What defines over-the-counter derivatives?

Over-the-counter (OTC) derivatives are defined as contracts that are negotiated and traded privately between two counterparts. This characteristic highlights the flexibility and customization of OTC derivatives, as they can be tailored to meet the specific needs of the parties involved. Unlike exchange-traded derivatives, which are standardized and regulated, OTC derivatives allow for a broader range of terms and conditions to be agreed upon by the participants, without the standardization required by exchanges.

This private negotiation aspect typically entails less transparency and increased counterparty risk compared to instruments traded on regulated exchanges. Such derivatives include various financial instruments like swaps, forwards, and certain types of options, which can be structured to cover a wide array of financial exposures.

The other options do not accurately describe OTC derivatives. For instance, contracts traded on an exchange are not classified as OTC because they follow a standardized format set by the exchange, and the trading occurs in a public marketplace rather than through private negotiations. Publicly offered contracts through a broker typically imply some level of standardization and regulatory oversight, contrasting with the tailored nature of OTC deals. Contracts involving multiple intermediaries may suggest a higher degree of complexity and intermediation than is commonly found in straightforward OTC transactions, which often involve just two parties engaging directly with one another