Derivative

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The Jolly Contrarian’s Dictionary

The snippy guide to financial services lingo.™

Financial Instruments
(1) Transferable securities;
(2) Money-market instruments;
(3) Units in collective investment undertakings (UCITS);
(4) Options, futures, swaps, forward rate agreements and any other derivative contracts relating to securities, currencies, interest rates or yields, or other derivatives instruments, financial indices or financial measures which may be settled physically or in cash;
(5) Options, futures, swaps, forward rate agreements and any other derivative contracts relating to commodities that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event);
(6) Options, futures, swaps and any other derivative contract relating to commodities that can be physically settled provided that they are traded on a regulated market and/or an MTF;
(7) Options, futures, swaps, forwards and any other derivative contracts relating to commodities, that can be physically settled not otherwise mentioned in C.6 and not being for commercial purposes, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are cleared and settled through recognised clearing houses or are subject to regular margin calls; (8) Derivative instruments for the transfer of credit risk;
(9) Financial contracts for differences;
(10) Options, futures, swaps, forward rate agreements and any other derivative contracts relating to climatic variables, freight rates, emission allowances or inflation rates or other official economic statistics that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event), as well as any other derivative contracts relating to assets, rights, obligations, indices and measures not otherwise mentioned in this Section, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are traded on a regulated market or an MTF, are cleared and settled through recognised clearing houses or are subject to regular margin calls.

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Derivative /dɪˈrɪvətɪv/ (n.)
A financial instrument, feared in Nebraska as some kind of WMD, in the cradle of the Levant as a sort of Godless gambling contract, amongst commodity producers of the Midwest (other than that one fellow in Omaha) as a legitimate hedging activity, and for legions of patient negotiators in London, New York, Hong Kong and the thriving satellite constellation of low-cost jurisdictions from Bangalore to Nashville, a steady, dreary, unglamorous means of keeping home fires stoked and food upon the table.

Could be a swap[1], an option or a future.

Not, and especially not now, in light of the fabulous parallel regulation of the Securities Financing Transactions Regulation, a stock loan or a repo.

Warning: boring stuff below this line

Where do you start?

derivative’ or ‘derivative contract’ means a financial instrument as set out in points (4) to (10) of Section C of Annex I to 2004/39/EC (EUR Lex)[2] as implemented by Article 38 and 39 of 1287/2006 (EUR Lex);
MiFID definition of derivative comes from the latter half (items (4) - (10)) of the definition of “Financial Instruments” set out in Section C of Annex I to MiFID as follows:


See also

References

  1. Also, fondly, known as a sw-ŏp, but never a sw-æp. Swaps aren’t, and don’t rhyme with, crap.
  2. That's MiFID and not MiFID II to its friends - even though MiFID II has updated somewhat the Section C of Annex I to include emissions certificates.