Hybrid derivatives are financial contracts that combine features from multiple asset classes, embedding different types of derivative instruments, such as combining equity and interest rate exposures. These structures are typically used by firms or investors looking for bespoke exposure to complex market risks, or by institutions creating structured financial products.
What are Hybrid Derivatives?
Given their customisable nature, hybrid derivatives can be difficult to categorise. They differ from hybrid securities, which are typically fixed-income instruments with equity-like features. Their main distinction is that they utilise more than one asset class and blend the characteristics of both debt and equity instruments. Some hybrid derivatives might combine elements of an equity option with an interest rate swap, or link commodity exposure with a credit-based trigger. Some common examples of hybrid derivatives are:
- Convertible bonds: debt instruments with equity options
- Equity-linked notes: can contain embedded derivatives, with interest rate caps or floors
- Structured products: can access exposure to multiple markets simultaneously
These instruments are used for creating customised investment strategies to hedge across risk types and due to their structure, they can be difficult to categorise. EU reporting regulations, such as the Markets in Financial Instruments Regulation (MiFIR), assess reportability based on where a financial instrument is traded rather than the complexity of the instrument.
When do Hybrid Derivatives Fall Under MiFIR Reporting?
Hybrid derivatives are subject to MiFIR post-trade transparency requirements when they are traded on regulated trading venues such as multilateral trading facilities (MTFs) or organised trading facilities (OTFs). The executing venue or investment firm must publish the trade details as close to real-time as possible, unless a deferral applies. These reports should include:
- Instrument identifiers (ISINs)
- Price and notional amount
- Date and time of execution
- Trading venue and currency
These post-trade requirements apply to hybrid derivatives regardless of the complexity of the contract as long as it is admitted to trading or traded on a regulated venue. Hybrid derivatives involve multiple asset classes and complex payoff structures. When these instruments are traded on regulated venues such as MTFs and OTFs, they are subject to MiFIR post-trade transparency reporting requirements. Firms must be able to accurately classify hybrid derivatives and accurate details are required to be published in a timely manner to comply with regulatory reporting obligations. If you require assistance with your MiFIR reporting obligations, one of Novatus Global's experts will be happy to talk you through our offering and show you how we can support your business.
