OTC derivatives

Contracts negotiated bilaterally rather than traded on an exchange. They can be tailored but carry counterparty and liquidity risk.

Where you will meet it

OTC derivatives comes up in 20 learning outcome notes across the FRM syllabus. A few of them:

• Introduction to Derivatives
  FRM Part I · Financial markets and products

  “Over-the-counter derivatives are negotiated bilaterally between dealers and clients, so terms can be tailored exactly to the exposure.”

• Credit Risk Transfer Mechanisms
  FRM Part I · Foundations of risk management

  “Bilateral over-the-counter trading made exposures opaque, so counterparty risk was hard to measure.”

• Derivatives
  FRM Part II · Credit risk measurement and management

  “Over-the-counter derivatives are privately negotiated between two parties, usually with a dealer, so terms can be tailored to the hedge.”

• The Failure Mechanics of Dealer Banks
  FRM Part II · Liquidity and treasury risk measurement and management

  “OTC derivatives dealing adds counterparty credit exposure, margin and collateral demands, and rating triggers.”

See also

Counterparty credit risk · Liquidity risk

All terms beginning with O · FRM glossary

GARP does not endorse, promote, review, or warrant the accuracy of the products or services offered by Charta Learning, nor does it endorse any pass rates claimed by Charta Learning. Further, GARP is not responsible for any fees or costs paid by the user to Charta Learning. FRM® and GARP® are registered trademarks owned by the Global Association of Risk Professionals, Inc. The questions, explanations and study notes are written for this product and are not GARP curriculum material.