The Over-the-Counter (OTC) market refers to a decentralised financial market where trading takes place directly between two parties, without a central exchange. OTC markets are commonly used for derivatives, foreign exchange (FX), commodities, and fixed income instruments.
Key Features of OTC Markets
● Decentralised Structure: Unlike exchange-traded products, OTC transactions are not listed on a formal exchange. They are facilitated through dealer networks, broker platforms, or electronic trading systems.
● Customisation: OTC contracts can be tailoured in terms of contract size, expiry dates, and settlement terms, providing flexibility for institutional and professional investors.
● Counterparty Risk: Because there is no central clearinghouse, each participant bears the credit risk that the counterparty may default.
● Less Transparency: Pricing and volume data are less publicly visible compared to exchange-traded instruments, making market information more fragmented.
How the OTC Market Works
In an OTC market, trade is conducted through brokerage firms, dealer networks or electronic trading systems. Each transaction is bilateral, meaning both parties agree on price, size, settlement, and other terms.
Examples of OTC Products
● Forward contracts on currencies or commodities
● Interest rate swaps and cross-currency swaps
● Non-deliverable forwards (NDFs)
● Options structured for specific hedging requirements
OTC vs Exchange-Traded Markets
| Feature | Over-the-Counter Market | Exchange-Traded Market |
|---|---|---|
| Trading Method | Decentralised (bilateral) | Centralised (regulated exchange) |
| Contract Type | Customisable contracts | Standardised contract terms |
| Transparency | Limited public data | High transparency in price and volume |
| Counterparty Risk | Higher | Lower (clearing house acts as intermediary) |
| Flexibility | High | Moderate |
Importance of OTC Markets
The OTC market is essential to global finance and risk management. It allows institutions to:
● Hedge exposures that cannot be addressed through listed instruments
● Access liquidity in less standardized or emerging market products
● Tailour derivatives to unique corporate or investment requirements
OTC markets complete the trading landscape, offering the flexibility and depth needed to refine and execute complex investment strategies.
Start Trading with Orient Futures Singapore
Being an Overseas Intermediary of Shanghai International Energy Exchange (INE), Dalian Commodity Exchange (DCE), and Zhengzhou Commodity Exchange (ZCE), when foreign clients participate in internationalised futures contracts in these Chinese markets with us, they have direct access to trading, clearing, and settlement. Our parent company, Shanghai Orient Futures, is the largest broker in terms of aggregated volume across the five regulated exchanges in China.
Orient Futures Singapore also currently holds memberships at the Singapore Exchange (SGX), Asia Pacific Exchange (APEX), and ICE Futures Singapore (ICE SG). Starting August 2023, corporate clients can also gain access to the B3 Exchange through us, opening additional trading avenues.
Expect streamlined processes and an easy-to-use interface designed for minimal latency, accompanied by our team’s round-the-clock availability on trading days to provide assistance for all your trading needs.
