Get to know OTC derivatives (2024)

FAQs

What are the 6 types of OTC derivatives? ›

OTC clearing refers to a process under which standardized derivative contracts which relate to over-the-counter transactions will be cleared through an agency established by a stock or commodities exchange.

Higher credit risk: OTC derivatives, lacking regulatory oversight, introduce an elevated level of credit or default risk. The absence of a supervisory body increases the potential for counterparty default, exposing participants to financial uncertainties and losses.

Key Takeaways

OTC derivatives do not have standardized terms and they are not listed on an asset exchange. As an example, a forward and a futures contract both can represent the same underlying, but the former is OTC while the latter is exchange-traded.

OTC markets have significantly fewer regulations than the stock exchanges and are less expensive for the companies that are quoted on them. The OTC Markets Group is organized into three main marketplaces: OTCQX, OTCQB, and OTC Pink, each with different requirements.

The clearing obligation applies to EU firms that are counterparties to an OTC derivative contract including interest rate, foreign exchange, equity, credit and commodity derivatives.

25% of the interest rate derivatives market, 33% of the credit default swaps market, and significant percentages of other types of OTC derivatives will remain non-cleared.

Exchange Traded Derivatives also offer high levels of transparency, as price and volume information is publicly available. This transparency promotes market efficiency, allowing investors to make informed decisions. In contrast, the OTC derivatives market is decentralized and less transparent.

Is a swap an OTC derivative? ›

A swap is an over-the-counter derivative contract that lets two parties exchange future payment streams for a set time period, typically in order to offset risk.

The SEC enforces federal securities laws that cover transactions in “securities” as defined by law, including some OTC derivatives such as securities options.

Counterparty risk, or counterparty credit risk, arises if one of the parties involved in a derivatives trade, such as the buyer, seller, or dealer, defaults on the contract. This risk is higher in over-the-counter, or OTC, markets, which are much less regulated than ordinary trading exchanges.

In general, however, all OTC derivative transactions involve some combination of market risk, credit risk, funding risk and operational risk.

Medicines you can buy without a prescription are called non-prescription or over-the-counter (OTC) medicines. They may be taken to treat minor health problems at home. Examples of over-the-counter medicines are acetaminophen, aspirin, antacids, decongestants, antihistamines, and laxatives.

Over-the-Counter Option. An option traded off-exchange, as opposed to a listed stock option. The OTC option has a direct link between buyer and seller, has no secondary market, and has no standardization of striking prices and expiration dates.