A derivative financial instrument or shortly derivative ( Latin derivare deduce ') is a mutual agreement that its economic value from the fair value of a market- derived-related reference size. The reference value is the underlying (English underlying referred). Underlyings can be securities ( stocks , bonds , etc.), financial indicators ( interest rates , indices , credit ratings , etc.) or objects of trade ( commodities , foreign exchange , precious metals , etc.).
Basic economic idea
Derivatives are used to transfer risks : The market risks of the underlying are implemented in the derivative contract through contract design and can now be traded separately. The underlying asset itself no longer has to be bought or sold. Derivatives therefore enable the separation of real ownership of the underlying asset and participation in its market opportunities and risks. At the same time, there is a high degree of contractual freedom: Participation in the market risks of the underlying asset through the derivative does not have to be assumed 1: 1, but can be modified as required, depending on the risk requirements of the contracting parties.
Depending on the structure of the main performance obligations in the contract, a distinction is made between fixed transactions, swap transactions and option transactions.
- Fixed business
- Fixed deals can be characterized as future purchases. Upon conclusion of the contract, the seller promises to deliver the base value on the due date (physical settlement) or to pay a cash settlement in the amount of the then current market price of the base value (cash settlement). The buyer, on the other hand, promises to make a fixed payment on the due date. If the market price of the underlying rises during the term, the transaction is advantageous for the buyer; if the market price falls, it is advantageous for the seller.
- Swap deal
- Swap transactions ( swaps ) can be viewed economically as a series of fixed transactions connected in series, e.g. B. the regular exchange of services every 3 months for a period of 5 years. In a classic interest rate swap, for example, one contracting party promises to pay a fixed interest rate on a nominal amount, while the other contracting party promises to pay a variable interest rate on this nominal amount.
- Option business
- Option transactions ( options ) give the buyer the right - but not the obligation - to buy a certain amount of the underlying at a fixed price at the due date (European option) or during a defined period before the due date (American option) (call option) or for sale (put option). The seller of the option (writer) has the granting of this right remunerated at the beginning of the term with an option premium.
Derivatives can also be underlyings of other derivatives (2nd degree) (e.g. swaption = option on a predefined swap transaction). Terms such as futures, financial futures, stock exchange futures, financial derivatives or commodity derivatives are legal or economic synonyms or sub-terms of derivative financial instruments.
A distinction can be made between conditional and unconditional derivatives according to the conditional nature of the performance claim. The unconditional derivatives (traditionally: unconditional futures transactions) include fixed-term transactions and swaps. There is a binding legal obligation to perform at the time of performance. Conditional derivatives (traditionally: conditional forward transactions) include options. Here, the obligation to perform depends on the option buyer exercising a right to choose.
Derivatives can be traded on the exchange or over the counter . Over-the-counter derivatives are also known as OTC derivatives (from OTC as the abbreviation for over the counter ).
Exchange-traded derivatives (futures and exchange-traded options) are highly standardized in accordance with the conditions of the stock exchanges in order to ensure fast and liquid trading and to be able to participate in central clearing . The world's largest derivatives exchanges are the German-Swiss Eurex (created from the merger of SOFFEX and DTB ), the Chicago Mercantile Exchange (CME), the Korea Exchange (KRX), the British NYSE Liffe , and the US Chicago Board of Trade (CBOT). Also worth mentioning are the ICE Futures US (formerly the New York Board of Trade) and the New York Mercantile Exchange (NYMEX), which represent the major commodity futures exchanges.
Over-the-counter derivatives are regularly negotiated and closed bilaterally. They are less standardized than exchange-traded derivatives and can contain individual contract components - for example, termination clauses, service descriptions and security deposits. The Regulation (EU) no. 648/2012 (Market Infrastructure Regulation) obliged parties of OTC derivatives, in principle, to give these transactions into central clearing. Since only sufficiently standardized and liquid derivatives transactions are economically suitable for central clearing, contracting parties for OTC derivatives that are not subject to the central clearing obligation must meet high operational risk management requirements.
A special case are as securities designed ( securitized ) warrants as other securities are traded.
Derivative transactions on the one hand to hedging purposes ( hedging ) completed. The market risk of an underlying transaction to be hedged can be hedged by means of a derivative transaction, which inversely maps the market value development of the underlying transaction. Ideally, perfect coverage can be achieved. Industrial, commercial and financial companies protect themselves against changes in market prices, interest rates, exchange rates, etc. The opposite side of the market is regularly taken by speculators . Speculators take responsibility for risks in the hope that they will not materialize and that a profit can be made. You are acting as the “insurer of the capital markets”.
Derivatives can also be used to generate profits from small price differences in different markets (see arbitrage ). Arbitrage profits can result from exploiting price differences between the cash and futures market , from comparative cost advantages between different market segments or from exploiting legally different treatment of economically equivalent transactions. Arbitrage opportunities are important for pricing in the markets. A typical example is the so-called cash-and-carry arbitrage .
In hedging and speculative transactions, derivatives offer various advantages over cash transactions in the underlying assets. Derivatives require a lower capital investment. If the actor is subject to state market regulation , for example capital regulation under banking supervisory law , this may no longer apply. In addition, there are no delivery and storage costs, which in particular makes speculation on raw materials and agricultural products easier. In addition, it can happen that the derivative markets are more liquid than the cash markets in the corresponding underlying.
Derivatives can be very risky. However, derivatives are not per se any riskier than cash transactions . From a microeconomic point of view, derivatives have the same type of market risks as the underlying cash transactions. Even in terms of extent, derivatives do not generate any risks that would not already exist in the same way on the cash markets.
Differences in risk only emerge in a direct comparison between the forward transaction and the underlying. For example, the pricing of derivatives is often less transparent , especially for private investors , as this is not (only) a result of supply and demand, as is the case with securities on the cash market, but other parameters (e.g. remaining term) can play a decisive role in addition to the price of the underlying asset. This is often difficult to understand for private investors (risk of complexity).
In addition - depending on the design of the contract - there may be the risk of having to raise additional funds when the contract matures, contrary to the original intention.
In addition, the prices of derivatives are also subject to the same stochastic uncertainty as the underlying (market risk), although the leverage effect also causes greater participation in negative price movements and can thus lead to disproportionate losses, including total loss and beyond.
Derivatives trading can go up to the 2nd millennium BC. In what is now Bahrain and India as well as Mesopotamia . Attempts were made at an early stage to hedge the risks from trading transactions, particularly those from shipping, in the form of unconditional forward transactions . Aristotle already describes politics around 330 BC in his work . Market manipulation using derivatives on the capacities of olive oil presses. Organized trade can be traced back to the 12th century in Venice.
Forwards and options were traded in Amsterdam from 1595, mainly on tulip bulbs. This led to the first speculative bubble in the first half of the 17th century , known as the tulip mania . Towards the end of the 17th century, the first futures market, the Dojima (堂 島 米 市場, Dōjima kome ichiba, 堂 島 米 会所, Dōjima kome kaisho), arose in Osaka , Japan , on rice on an appointment basis without physical delivery ( cash compensation, i.e. only compensation of profit and loss) was traded.
In the USA, the Chicago Board of Trade (CBOT) was founded on April 3, 1848 . Originally founded as a chamber of commerce , the first time contract was traded in 1851 for the future delivery of a certain amount of corn at a fixed price. A year later, similar contracts were traded for wheat. These temporary contracts were already similar to modern futures , but were more comparable to forwards due to their individual design and conditions. The growing trade in time contracts in the following years led to the participation of people who had no connection to grain production or trade and who pursued purely speculative interests. Contracts changed beneficiaries several times until they finally got to someone interested in the delivery of the underlying grain. The increased trade in time contracts with longer terms by speculative investors subsequently led to the misuse of the instrument and in 1863 the CBOT issued the first rules to control trading. The rules introduced in 1865 established standardized contracts that stipulated , among other things, the term, margin obligations and delivery conditions. They thus laid the foundation for the design of modern futures. With the standardization of contracts, trading in futures grew. In 1874 the Chicago Produce Exchange , on which various agricultural products were traded, was founded. Twenty-four years later, in 1898, a subgroup of this exchange responsible for trading butter and eggs decided to form the Chicago Butter and Egg Board . Although trading in eggs made up only a small part of the total activities in the derivatives sector in the United States, the exchange is notable because the first comprehensive regulations for trading in futures were laid down on it in 1919 and the trading of time contracts was expanded to include futures. At the same time, the name was changed to Chicago Mercantile Exchange (CME). Until the merger of the CBOT and the CME, these two exchanges were the most important trading venues for futures.
Derivatives are arguably the fastest growing and changing segment of modern finance. According to the BIS ( Bank for International Settlements ), the nominal value of all outstanding OTC derivative contracts worldwide in the second half of 2010 was 601 trillion US dollars. In 2000 it was $ 95 trillion.
However, the nominal values of the outstanding contracts are only of limited significance because nominal amounts only form the calculation basis for the contracts. These are neither payments that are exchanged nor the value of the claims arising from the derivative contracts. In addition, when the amounts are determined by the BIS, multiple considerations occur in the sense that gross volumes are involved, but the risks from the contracts also partially offset each other at the level of the individual market participants.
Derivatives in the German legal system
The core of the market economy and an essential structural element of our legal system is private autonomy . No exchange fairness in the sense of equivalent services is required, but it is left to the contracting parties to determine the service and consideration independently. With derivatives, however, the possibility of an asymmetrical distribution of benefits is particularly high due to the risks presented. In order to enable the parties to make a well-considered assessment of performance and consideration, transparency is required, which the legislature must guarantee.
Ground plan of the protection system before 2002
With the First Financial Market Promotion Act (FFG) in 1989, the legislature introduced forward business capability by virtue of information (Sections 50–70 BörsG old version). The aim of the regulation was to enable a broader investor audience to gain access to the market and thus strengthen Germany's financial center: speculative stock exchange futures transactions could be countered with the game objection ( Section 762 BGB ) or difference objection (Section 764 BGB old version), so that no enforceable claims arose . However, if the contracting party was (formally) informed about the specific risks, the need for protection no longer applies according to the legal model, and these objections were excluded by law.
This investor protection model, however, suffered from serious gaps in protection: Even the uninformed merchant was already legally capable of trading on futures trading (Section 53 (1) BörsG old version). In addition, the ability to negotiate on the stock exchange could be acquired through a formal signature on a standardized information document developed by the banking industry, which then only worked between the credit institution and the informed customer (relative ability to negotiate). According to the case law, this was true even if the investor did not or could not understand the content. This formal parked on the degree of maturity the investor offered in casu no effective protection from ruinous dispositions. The case law therefore developed a two-stage protection model for the investor: In addition to obtaining (formal) future business capability by signing the explanatory note (basic clarification), advice had to take place on the second stage, which was appropriate for the investor and the property , which included the individual circumstances of the investor and the specifics of the specific Business considered. The new protection system of the 4th FFG from 2002 builds on this development.
Ground plan of the protection system 2002–2007
The protection system was transferred from the Stock Exchange Act to the Securities Trading Act (WpHG). From a substantive point of view, investor protection was placed on a different economic incentive basis. In principle, effective claims arise from the conclusion of financial futures transactions , because the difference objection (Section 764 BGB old version) has been deleted and the gaming objection ( Section 762 BGB) for financial futures transactions in accordance with Section 37e WpHG has been excluded. Investor protection should continue to be ensured through education . In section 37d (5) of the WpHG, the two-stage theory of case law was codified by making it clear that in addition to the basic information required for damages under section 37d (1) of the WpHG, there are also general disclosure obligations. The investor was thus protected by the juxtaposition of several information obligations, which were based on different legal bases and in the event of poor performance consistently triggered a claim for damages . In addition, compliance with the basic disclosure requirements was also ensured by BaFin ( Section 37f of the WpHG). According to this system, derivative transactions could only be legally ineffective if they represented prohibited financial futures transactions under Section 37g WpHG or did not fall under the term financial futures transaction ( Section 2 (2a) WpHG), so that the exclusion of the objection to gambling ( Section 37e WpHG) did not apply.
The protection system from November 2007
The law on derivatives was reformed again in 2007 through the Financial Market Directive Implementation Act (FRUG, Implementation Act for the Financial Market Directive ).
On the one hand, the term derivatives in the WpHG has been expanded compared to the old term financial futures. In accordance with Section 2 (2) No. 1 and 2 WpHG , futures transactions continue to exist as the core of the term derivatives. However, derivatives have been expanded to include mere contracts for differences (No. 3), so that day trading transactions or credit derivatives were also recorded according to the draft implementation law. The expansion of the term is intended to facilitate the application of the law and thus strengthen investor confidence.
In addition, the “first information level” of Section 37d WpHG was deleted without replacement. Investor protection through information should also be adequately guaranteed in the case of derivatives through the extended requirements of the code of conduct pursuant to Section 31 ff. WpHG. The core area of the single information level of Sections 31 et seq. WpHG is also the best possible execution ( Section 33a WpHG), which is to be ensured by a standard customer categorization ( Section 31a WpHG). The necessary individual information content must be geared towards these customer categories. Derivatives are therefore assigned to the highest protection level.
Notification from February 2014
Since February 12, 2014, all companies are obliged to report the conclusion of new derivative contracts as well as the change or premature termination of existing derivative contracts to a trade repository in accordance with Article 9 of Regulation (EU) No. 648/2012 (Market Infrastructure Regulation) . All derivative contracts are covered by this reporting requirement - both on- exchange and over-the-counter transactions are affected.
For the purposes of bank accounting, it must first be taken into account that derivatives are to be classified as a pending transaction and initially have no market value on the day they are concluded, so that accounting is not possible either. As soon as they develop a negative market value after the conclusion of the transaction, provisions must be made for these impending losses in accordance with Section 249 (1) of the German Commercial Code . Due to the realization principle, positive market values are always disregarded ( Section 252, Paragraph 1, No. 4, Clause 2 HGB). These rules also apply to the accounting of derivatives by non-banks .
Special rules for credit institutions
Most derivatives are entered into by credit institutions - among themselves or with non-banks . According to Article 286 (2a) of the Capital Adequacy Ordinance , credit institutions must subject the creditworthiness of their business partners (“ counterparties ”) to a creditworthiness check. Credit decisions must lead to the granting of internal credit lines for counterparties in order to limit the business volume for each individual counterparty. The particular risk for banks lies in the term of the derivative transactions, because the market value of the derivative can change during this term. In the case of derivative financial instruments , credit institutions are at risk of default if the derivative has a positive replacement value and, from the bank's point of view, a claim against the counterparty arises as a result of market developments .
- ^ Christian Köhler: The admissibility of derivative financial instruments in companies, banks and municipalities: An economic and legal analysis. Mohr Siebeck, ISBN 978-3-16-151928-4 , p. 7.
- ^ John Hull: Options, Futures, and Other Derivatives. 2010, p. 942.
- ↑ a b Randall Dodd: Derivatives Markets: Sources of Vulnerability in US Financial Markets. In: Gerald A. Epstein: Financialization and the World Economy. Edward Elgar Publishing, 2006, ISBN 1-84542-965-6 , pp. 149-150.
- ^ A b Robert Schittler, Martin Michalky: The big book of the stock exchange. FinanzBook Verlag, 2008, ISBN 978-3-89879-265-3 , p. 565 ff.
- ↑ Michael Bloss, Dietmar Ernst, Joachim Häcker: Derivatives: An authoritative guide to derivatives for financial intermediaries and investors. Oldenbourg Wissenschaftsverlag, 2008, ISBN 978-3-486-58632-9 , pp. 1-2.
- ^ Geoffrey Poitras: Risk Management, Speculation, and Derivative Securities. Academic Press, 2002, ISBN 0-12-558822-4 , p. 33 ff.
- ↑ Olaf Kurpiers, Dominik Zeitz: EMIR: Reporting obligation for derivatives. BaFin , January 2, 2014, accessed on February 3, 2014 .
- ↑ Reporting obligation for derivative transactions from February 12, 2014. BaFin , January 21, 2014, accessed on February 3, 2014 .
- ↑ Martin Jonas, The formation of valuation units in the annual financial statements under commercial law , 2011, p. 58
- ↑ Burkhard Vamholt: credit risk management . 1997, p. 141.
- Michael Bloss, Dietmar Ernst: Derivatives. Handbook for financial intermediaries and investors. Oldenbourg Verlag, Munich 2008, ISBN 978-3-486-58354-0 .
- Martin Bösch: Derivatives. Understand, apply and evaluate. 3. Edition. Vahlen Verlag, Munich, 2014, ISBN 978-3-8006-4843-6 .
- John C. Hull : Options, Futures, and Other Derivatives . Translated from the English by Hendrik Hoffmann. 8th, updated edition. Pearson Studies, Munich 2012, ISBN 978-3-86894-118-0 .
- Sebastian Kind: Stock market and financial futures. Peter Lang, Frankfurt am Main 2004, ISBN 3-631-53077-3 .
- Ernst Müller-Möhl: Options and Futures. Basics and strategies for the futures business in Germany, Austria and Switzerland. 5th edition. revised and updated by Erhard Lee. Schäffer-Poeschel, Stuttgart 2002, ISBN 3-7910-1819-1 .
- Günter Reiner : Derivative Financial Instruments in Law. Nomos Verlag, Baden-Baden, 2002, ISBN 3-7890-7855-7 .
- Legal treatise "Derivative Financial Instruments in Law" (Günter Reiner, Universität der Bundeswehr Hamburg; PDF; 3.5 MB)
- German Derivatives Association V.
- Deutsche Bundesbank - Financial derivatives and their repercussions on the cash markets (PDF; 177 kB)
- Graphic: Financial derivatives: portfolio and trading , from: Figures and facts: Globalization , Federal Agency for Civic Education / bpb