Within the derivatives markets, many products are traded through exchanges. An exchange has the benefit of facilitating liquidity and also mitigates all credit risk concerning the default of a member of the exchange. Products traded on the exchange must be well standardised to transparent trading. Non-standard products are traded in the so-called over-the-counter (OTC) derivatives markets. OTC derivatives have less standard structure and are traded bilaterally (between two parties). In such bilateral contract, each party should have credit risk concerns with respect to the other party. OTC derivatives are significant in the asset classes such as interest rate, foreign exchange, equities and commodities.
Over-the-counter (OTC) or off-exchange trading is to trade financial instruments such as stocks, bonds, commodities or derivatives directly between two parties. It is contrasted with exchange trading, which occurs via facilities constructed for the purpose of trading (i.e. exchanges), such as futures exchanges or stock exchanges.