Derivatives Laws and Regulations for Alternative Asset Managers

Switzerland is home to a robust derivatives market, characterized by a wide array of financial instruments including swaps, futures, options, and forwards. This market supports diverse asset classes such as equities, interest rates, commodities, and foreign exchange, making it a vital component of the global financial ecosystem. Swiss financial centers—most notably Zurich and Geneva—serve as hubs for sophisticated market participants, including banks, hedge funds, and institutional investors. With its long-standing tradition of financial stability and a unique regulatory framework, Switzerland continues to refine its approach to derivatives trading while maintaining an environment that promotes innovation and risk management. There are broadly two categories of derivatives transactions: "over-the-counter" (OTC) derivatives transactions and exchange-traded derivatives transactions. OTC derivatives transactions are tailored to the specific needs of the contracting parties, whereas exchange-traded derivatives transactions consist of standardized products traded on regulated platforms such as the SIX Swiss Exchange. Unless expressly stated otherwise, the focus of this discussion is on the OTC derivatives market. Derivatives transactions are employed by alternative asset managers primarily for either investment (or speculative) purposes or for risk management. In the former case, funds utilize derivatives to actively pursue investment returns, while in the latter, these transactions serve to mitigate the economic impact of various risks confronting the portfolio. This dual utility underpins the critical role derivatives play in modern financial strategies within Switzerland’s dynamic market landscape.

Switzerland's prominence as a derivatives hub is rooted in its longstanding reputation as a bastion of financial stability and innovation. From the evolution of its financial institutions in the early 20th century to the establishment of modern trading platforms like SIX Swiss Exchange, the country's robust legal and financial infrastructure has continually fostered global advancements. In the wake of the 2008 financial crisis, Swiss regulators, led by the Swiss Financial Market Supervisory Authority (FINMA), introduced comprehensive reforms to enhance market oversight and mitigate systemic risks associated with derivatives trading. Unlike jurisdictions bound by EU mandates, Switzerland has crafted a tailored regulatory framework that balances market freedom with rigorous risk management, ensuring the resilience and competitiveness of its derivatives market on the global stage.