There are a variety of derivative products available in the modern world. They are either Exchange traded derivatives(traded on organised exchanges) or over-the-counter(OTC) derivatives(agreed directly between the contracting counterparties).
The 4 types of derivatives products are forwards, futures, options and swaps.
OTC market is more of a way of doing business rather than a physical marketplace. Buying and selling of contracts is matched through a negotiated bidding process over a network of telephone or electronic media that link thousands of intermediaries. The OTC market participants include banks, financial institutions, hedge funds, corporations and high-networth individuals.
Transactions in the OTC derivative market occur among qualified counterparties in private and are hence less regulated.
OTC derivatives market contrasts against Exchange traded derivatives market as follows:
-contracts are tailor made to fit in the specific requirements of dealing counterparties.
-management of counter-party credit risk is decentralized and located within the individual institutions.
-there are no formal centralized limits on individual positions, leverage, or margining.
-there are no formal rules or mechanisms for risk management to ensure market stability and integrity, and for safeguarding the collective interest of market participants.
-transactions are private with little or no disclosure to the entire market.
On the other hand,
Exchange traded contracts are standardized, traded on organized exchanges with prices determined by the interaction of buyers and sellers.
A clearing corporation guarantees settlement of transactions and maintains a standard contract performance.