Over The Counter Markets (OTC)

Over The Counter trading refers to financial instruments trading on a different context than organized financial markets or exchanges.

The term OTC trading or OTC market can be used for contracts on financial instruments made directly between two parties and also for trading with derivative financial instruments traded through a dealer and not through a centralized market (such as the stock exhange).

For example, a futures contract is a standardized product traded in the futures market while a forward contract is an OTC product.

Usually, when it refers to stocks, if a stock is traded at a Over The Counter context, this is usually because the company is small and does not meet the requirements for being listed in a regular stock exchange such as NASDAQ or NYSE. These stocks of companies that are not publicly traded are traded through brokers or dealers who negotiate directly between the investor and the company through computer networks or telephone.

Most bond and financial instruments debt are not traded on organized and standardized markets and therefore are considered OTC instruments. For example most bonds are sold through banks, so if an investor wants to buy a particular bond them should go directly to the bank concerned which sell the bond and negotiate directly with it out of a standard market.

OTC contracts that occur in these negotiations are bilateral contracts that contain the agreement on the settlement of the instrument to which the two parties have reached. Most OTC contracts are made through banks and financial investment companies. There are also negotiating frameworks of OTC derivatives that are often included in these contracts such as the rules of the International Swaps and Derivatives Associaton (ISDA) or, in Spain, the CMOF contract.