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Safety netting for futures dealers

Exchange-traded derivatives now have their own standard-form agreement. But that's no excuse for leaving your brain at home. Christopher Stoakes reports.

It is tempting to think most market transactions have their own standard form agreements: if a deal can't be done under Isda (International Swaps and Derivatives Association) terms, it can't be worth doing. However, exchange-traded futures and options have only recently received their own standard terms, courtesy of the Futures and Options Association (FOA).

The reason is that derivatives exchanges are among the most heavily regulated markets and so the need for such contracts may not have been obvious. But if you are, say, a bank in New York or London, dealing on a client's behalf in an overseas futures market, you and your client may have less protection than you think. One of the problems is netting.

The way such a deal is done is by contacting a local broker in the overseas futures market and doing the deal through him. He would act either as agent or, more likely, as principal, executing a back-to-back deal on the floor of the exchange. The contract you receive is in the local language, subject to local law, and non-negotiable because it is in the form laid down by the exchange, or because it is in a standard form which was never negotiated.

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