Legal Aspects and Operations of Derivatives Trading

  • Dongsheng Lu
Part of the Financial Engineering Explained book series (FEX)


An OTC derivative transaction is a legal contract between two trading counterparties. In order for a derivative transaction to be executed, both parties have to agree on all the legal terms. The contract would cover a variety of aspects, including terms relating to:
  • Specific derivative transaction payoffs, such as cash flow schedules, payment index, coupon frequency, holiday calendar, etc.

  • Options exercise and terminations, including discretionary exercises and mandatory terminations, as well as how to determine the termination values and the settlement procedures.

  • Derivatives operations, such as settlement, transfer provision, collaterals types, currencies, thresholds, and margin grace period.

  • Counterparty credit and default: what situation would be regarded as default, what would be the legal jurisdiction, and the seniority of the derivative transaction in the payment waterfall, etc.


Credit Risk Generally Accepted Accounting Principle Financial Account Standard Board Collateral Threshold Illiquid Asset 
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© Dongsheng Lu 2015

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  • Dongsheng Lu

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