SECTION 52. Glossary of Terms for Derivative Financial Instrument purposes
For the purposes of the regulation of Derivative Financial Instruments referred to in this Act, the following terms shall have the meanings set forth below:
Contract Clearing and Settlement Houses: Entities domiciled within or outside the country, recognized under the respective securities market laws of each country, whose purpose, among others, is the settlement and clearing of transactions involving futures and options contracts entered into by their members. They perform as intermediaries between the buyer and the seller and are committed to deliver the respective asset to the buyer and make the corresponding payment to the seller on the contract’s expiration date.
Closing a position: This involves executing a transaction opposite to an open position, either by buying a contract identical to one previously sold or by selling one identical to one previously bought. For two contracts to be identical, they must match in terms of the type of derivative, the underlying asset, and the expiration date. Positions may be closed before or at the contract’s expiration date.
Forward contract: This is an agreement structured according to the specific requirements of the contracting parties to buy or sell an underlying asset on a future date at a previously agreed-upon price. It is not a standardized contract and is not traded on centralized trading platforms.
Futures contract: An agreement with a standardized amount, subject matter, and expiration date, whereby the buyer agrees to purchase an underlying asset and the seller agrees to transfer it for an agreed-upon price on a future date. It is traded on a centralized exchange and is subject to daily clearing and settlement procedures that ensure the contracting parties fulfill their obligations.
Option contract: An agreement signed under a centralized trading platform with standardized amount, underlying asset, strike price, and expiration date. Its purpose is for the option holder, upon payment of a premium, to acquire the right to buy or sell the underlying asset at an agreed-upon price on a future date; while the option writer is obligated to sell or buy, respectively, the same asset at the price set in the contract.
Underlying asset: This is the reference asset upon which the derivative financial instrument is structured and may be financial (interest rates, exchange rates, bonds, stock indices, among others), non-financial (agricultural products, metals, oil, among others), or another derivative; it either currently exists or its future existence is certain.
Financial hybrids: Financial products structured on the basis of other financial products.
Daily Settlement: A procedure whereby, at the end of each trading session, the clearing and settlement institution debits or credits the gains and losses incurred during the session to the participants in the derivatives market. Through this procedure, the clearing and settlement institution also debits the losses incurred on short positions in option contracts.
Settlement of the Derivative Financial Instrument: This is the procedure by which compliance with the obligations contained in the derivative financial instrument is verified. It can take two forms:
a) Through the physical delivery of the underlying asset.
b) Through financial settlement, either by cash settlement, the closing of positions, or payment of the difference.
Cash Settlement: Settlement in cash upon the contract’s expiration.
Initial Margin: This is the initial security deposit required of both the buyer and the seller to ensure contract performance in the event of losses on futures contracts and short positions in option contracts.
Maintenance margin: The amount that must be provided, in accordance with the rules of each clearinghouse, to cover losses incurred at the end of each trading day while an open position in the purchase or sale of futures contracts or in the sale of options contracts remains active.
Centralized trading mechanisms: These are entities located domestically or abroad that simultaneously bring together and interconnect various buyers and sellers for the purpose of quoting and trading securities, products, contracts, and similar instruments. They are regulated and supervised by securities market regulatory authorities.
Recognized markets: A derivative financial instrument is deemed to be traded on a recognized market when:
It is traded on a centralized trading mechanism that has been in operation for at least two (2) years and has been authorized to operate as such in accordance with the laws of the country in which it is located, where the prices determined are publicly known and cannot be manipulated by the contracting parties to the Financial Derivative Instruments; or
It is contracted at prices, interest rates, currency exchange rates, or other indicators that are publicly available and published in a widely circulated print or electronic medium, the source of which is a public authority or a recognized and/or supervised institution in the relevant market; or
In the absence of exact prices or indicators for the underlying asset on which the contract is structured, the prices or indicators specified in subsection (b) relating to an underlying asset of the same or similar nature shall be used as a reference, provided that any differences can be adjusted to make them comparable.
Call option: A financial option through which the holder acquires the right, but not the obligation, to purchase the underlying asset covered by the contract at a specified strike price.
Put option: A financial option through which the holder acquires the right, but not the obligation, to sell the underlying asset covered by the contract at a specified strike price.
Open long or short position in futures and options contracts: It represents a participant’s outstanding commitments to future or optional purchases or deliveries of an underlying asset, not offset by outstanding opposite positions in a contract of the same type, class, and series on the same exchange.
Symmetrical positions: A financial strategy in which long and short positions are held simultaneously in two or more derivative financial instruments with the same strike price and the same expiration date, resulting in correlated and opposite movements.
Spot price: The spot value of the underlying asset, as recorded in the books. Provisions not provided for in this Act may not affect the spot price.
Strike price: The price at which the holder of a call or put option may exercise their respective rights to buy or sell the underlying asset.
Premium: The amount that the holder of an option pays to the writer in order to acquire the right to buy or sell an underlying asset at the strike price.
Returns: The return of the total or partial maintenance margin deposited by one of the parties when, as a result of daily settlement, the contracting party ends up in a credit position.
Financial swaps: Financial swap contracts through which periodic exchanges of cash flows are made, calculated based on the application of a rate or index to a notional amount or reference base.