# Over-the-counter (OTC)

- Canonical URL: https://www.gerhardmerk.de/over-the-counter-otc
- Post ID: 592005
- Modified: 2023-07-25T21:13:05+00:00
- Language: en

## Definition

Financial products that are not traded on the stock exchange, but are settled bilaterally between trader and buyer and, above all, hedge funds. - The main disadvantages of this form of trading are: - the volume of transactions and the prices remain hidden; - the price formation process is not transparent; - there is no market monitoring as on the stock exchange; - the risk content of the traded securities remains largely unknown; and - in the event of unexpected price distortions (reeling of prices) on the financial market, OTC trading abruptly comes to a halt, as has been clearly demonstrated on several occasions and most recently in the slipstream of the turmoil surrounding the subprime crisis. - This is because hedge funds continuously raise money for their various market activities and offer assets as collateral. If the value of the collateral offered falls as a result of general market developments, the banks approach the hedge fund with a request for additional funding. In order to be able to meet this demand, but also to settle the current payments, securities are sold from the fund's assets. There is therefore a lack of liquidity for the purchase of new securities. - The advantage of over-the-counter transactions is that they can be executed within a very short time. The time between the offer of a special purpose vehicle to a hedge fund to acquire securitized securities made via telemedia (all electronic communications channels) and the purchase commitment on the part of the fund management is often only minutes. - See derivatives transactions clearing obligation, Derivatives transactions reporting obligation, hedge fund risks, listing, mentioned, over-the-counter trading. - Cf. Financial Stability Report 2011, pp. 43 f., p. 75 (intransparency of OTC trading in general and of over-the-counter derivatives markets in particular; measures to establish market transparency in OTC trading), Financial Stability Report 2012, pp. 92 ff. (intransparent over-the-counter derivatives market poses high risks), Financial Stability Report 2013, pp. 91 ff. (systemic risks in over-the-counter derivatives markets; detailed presentation). Attention: The financial encyclopedia is protected by copyright and may only be used for private purposes without express consent! University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec. Professor Dr. Eckehard Krah, Dipl.rer.pol. E-mail address: info@ekrah.com https://de.wikipedia.org/wiki/Gerhard_Ernst_Merk https://www.jung-stilling-gesellschaft.de/merk/ https://www.gerhardmerk.de/

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