3Structured Finance and Financial Products – Derivatives
This chapter will mainly provide an overview of OTC derivatives financial instruments, both in terms of the products and then the documentation used for them. It is of course only one example of financial instruments, however, it provides a useful context for the remainder of the text, both in terms of background understanding, as well as for examples of legal agreement data considerations. They are also important trading products, for which close‐out netting is a significant commercial consideration, due to the regulatory capital impact netting can have on the exposure of a firm to its counterparty – an item that will be considered in the context of legal opinions and legal opinion data in Chapter 6. Additionally, these products were found to be a major component of the Financial Crisis, and therefore the legal agreement data aspects of these products have become the focus of much regulatory reform post‐crisis.
Derivatives
Derivatives contracts are agreements to receive, make or provide payments and/or assets at a time or times in the future, with the value being derived from the level and/or value of a different underlying asset. Such underlying asset might be an interest rate, asset or index, or even decisions made by parties to the contract. In many regards, derivatives instruments are similar to the underlying, but allow a mechanism to take a very similar synthetic position. For example, an airline may enter into ...