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Over-the-counter transactions

OTC transaction (OTC - over the counter) is a transaction in a financial instrument (share, bond, depositary receipt) concluded by the parties directly and not through the exchange. Most OTC transactions are made through trade organizers, but in contrast to exchange trades, at the OTC market the organizer is not responsible in case one of the participants fails to fulfill his obligations. For OTC transactions there is no need to reserve funds on the eve of trading, as the participants of transactions settle directly. As a rule, OTC transactions are concluded with delayed settlements. Such transactions are designated as T+N1+N2, where N1 and N2 are respectively the date of delivery of securities and the date of payment (e.g. T+5+7 - delivery in 5 working days, payment in 7 working days). An over-the-counter transaction can involve a contract for the purchase and sale of securities.

The over-the-counter securities market in Europe dates back to the creation of the first joint stock companies in the 1660s, when one of the very first transactions was registered in 1568.

Types of OTC transactions

Deliverable forward - is the most common form of OTC transactions, one party supplies the underlying asset, the other pays the money. Spot transactions may be considered as a special case of such transactions with the "nearest" settlement date.

Settlement forwards are a less common form. For Russia this type of transactions is quite rare because of its legal insecurity. In 1998, after the August crisis, a Russian court denied several foreign banks their claims about nonpayment by Russian banks of their obligations under settlement forwards. The Russian court equated these transactions with betting.

An OTC option is a common type of OTC transaction in which one party receives the right, but not the obligation, to buy/sell an asset. OTC options should not be confused with standard stock options. For OTC markets, an option is not a trading tool but rather a type of transaction, whereas for exchange trades, an exchange-traded option is precisely a financial instrument.

Over-the-Counter Markets

The over-the-counter market does not have a single trading floor. It exists because not all securities may be traded on the exchange. As a rule, these are the securities of medium and small corporations, and also those of big ones, which are not listed one way or another[2]. About 2/3 of all securities turnover passes through OTC market. Historically, the OTC market originated earlier, and then the growth of securities transactions necessitated the organization of more orderly trading.[3]

In the United States, the OTC market has 415,000 official holders of stocks and bonds.

The most famous OTC platforms are:

OTC Platform - Moscow Exchange's trading platform for finding a counterparty in OTC trades[4]

RTS Board - Russian multifunctional information system[5]

Pink Sheets - US OTC system

OTCBB - electronic message boards of over-the-counter market in USA


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