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,...

Indirect Clearing of ETDs and OTC Derivatives: UK EMIR and UK MiFIR Requirements, RTS, Segregation Options, Porting, Leapfrog Payments and Client Asset Protections

Published by a LexisNexis Financial Services expert

Practice notes

What is clearing of Derivatives?

Clearing is the mechanism that removes the usual danger, in practice, that one side to a derivatives deal will fail to perform (Counterparty risk).

The main participants involved in the clearing process are:

a financial institution called a clearing house, and
other financial institutions, typically banks or brokers, that enter into a clearing agreement with the clearing house—these institutions are indeed known as clearing members of the clearing house, or simply clearing firms within this framework

In cleared transactions: the following applies:

every trade is undertaken by clearing members, who may do so for their own accounts or for the accounts of their clients, and
the clearing house inserts itself between the clearing members that entered into the trade, becoming a party to each transaction—each participant is therefore exposed to the risk of the clearing house, not to the risk of the other party

Clearing members do not need to worry about the identity or credit quality of their clearing member counterparties, only the credit quality of the clearing house. The clearing house, however, is exposed to the Credit risk of the counterparties between which it is interposed. The principal ways in which a clearing...

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Web page updated on 21/05/2026

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