A derivative contract is a financial instrument or other contract with all three of the following characteristics:
- It has: (a) one or more underlyings; (b) one or more notional amounts; and (c) payment provisions. These terms determine the amount of the settlement or settlements, and, in some cases, whether or not a settlement is required.
- It requires no initial net investment, or an initial net investment that is much smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors.
- Its terms require or permit net settlement, it can readily be settled net by a means outside the contract, or it provides for delivery of an asset that puts the recipient in a position not substantially different from net settlement.
Derivative contracts are only reportable on the TIC D reports. Embedded derivatives that are not bifurcated under FAS 133 should not be separated from the host contract and should be reported on the TIC B reports. However, if an embedded derivative is bifurcated, the derivative should be excluded from the B reports.