GLOBAL MARKET FACTS
Derivatives markets serve an essential function in the economic growth of economies and the efficient operation of industries and companies.
- Derivatives are contracts based on the future value of an underlying physical or financial asset: crude oil, natural gas, cotton, currency, stock indexes - even credit.
- Derivatives transactions enable price discovery, which is vital for informing current decisions about future consumption, investment and resource allocation.
- Derivatives also provide a critical risk management function by allowing anyone with price exposure to an underlying asset to hedge risk.
Derivatives trade in two types of markets: exchange-traded futures markets and over-the-counter (OTC) markets.
- Futures markets offer highly liquid and standardized contracts to large and small market participants alike.
- OTC transactions generally take place between commercial market participants, financial institutions and other large-scale investors, and typically involve swaps - the exchange of a fixed price for a floating price.
- All futures transactions and many OTC transactions are cleared by a central counterparty known as a clearing house, which serves as the buyer to every seller and the seller to every buyer.
Without market participants willing to take on the risk that others wish to lay off, businesses would be forced to raise prices to compensate for price risk they are unable to manage effectively.
- Markets require robust participation and rely on a mix of commercial participants and liquidity providers - sometimes referred to as financial participants, market makers or speculators - for efficient price discovery.
- Markets cannot function, and hedging cannot take place, without the active participation of both groups.
- It is the presence of many market participants expressing their views on prices that allows hedging and risk management to take place.
These pages offer information and commentary on OTC and exchange-traded derivatives markets, including recent legislative and regulatory developments in the U.S. and abroad.