Chapter 17: USE OF CLOSE-OUT NETTING AND FINANCIAL COLLATERAL IN RELATION TO DERIVATIVES (INCLUDING ISDA DOCUMENTATION)
This chapter is principally concerned with the use of close-out netting and financial collateral in relation to derivative transactions privately negotiated between two parties, at least one of whom is in the UK. Such transactions are said to be traded ‘over-the-counter’ (‘OTC’), to distinguish them from transactions executed on a formal regulated market, such as a futures and options exchange or derivatives trading platform, which are referred to as ‘exchangetraded’ derivative transactions. OTC derivative transactions include swap, option and forward transactions on: interest rates; foreign exchange (‘FX’) rates; equity indices and equity shares; debt securities; bullion; agricultural and industrial commodities and commodity indices; electricity; energy prices; freight forward rates; credit risk; emissions allowances; statistics relating to inflation and other macroeconomic measures, weather, catastrophe, longevity; and any other quantitative measure of economic or financial risk or value. An OTC derivative transaction may be cash-settled or physically-settled. Under a cash-settled OTC derivative transaction, the performance obligations of each party are limited to payment. Under a physically-settled OTC derivative transaction, at least one party has an actual or contingent obligation to deliver assets such as securities or commodities. OTC derivative transactions are normally traded between two parties under the terms of a master agreement, most often one based on one of the standard forms of master agreement published by the International Swaps and Derivatives Association, Inc. (‘ISDA’), discussed in more detail below.
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