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What is OTC?: Meaning & Types

What is OTC?: Meaning & Types

  • Calender22 Sept 2026
  • user By: BlinkX Research Team
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    • In over the counter (OTC) derivatives, financial contracts are negotiated and traded between two parties without the involvement of a centralised exchange. In contrast to exchange-traded derivatives, which are standardised and regulated, OTC derivatives are more flexible and customised to meet the specific needs of the participants.

    Here, we will explore the over the counter meaning in trading and discuss its importance on the financial market. We will also explore types of OTC derivatives, their underlying assets, advantages, disadvantages, and risks. 

    Over the Counter (OTC) Meaning

    OTC meaning refers to the trading stocks of companies not listed on a stock exchange. The reason could be non-compliance with listing norms or ineligibility.

    Types of OTC Derivatives Market

    Over the Counter derivatives are traded through dealer networks, and they're often called unlisted stocks. OTC derivatives are traded through the broker/dealer network through direct negotiation between the two parties. Moreover, knowing the OTC meaning you also must understand that the counter derivatives market can be divided into two types:

    1. Inter-dealer Market

      In this market, OTC trading is done between different dealers. To hedge against risks, they negotiate prices.

    2. Customer Market

      It's OTC trading between a dealer and a customer. A dealer provides the customer with prices for buying and selling derivatives, which they agree on.

    Types of OTC Derivatives

    The following kinds of OTC trading are available based on the underlying assets below:

    1. Interest Rate Derivatives

      In this case, the underlying asset is a standard interest rate. Interest rate OTC derivatives include swaps, which involve the exchange of cash flows over time.

    2. Commodity Derivatives

      The underlying assets of commodity derivatives are physical commodities, such as gold, food grains, etc. An example of OTC trading in commodity derivatives is forward contracts.

    3. Equity Derivatives

      In equity derivatives, the underlying assets are equity securities. OTC trading in equity derivatives includes options and futures.

    4. Forex Derivatives

      The underlying asset in forex derivatives is the change in the foreign exchange rate.

    5. Fixed Income Derivatives

      The underlying assets in this case are fixed income securities.

    6. Credit Derivatives

      In this situation, one party transfers the credit risk to another without exchanging any underlying assets. Moreover, there are two types of credit derivatives: funded and unfunded. OTC credit derivatives include credit default swaps (CDS) and credit-linked notes (CLNs).

    Advantages of OTC Derivatives

    Here are the advantages and disadvantages of OTC derivatives:

    Advantages of OTC DerivativesDisadvantages of OTC Derivatives
    Allows trading for unlisted small businesses, reducing financial/administrative costs.Lack of central clearing and settlement poses credit/default risks.
    Enables hedging, risk transfer, and leveraging for businesses.The absence of standardized regulations leads to inherent and systemic risks.
    Provides flexibility by not adhering to standardized norms of exchange-traded derivatives.OTC contracts can involve speculative trading, resulting in potential losses for traders.

    Conclusion 
    The OTC full form is "over the counter". The over the counter meaning in derivatives is that the contracts are traded directly between buyer and seller, without a central exchange. Furthermore, the underlying assets of OTC derivatives can include interest rates, commodities, equities, forex, fixed income securities, and credit risks.  
    While OTC derivatives have advantages like lower costs, risk hedging, and greater flexibility, they also have some risks. There are credit and default risks because there is no centralized clearing mechanism, and there are also speculative risks. 

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    Frequently Asked Questions

    What is the OTC full form in trading?

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    Is OTC trading risky?

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    What is the difference between OTC and the stock exchange?

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    What are OTC shares?

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    Is OTC a primary or secondary market?

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