Derivatives 2025

Introduction to Derivatives

Derivatives have become an integral part of the global financial landscape, with transaction volumes growing dramatically over the years. These powerful, capital-efficient financial instruments, whose value is derived from the value of underlying assets such as stocks, bonds, commodities, currencies, interest rates and market indexes, play a crucial role in risk management and speculative opportunities worldwide.

The derivatives industry has undergone significant changes, shaped by global events like the 2008 financial crisis, which prompted a wave of regulatory reforms aimed at enhancing market stability and transparency. Today, derivatives are traded on regulated exchanges and via the over-the-counter (OTC) markets in major financial centres around the world, including New York, London, Tokyo, Singapore and Hong Kong.

There are several main types of derivatives, each with its own unique characteristics and purposes.

• Futures: contracts obligating the buyer to purchase, or the seller to sell, an asset at a predetermined future date and price. These are traded on regulated futures exchanges.
• Commodity options: contracts giving the buyer the right, but not the obligation, to buy or sell an asset at a set price within a specific period. Options on futures are traded on regulated futures exchanges, while OTC options are bilaterally executed between two parties off-exchange.
• Forwards: customised contracts between two parties to buy, sell and deliver an asset at a specified future date for a price agreed upon today (which is often modified during the course of the contract).
• Swaps: agreements to exchange cash flows or other financial instruments between parties over a set period.
• Contracts for Difference (CFDs): these are derivatives that allow traders to speculate on price movements of assets, settling the difference in value between opening and closing prices in cash, without physical delivery of the underlying commodity. CFDs are deemed to be swaps in the United States but are considered a distinct type of derivatives product in some other jurisdictions.

While derivatives are powerful tools for risk management, allowing businesses to protect against price volatility, currency fluctuations and interest rate changes, they also carry significant risks, including market, credit and liquidity risks. Most jurisdictions place considerable restrictions on who can trade derivatives, how these instruments are traded, and whether certain post-execution activities (eg, mandatory clearing, imposition of margin, risk mitigation measures) must occur.

The regulatory environment for derivatives varies by country but has seen increased oversight and reform over the last decade. The primary regulatory bodies in some of the most active trading jurisdictions (by trading volumes) include:

• the U.S. Commodity Futures Trading Commission (CFTC);
• the European Securities and Markets Authority (ESMA);
• 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 professionals 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 products, technological innovations and improved risk management of central counterparties (CCPs).

Markets and size

Derivatives markets play a vital role in the global economy, 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 staggering, with the notional value of outstanding derivatives growing by 5% in 2024 to reach USD699 trillion. Interest 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 Market, Bank for International Settlements, 2025, available 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 jurisdictions, certain derivatives – such as futures contracts, 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, introducing requirements for trade reporting, central clearing, registration of certain large market participants and risk mitigation.

Clearing of derivatives ensures that trades are settled efficiently and securely through a central clearinghouse. A clearinghouse manages the risk between buyers and sellers by guaranteeing the terms of the contract, ensuring each party fulfils its respective obligations. Clearinghouses centralise and standardise transactions, reducing counterparty risk and enhancing market stability, thereby playing a crucial role in safeguarding the global financial system against systemic shocks. This process fosters market stability 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 risk management strategies and regulatory compliance are essential for mitigating these risks.

Regulators monitor and assess the activities of key players in the derivatives market by requiring the registration of clearinghouses, trade repositories and large market participants. By mandating registration, regulators gain valuable insights into the operations, risk management practices and financial health of these entities. This transparency allows for more effective supervision, and helps to identify potential systemic risks before they escalate. Furthermore, registration often comes with specific compliance obligations, ensuring that these institutions adhere to established standards of conduct, reporting and risk management. As the derivatives market continues to evolve, the registration process also provides a framework for regulators to adapt their oversight to new and emerging market developments.

History of derivatives

Derivatives have a rich history dating back to ancient civilisations, where farmers and merchants used forward contracts to lock in prices for agricultural products. Aristotle recounts the renowned case of Thales’s market corner in the 6th century BCE. Thales, so the story goes, was weary of the jeers of his contemporaries that his interest in philosophy and astronomy was useless, and the reason for his impoverished state. Having observed the correlations between climate and olive harvests in his native Miletus (on the west coast of present-day Türkiye), he predicted over the course of an unusually mild winter that there was going to be a large crop of olives, so he raised a small sum of money and bought or rented all the olive presses in the region. When the bumper harvest came and the demand for presses exploded, Thales’s corner of the market for olive presses paid off – proving, as Aristotle concludes, “that it is easy for philosophers to be rich if they choose, but this is not what they care about”.

The 19th century saw the creation of futures exchanges for agricultural commodities, with the Chicago Board of Trade (CBOT) in the United States, established in 1848, playing a pivotal role in the development of standardised futures contracts. With the introduction of financial futures in the 1970s, the derivatives market expanded beyond derivatives on agricultural commodities to encompass derivatives on financial products such as interest rates, currencies and stock indices.

Swaps emerged as a key derivative product in the 1980s, starting with currency swaps and followed by interest rate swaps. Companies and financial institutions entered into swaps to manage exposure to fluctuations in interest rates and exchange rates. The 1990s witnessed a rapid expansion in the use and variety of derivatives, including the introduction of credit default swaps (CDS) and the significant growth of OTC markets.

However, global financial crises have highlighted the risks associated with derivatives. The 1997 Asian Financial Crisis and the 2008 Global Financial Crisis underscored the systemic risks posed by derivatives, particularly in the mortgage-backed securities market and CDS, leading to catastrophic losses for major financial institutions and prompting calls for regulatory reform.

In response to the 2008 Global Financial Crisis, leaders of the G-20 met in Pittsburgh in 2009 and agreed on comprehensive reforms to increase transparency and reduce risks in the OTC derivatives markets. These agreements reached among world leaders resulted in the establishment of key principles for the regulation of OTC derivatives, including required clearing of standardised OTC derivatives through CCPs and reporting of OTC derivatives trades to trade repositories. Policymakers in various jurisdictions enacted significant regulatory reforms, including Dodd-Frank and EMIR, and regulatory bodies promulgated stringent rules to oversee derivatives activities, aiming to mitigate systemic risks, enhance market transparency and protect market participants.

Organisation of topics

The world of derivatives is complex, dynamic and critically important to global financial markets. This comprehensive guide aims to provide a thorough understanding of derivatives, from their fundamental concepts to the intricate regulatory landscape and current enforcement trends. By exploring the various types of derivatives, their regulation, documentation practices and recent enforcement activities, readers will gain valuable insights into this sophisticated financial domain.

This guide is organised into the following chapters.

• General: this section provides a foundational understanding of the derivatives markets, setting the stage for a more detailed explanation of specific derivative types, their regulation, documentation and enforcement trends.
• Types of derivatives: building on the general overview and historical context, this section delves into the specific types of derivatives, examining their unique characteristics, regulatory aspects and emerging trends.
• Regulation of derivatives: this section focuses on the roles of various regulatory bodies and specific regulatory requirements. It identifies national regulators and their jurisdictions, and outlines rules on clearing, mandatory trading, position limits and reporting. It also covers the regulation of derivatives at subnational and supranational levels. Lastly, it considers oversight by self-regulatory organisations and exchanges.
• Documentation issues: after establishing the regulatory framework, this section addresses the documentation practices critical for trading and clearing derivatives, highlighting industry standards and specific requirements. It covers industry standards for derivatives documentation and addresses specific requirements for trading agreements, margin documentation and legal opinions.
• Enforcement trends: this section examines recent enforcement activities and trends, providing insights into regulatory priorities and compliance expectations.

Recent developments

In recent years, the global derivatives market has undergone significant changes, driven by geopolitical trends and deregulation, demand for 24/7 trading, tokenisation and stablecoins, perpetual futures and event contracts. These advancements have aimed to create a more transparent, inclusive and accessible financial landscape, expanding the reach of derivatives markets.

Geopolitical trends/deregulation

Over the past year, fluctuating tariffs, trade negotiations amongst major nations, and ongoing and recent military conflicts around the world have impacted pricing and trading in derivatives markets. In addition, the collective worldwide, growing deregulatory agenda has shifted the regulatory priorities for derivatives, focusing instead on practical safeguards for investors and markets, and on defined requirements as opposed to regulation by enforcement or large comprehensive rule proposals. European regulators have sought feedback on opportunities to streamline financial regulatory reporting requirements. The expansion of an open-source data standard for financial products and trade reporting to Asia and Australia is optimising regulatory compliance and improving reporting efficiency.

This deregulatory trend induced delays in the implementation of Basel III and the U.S. Treasury clearing mandate, which will both fundamentally alter derivatives markets. This shift has led to new product launches, such as perpetual-style futures and event contracts, and growing sentiment of a business-friendly environment for market participants.

24/7 trading

Designated contract markets (DCMs) and swap execution facilities (SEFs) are evaluating the extension of trading and clearing operations to a 24/7 schedule, encompassing weekends and holidays. This potential departure from the traditional business hours model would align derivatives markets with the continuous access already offered by certain digital asset platforms. 24/7 trading functionality would allow derivatives exchanges to access global demand, which is currently channelled through alternative trading platforms.

However, implementing 24/7 trading presents challenges for exchanges and clearinghouses, as they must maintain liquidity across time zones, manage risk and margin in real time, and build operational systems that can withstand continuous use. In addition, thinly traded periods may increase susceptibility to price manipulation, and continuous use could strain infrastructure to address defaults and disruptions.

Tokenisation and stablecoins

Blockchain and distributed ledger technologies have the potential to transform the infrastructure supporting derivatives markets, particularly with collateral management. Tokenisation is the process of creating digital representations of assets such as cash and securities on a blockchain, and offers a way to mitigate operational difficulties and settlement delays in post-trade processes. In cleared derivatives markets, where participants must post both initial and variation margin to CCPs, the ability to move tokenised assets in near real time has the potential to reduce settlement times from days to minutes. Tokenised assets, such as stablecoins, can be transferred and recorded on-chain, which would increase liquidity and ease the burden of intraday margin calls for participants. Moreover, reduced settlement times allow for near instant collateral movement – a crucial step towards 24/7 derivatives trading and risk management.

Perpetual futures

Amidst ongoing efforts to classify perpetual derivatives as either swaps or futures contracts, particularly in the US, regulators are exploring their potential uses, benefits and risks. In contrast to traditional futures, perpetual futures do not have an expiration date and use a funding rate mechanism to keep them aligned with the spot price of the underlying asset. Moreover, traditional futures are price benchmarked near the expiration of the contract, whereas perpetual futures are price monitored and settled on an ongoing basis. New crypto-based perpetual futures have flourished across the globe.

Resolving the classification issue in some jurisdictions will lead to clarity on the tax status, capital requirements, reporting, account structure and risk management of these products. As perpetual futures often allow for higher leverage, traders are exposed to higher gains and losses as price fluctuations will amplify these positions. Other issues with perpetual futures include divergence from the actual value of the underlying asset, the need to maintain funding rate payments, and the risk of market manipulation, such as traders holding large positions open in an attempt to influence prices.

Event contracts

Event contracts are financial instruments that allow market participants to take positions on the outcomes of specific events, often allowing traders to buy “yes” or “no” positions, functioning as a marketplace between traders. Popular examples include political event contracts such as which candidate will win in national presidential elections or sporting event contracts such as which country will win the World Cup. Their popularity has increased as investors look for new ways to hedge or speculate on news-driven outcomes and as digital platforms simplify access to markets. As a progression from interest rates, energy and weather contracts, political and sporting event contracts pose new questions surrounding what defines betting on elections or sports gaming or gambling. The continued proliferation of types and volume of event contracts will shape prediction and information markets and retail investor access to derivatives.

Conclusion

Derivatives have evolved significantly from their early origins and become integral to modern financial markets. Despite their benefits in risk management, the complexity and potential risks of derivatives require ongoing regulatory oversight and prudent use by market participants. The future of derivatives will likely continue to be shaped by technological innovations, regulatory developments and the changing needs of the global economy.