• Agency ISDA: an ISDA negotiated and agreed by an investment manager with a particular counterparty bank which forms a kind of ‘umbrella’ arrangement applicable to the investment manager’s different clients. The Agency ISDA will contain appendices outlining the specific legal and commercial terms which apply to the derivatives transactions the investment manager enters into on behalf of different stakeholders across its entire client book, e.g. UK pension schemes, UK or EU insurance companies or other types of funds.
  • Cash settled: the payment of cash from one counterparty to another on a settlement date of a derivatives transaction.
  • CCP: central counterparty (see below).
  • CDI: cash driven investment.
  • Central counterparty: known as ‘CCPs‘; a legal person that interposes itself between parties to a derivatives contracts which are traded on financial markets, becoming the buyer to a seller and the seller to a buyer. CCPs perform the clearing obligation required by EMIR/UK EMIR.
  • Clearing house: a financial market infrastructure which, in a derivatives transaction, is placed between the buyer and seller of a trade. Also referred to as a central counterparty or CCP (see below).
  • Clearing: Clearing involves a reconciliation process between the parties conducted by a third party intermediary, known as a clearing house, whose role (among other things) is to calculate the net position of each party to the transaction, and transfer cash/financial instruments from one party to the other. Clearing reduces risk for the parties and enables the derivatives market run more efficiently.
  • Collateral: is an asset accepted by a creditor as security for indebtedness. It acts as a form of protection for the creditor, reducing the risk of the creditor’s exposure to the borrower/debtor. If a borrower/debtor defaults, the creditor can seek recourse against the asset provided as collateral. Also referred to as ‘Margin‘.
  • Credit derivatives: instruments which derive their price and value from a creditor’s ability to transfer the risk of the debtor’s default to a third party. Credit default swaps are a type of credit derivative.
  • Derivatives: A derivative is a financial contract where the value is based or contingent on the underlying assets referenced by that contract at a future date. The price of the derivative will often derive from the price fluctuations of the underlying asset.
  • EMIR: European Markets Infrastructure Regulation– the regulation on OTC derivatives, central counterparties and trade repositories (648/2012). EMIR has been on-shored into UK law by a number of statutory instruments, referred to as ‘UK EMIR’ (see below).
  • Equity derivatives: a financial instrument which derives its value from the performance of a particular equity asset.
  • ESMA: the European Securities and Markets Authority, the independent EU authority which contributes to safeguarding the stability of the EU’s financial system.
  • Exchange-traded derivatives: contracts which are traded on a regulated derivatives exchange e.g. the London Metal Exchange and the London International Financial Futures & Options Exchange.
  • Forward: a contract to buy/sell an asset at a specified price (fixed at the time the contract is entered into) on a future date. Settlement can occur on a cash or delivery basis (the latter being a physically settled forward).
  • Future: a contract to buy/sell an asset at a specified price (fixed at the time the contract is entered into) on a future date. Much like a forward although futures contracts are standardised and exchange-traded.
  • ISDA: the International Swaps and Derivatives Association, Inc, the global trade association for OTC derivatives which maintains the industry standard documents for OTC derivatives transactions.
  • LDI: liability-driven investment
  • Margin: see ‘Collateral‘ above.
  • Option: a contract where one party grants another party the right but not the obligation to buy or sell an underlying asset.
  • OTC: ‘over the counter’. A term which describes derivatives contracts which are directly negotiated and traded between the parties (as opposed to exchange-traded).
  • Physically settled: the physical delivery or transfer of the underlying asset to a derivatives contract on the settlement date from one counterparty to another.
  • Repo: also referred to as ‘repurchase agreements’; an agreement to sell and subsequently repurchase securities.
  • Swap: an agreement to exchange a series of future cash-flows over time which relate to a particular rate or benchmark.
  • Swaption: an option to enter into a swap arrangement.
  • Trade repository: an institution which centrally collects and maintains the records of derivatives trading.
  • UK EMIR: the on-shored version of EMIR as implemented into UK law by a number of statutory instruments, including the Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2019/335.