What is the difference between over-the-counter (OTC) and exchange-traded derivatives?

Overthecounter (OTC) derivatives are contracts that are privately negotiated and traded directly between two parties, without going through an exchange or clearinghouse. In contrast, exchangetraded derivatives are standardized contracts that are traded on an organized exchange, with all trades cleared through a central clearinghouse.

OTC derivatives are usually customized to meet the specific needs of the parties involved, whereas exchangetraded derivatives are standardized contracts with predetermined terms and conditions. This means that OTC derivatives can be more flexible and tailored to individual requirements, but may also carry more counterparty risk and are less transparent. Exchangetraded derivatives, on the other hand, offer greater liquidity, price transparency, and reduced counterparty risk due to the central clearinghouse.

Examples of OTC derivatives include forward contracts, swaps, and some options contracts. Examples of exchangetraded derivatives include futures contracts and options contracts traded on organized exchanges such as the Chicago Mercantile Exchange (CME) and Intercontinental Exchange (ICE).