OTC (Over the Counter) Derivatives are customized and privately negotiated contracts for which the terms and conditions of the contract are mutually decided by the parties involved in the transaction. These contracts are traded and negotiated directly between two parties without being involved with any Exchange – which gives the Over the counter name.
OTC derivative market is the largest market in terms of trading and volume and highly unregulated till Dodd Frank rule came into force in 2010. As no exchange is involved here, counterparty risk or default risk is very high which poses significant risk for the financial market as well.
Different types of OTC Derivatives are:
Benefits of OTC Derivatives:
Disadvantages of OTC derivatives: