OTCderivaatit

OTCderivaatit, or over-the-counter derivatives, are financial contracts whose value is derived from the performance of an underlying asset or rate. They are traded directly between two parties outside formal exchanges, and they are typically customized to fit the specific needs of the counterparties. Common OTC derivatives include interest rate swaps, currency swaps, forwards, options, and credit default swaps. They are used for hedging risk, managing cash flows, or for speculative purposes by banks, corporations, asset managers, and other financial institutions.

A defining feature of OTCderivaatit is their bespoke nature. Terms such as notional amounts, maturities, settlement methods, and payoff structures can be tailored, which allows precise risk management but also introduces bilateral credit risk—the possibility that one party may default. To mitigate this risk, market participants use standardized documentation, most notably ISDA Master Agreements, and collateral arrangements through Credit Support Annexes. Since the global financial crisis of 2008, many standardized OTC derivatives have moved toward central clearing via clearinghouses (CCPs) and are subject to margin requirements and formal trade reporting.

Regulatory frameworks in major jurisdictions, such as EMIR in the European Union and the Dodd-Frank Act in the United States, aim to enhance transparency, reduce systemic risk, and improve risk management. These reforms encourage or require central clearing for standardized products, impose reporting to trade repositories, and impose stricter margin and collateral standards.

Overall, OTCderivaatit play a significant role in risk management and corporate finance, balanced by heightened regulatory oversight and counterparty risk considerations.