The examples and perspective in this article deal primarily with the United States and do not represent a worldwide view of the subject. It is contrasted with exchange trading, which occurs via exchanges. Products traded on the otc market must be well standardized.
In 2008 approximately 16 percent of all U. April 2014 that number increased to about forty percent. Although the notional amount outstanding of OTC derivatives in late 2012 had declined 3. Some companies, with Wal-Mart as one of the largest, began trading as OTC stocks and eventually upgraded to a listing on fully regulated market.
It is usually from an investment bank to its clients directly. Over-the-counter derivatives are especially important for hedging risk in that they can be used to create a “perfect hedge. With exchange traded contracts, standardization does not allow for as much flexibility to hedge risk because the contract is a one-size-fits-all instrument. With OTC derivatives, though, a firm can tailor the contract specifications to best suit its risk exposure. OTC derivatives can lead to significant risks. Especially counterparty risk has gained particular emphasis due to the credit crisis in 2007.
OTC derivatives are significant part of the world of global finance. The OTC derivatives markets grew exponentially from 1980 through 2000. This expansion has been driven by interest rate products, foreign exchange instruments and credit default swaps. 601 trillion at December 31, 2010.
In their 2000 paper by Schinasi et al. International Monetary Fund in 2001, the authors observed that the increase in OTC derivatives transactions would have been impossible “without the dramatic advances in information and computer technologies” that occurred from 1980 to 2000. ISDA 2012 Market Analysis drew on “information sources including LCH. A Focus on OTC Clearing Innovation Archived 2011-09-29 at the Wayback Machine. Enter the characters you see below Sorry, we just need to make sure you’re not a robot. This article contains content that is written like an advertisement.