Over the Counter (OTC)
Over the counter instruments are highly customisable to meet the specific needs of the clients. Any instrument that is not traded on an exchange is said to occur over the counter. The following instruments are usually traded in the OTC market.
Deals are normally done between two financial institutions or between a financial institution and one of its clients. A disadvantage of OTC deals is that there is usually some credit risk from the slim chance that the contract will not be honoured. Trades in OTC are typically much larger than trades done on a exchange.
These contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. Products such as swaps, forward rate agreements, and exotic options are almost always traded in this way. The OTC derivatives market is huge.
OTC dealers can operate in both primary and secondary markets.
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