What are the key differences between exchange-traded and over-the-counter derivatives?

The key differences between exchange-traded and over-the-counter derivatives are as follows:

1. Trading Platform: Exchange-traded derivatives are traded on organized exchanges, whereas over-the-counter derivatives are traded directly between two parties without the involvement of an exchange.

2. Standardization: Exchange-traded derivatives are standardized contracts with predetermined terms and conditions, such as contract size, maturity, and settlement procedures. On the other hand, over-the-counter derivatives are customized contracts tailored to the specific needs of the parties involved.

3. Counterparty Risk: In exchange-traded derivatives, the exchange acts as the counterparty to both buyers and sellers, reducing counterparty risk. In over-the-counter derivatives, the counterparty risk is higher as it depends on the creditworthiness of the individual parties involved.

4. Liquidity: Exchange-traded derivatives generally have higher liquidity due to the presence of a centralized marketplace and multiple participants. Over-the-counter derivatives may have lower liquidity as they are traded directly between two parties, making it more challenging to find a willing buyer or seller.

5. Transparency: Exchange-traded derivatives offer greater transparency as prices, volumes, and other relevant information are publicly available. Over-the-counter derivatives have less transparency as the transactions are private and not publicly disclosed.

6. Regulation: Exchange-traded derivatives are subject to regulatory oversight by government authorities and are required to adhere to specific rules and regulations. Over-the-counter derivatives have less regulatory oversight, although recent regulations have been implemented to enhance transparency and mitigate risks in this market.

Overall, exchange-traded derivatives provide standardized contracts, lower counterparty risk, higher liquidity, and greater transparency, while over-the-counter derivatives offer customization but come with higher counterparty risk, potentially lower liquidity, and less transparency.