OTC DERIVATIVES
What is OTC Brokering? How it Works, the Differences & Benefits
April 18, 2025
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3 minutes
OTC brokering allows financial transactions outside traditional exchanges, offering flexibility and customized terms while balancing advantages with risks such as counterparty and liquidity challenges.
What is OTC Brokering?
Over-the-counter brokering or OTC brokering is the personalized facilitation of trades between two parties directly, rather than through a centralized exchange. OTC markets are decentralized and involve financial instruments such as currencies, bonds, derivatives, and commodities, involving brokers to act as intermediaries to match buyers and sellers to negotiate terms.
How OTC Brokering Works?
OTC brokering works through a decentralized network, negotiation and settlement. Unlike a centralized exchange, OTC trades are carried out through a network of brokers, dealers or electronic platforms. Therefore, brokers can use their networks and expertise to find counterparties for specific trades.
OTC trades such as price, quantity and settlement date are privately negotiated between parties with the broker’s assistance. OTC transactions are then settled directly between counterparties. However, the settlement method may vary depending on the asset traded and the agreements reached.
How OTC Brokering Differs from Exchange Trading?
The four key differences between OTC brokering and exchange trading are decentralization, customization, transparency, and counterparty risk.
OTC Brokering | Exchange Trading |
Trades occur directly between counterparties | Trades occur on regulated platforms with standardized processes |
Involves highly customizable contracts that are tailored to specific client needs | Relies on standardized contracts with fixed terms and conditions |
Limited transparency as prices and terms are privately negotiated | Higher transparency as prices and trade data are publicly visible |
Higher counterparty risk as there is no clearinghouse guarantee and relies on counterparty trust | Lower counterparty risk as the clearinghouse acts as an intermediary, ensuring trade settlement
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Benefits of OTC Brokering with Straits Financial Services
At Straits Financial Services, we provide customized solutions by tailoring our OTC derivative products to aid our clients in accessing markets that might otherwise be unavailable to them.
Our firm offers unparalleled expertise in navigating the complexities of OTC derivatives, assisting various market participants including elevators, corporations, and traders in managing risks and optimizing financial performance.
We have successfully cleared pioneering contracts such as the SGX OTC Container Freight Futures Contract, utilizing advanced trading platforms like Braemar Screen to enhance risk management for clients.
We offer tools to hedge against various financial risks, including price fluctuations, interest rate changes and currency volatility.
As a client, you can benefit from customized trading solutions, expert guidance, innovative platforms, and comprehensive risk management strategies in the OTC brokering space.
Read also: Listed Derivatives vs OTC Derivatives
Conclusion
Ultimately, OTC brokering comes with opportunities in tailored financial instruments that offer both flexibility and confidentiality. At Straits Financial Services, you will gain access to a range of OTC derivative products and the highest quality advice from our experts to cater to your needs.
Written and edited by the Straits Financial Group Content Team
DISCLAIMER: This document is issued for information purposes only. This document is not intended, and should not under any circumstances to be construed as an offer or solicitation to buy or sell, nor financial advice or recommendation in relation to any capital market product. All the information contained herein is based on publicly available information and has been obtained from sources that Straits Financial believes to be reliable and correct at the time of publishing this document.
Straits Financial will not be liable for any loss or damage of any kind (whether direct, indirect or consequential losses or other economic loss of any kind) suffered due to any omission, error, inaccuracy, incompleteness, or otherwise, any reliance on such information. Past performance or historical record of futures contracts, derivatives contracts, and commodities is not indicative of the future performance. The information in this document is subject to change without notice.
Please also refer to our important notices at https://www.straitsfinancial.com/important-notices-and-disclaimer.
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