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Five Differences Between OTC and Exchange Traded Derivatives

Minneapolis, MN | June 27, 2024 | By: John Trefethen, Director and Co-Founder

Five Differences Between OTC and Exchange Traded Derivatives

Over-the-counter derivatives, also called OTC derivatives, and exchange-traded derivatives have several key differences.  Below are five major distinctions between them:

Trading Venue:

  1. OTC derivatives are traded directly between two parties with no centralized exchange or intermediary involved.

  2. Exchange-traded derivatives are traded on a formal exchange such as the Chicago Mercantile Exchange where the transaction is facilitated by the exchange.


  1. OTC derivatives are customized to meet the specific needs of the parties involved such as notional amount, maturity and other contract terms.

  2. Exchange-traded derivatives are standardized in terms of contract size, expiration dates and underlying asset.

Counterparty Risk:

  1. The risk of counterparty default is higher with OTC derivatives because these trades are not guaranteed by a clearinghouse.  Each party must assess and manage the credit risk of the other party.

  2. With exchange-traded derivatives the exchange acts as an intermediary and clearinghouse which mitigates counterparty risk.  The clearinghouse guarantees the performance of the contract, reducing the risk of default.


  1. OTC derivatives are less regulated compared to exchange-traded derivatives.  Regulatory oversight may vary by jurisdiction, but in general, OTC markets are more opaque.

  2. Exchange-traded derivatives are subject to strict regulatory oversight by financial regulatory authorities.  Exchanges must comply with specific rules and reporting requirements ensuring greater transparency and protection.

Liquidity and Pricing:

  1. OTC derivatives tend to be less liquid because they are customized and traded privately.  Pricing can be less transparent and more difficult to determine.

  2. Exchange-traded derivatives are typically more liquid due to their standardization and centralized trading.  Prices are publicly available, and there is often a continuous market for these contracts.


There are pros and cons to both OTC and exchange-traded derivatives that impact which is most suitable for a particular organization.  If you are unsure which one best fits your needs, enlist the help of an advisor to assist in making this determination. 


Author: John Trefethen, Director and Co-Founder

Mobile: 612-868-6013

Office: 952-746-6040

HedgeStar Media Contact:

Megan Milewsky, Marketing Manager

Office: 952-746-6056


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