Over-the-counter (finance)

The off-exchange trading, and OTC, direct or OTC trading, means financial transactions between market participants that are not handled by the stock exchange. OTC stands for the English term " Over The Counter " which can be translated as " over the counter " with. The OTC trading is called in German telephone trading, even if he mostly takes place electronically today.

Molding

One can distinguish three forms of OTC trading:

• OTC trading in listed securities. These transactions are settled OTC business when the partners the business does not want to make public. This is done in a rapidly increasing extent and in high volume in dark pools.
• OTC trading of financial derivatives without standardized specifications (eg, exotic options, OTC options).
• OTC trading in securities which are not admitted to trading.

Exchanges offer only standardized products, but often do not meet the hedging desire of acting partner. If a company wants, for example, the interest rate risks of an investment hedge, it will apply only in exceptional cases on the stock exchanges for a term of moderately suitable instrument. For some of the financial products traded on the OTC trading is therefore more important than the stock exchanges, such as certificates.

Through online brokers and private investors have the ability to directly conduct business with an issuer or broker. The investor provides this via the Internet an inquiry about the price of the specified financial product to its online broker. The issuer shall subsequently inform the binding purchase and sale price for the specified quantity. The investor must then decide within a few seconds if he wants to conclude this business with these terms or not.

Pros and Cons

Advantages:

• Conserving the exchange fees that would be due to a trade on the stock exchange
• Individual modification of the traded product
• Speed ​​by the direct trade between the two trading partners
• Bid- ask spread provides attractive margins for especially investment banks especially for complex products
• High flexibility enables rapid product innovation

Cons:

• Less control and supervision
• Any missing reference markets
• Only partial specification options of limit orders (only relevant for private investors )
• Not visible options in an order book, so there is only a lower market transparency
• In part lesser liquidity than in the trading
• The result is counterparty risk, but can be limited by netting agreements and collateral as well as through the clearing through central counterparties (especially for OTC derivatives relevant).

Sales volume

The publicly -bound derivative trading should have approximately quintupled from 1990 to 2002 in part the slight drop in the 2007-2009 financial crisis. The volume of outstanding OTC derivatives in the field of interest rate and currency contracts has increased by about a factor of 120 in the period 1990-2009. In addition, over the past 15 years, credit derivatives have gained considerable importance. The volume of the OTC derivatives market is $ 450 trillion.

Organized " off-exchange " trading platforms

There are now organized securities markets outside the traditional stock exchanges, which are also counted for OTC trading and call themselves " over the counter ", for example, Lang & Schwarz, Tradegate, CATS - OS or TIQS. According to the definition of the term exchange is also in these organized markets to exchanges, the term " over the counter " here is so contradictory.

Specifications of the G20 and European legislation since 2007

Derivatives trading is regulated in Europe by the European Union. On the occasion of the financial crisis in which the regulators responded inadequately to distortions in OTC trading, the EU institutions have made new legislative proposals. First opinions of the European Commission related to it explicitly to the decisions of the G20 Summit in Pittsburgh (2009) and Toronto (2010). In Pittsburgh was demanded: " All standardized OTC derivatives should be traded on exchanges or electronic trading platforms and cleared no later than the end of 2012 through a central counterparty. OTC derivative contracts should be reported to trade repositories. Non-centrally cleared contracts should be subject to higher capital requirements. ", The European Commission proposed in September 2010 a regulation on derivatives trading. Currently, this is negotiated between the Council of the European Union and the European Parliament. EP rapporteur Werner Langen.

While the majority of the European Parliament welcomed the Commission's proposal, the Green Group is the regulation does not go far enough. So to the European Securities and Markets Authority (ESMA) more powers to be given and derivatives trading are generally limited.