CFM13120 - Understanding corporate finance: derivative contracts: types of derivative: regulatory definitions
CFM14000 explains that the Financial Services and Markets Act 2000 (FSMA 2000) provides a regulatory structure for dealing in, advising on and managing investments. Part II of Schedule 2 FSMA 2000 and FSMA 2000 Regulated Activities Order (SI2001/544) defines particular types of investments, including instruments which are derivative products.
Paragraph 14 of Part II Schedule 2 deals with 'instruments giving entitlement to investments', which are defined as 'warrants or other instruments entitling the holder to subscribe for any investment. It is immaterial whether the investment is in existence or is identifiable'.
Paragraph 17 deals with 'options to acquire or dispose of property'.
Paragraph 18 deals with futures, defined as 'rights under a contract for the sale of a commodity or property of any other description under which delivery is to be made at a future date'.
Paragraph 19 deals with contracts for differences. It ensures that the general category of investments includes 'rights under
- a contract for differences, or
- any other contract the purpose or pretended purpose of which is to secure a profit or avoid a loss by reference to fluctuations in -
- the value or price of property of any description, or
- an index or other factor designated for that purpose in the contract'.
These definitions are very wide. They need to be, in order to bring into the regulatory regime all the different kinds of contract which the market would recognise as being derivatives - not only the straightforward types of forward contract, future, option and swap that have been discussed here, but also more complex derivatives built up from these basic elements.
For regulatory purposes, the definitions of future, option and CFD in FSMA 2000 are then limited by the Financial Services and Markets Act 2000 (Regulated Activities Order) 2001. CFM13130 gives more detail about how this is achieved. (For tax purposes, the necessary limitation is achieved in a different way, principally by excluding contracts which would not be treated as derivatives in a company's accounts - see CFM50000).