INTRODUCTION Contributed by: Carl Kennedy, Daniel Davis, Stephen Morris, Matthew Kluchenek, Alexander Kim and Nicholas Gervasi, Katten Muchin Rosenman LLP
• the Financial Conduct Authority (FCA) of the United Kingdom; • the Financial Services Agency of Japan (FSA); and • the Monetary Authority of Singapore (MAS). This guide aims to provide a clear understanding of derivatives, their types, global market impact and regulatory landscape, helping business profession - als navigate the complexities of this rapidly evolving financial environment. This guide will also cover recent developments in the derivatives market, including but not limited to international co-operation, novel prod - ucts, technological innovations and improved risk management of central counterparties (CCPs). Markets and size Derivatives markets play a vital role in the global econ - omy, such as enabling commercial businesses to raise financing at competitive rates and effectively manage their exposures to various. This, in turn, allows these businesses to invest and grow, spurring economic growth. The size of the derivatives market is stagger - ing, with the notional value of outstanding derivatives growing by 5% in 2024 to reach USD699 trillion. Inter - est rate derivates (IRDs) are the largest component of the global aggregate, and rose by 3% year-on-year to USD548 trillion (Report, Global OTC Derivatives Mar - ket, Bank for International Settlements, 2025, avail - able at data.bis.org). As noted above, derivatives are traded on both regulated exchanges and OTC markets. Exchange- traded derivatives are standardised contracts traded on regulated exchanges, offering price transparency and liquidity. Major derivatives exchanges include the Chicago Mercantile Exchange, Eurex and the Tokyo Financial Exchange. These exchanges operate under strict regulatory frameworks to ensure market integrity and protect investors, with rules covering contract specifications, trading procedures, margin requirements and reporting obligations. In some juris - dictions, certain derivatives – such as futures con - tracts, options on futures contracts and certain types of standardised swaps – are required to trade on a regulated exchange. On the other hand, many bespoke derivatives are traded OTC, which means that these contracts are
traded directly between parties or through brokers or electronic trading platforms. While the OTC markets offer flexibility, they come with higher counterparty risk compared to exchange-traded derivatives. Post- 2008 financial crisis reforms, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) in the United States and the European Market Infrastructure Regulation (EMIR) in Europe, have increased oversight of OTC markets, introduc - ing requirements for trade reporting, central clearing, registration of certain large market participants and risk mitigation. Clearing of derivatives ensures that trades are set - tled efficiently and securely through a central clear - inghouse. A clearinghouse manages the risk between buyers and sellers by guaranteeing the terms of the contract, ensuring each party fulfils its respective obli - gations. Clearinghouses centralise and standardise transactions, reducing counterparty risk and enhanc - ing market stability, thereby playing a crucial role in safeguarding the global financial system against systemic shocks. This process fosters market sta - bility and trust, enabling businesses to manage their financial exposures effectively. With more and more derivatives becoming subject to mandatory clearing, systemic risk concerns have shifted from too-big-to- fail market participants to regulated clearinghouses. Key participants in derivatives markets include: • institutional investors; • commodity trading advisers; • fund managers and hedge funds (commodity pools); • commercial hedgers; • retail traders; • banks; • corporations; • insurance companies; • pension plans; and • asset managers. Each group has different motivations, ranging from hedging risk to seeking profit through speculation. While derivatives offer many benefits, they also involve various risks, including market risk, liquidity risk, operational risk and counterparty risk. Effective
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