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Direct (bilateral) dealing between counterparties - for example non-financial corporates and banks - which allows for tailoring of financial contracts but which also exposes the parties to credit risk.

Exchange trading is the alternative to OTC dealing.

Exchange traded instruments are standardised, and less flexible, but the interposition of the exchange substantially reduces credit risk.

Collateral requirements in OTC markets have reduced the historical differences in credit risk between exchange traded and OTC markets.

More specifically, this is a market for the trade of securities that are not listed on the stock exchange consisting of bilateral dealing contracts between brokers.

As opposed to an organised stock exchange, prices on the OTC markets are set by direct negotiation between dealers and not by an auction system.

The OTC market is a market for companies which do not fulfil the listing requirements of the official stock exchange markets, or for derivatives or other financial instruments that do not have a liquid market.

See also