Over the Counter OTC
In financial derivatives terminology, the term Over-the-counter or OTC refers to financial instruments that are not traded on an official exchange. In general, such OTC instruments will instead be dealt directly between counterparties over the telephone or via some other reliable means of communicating contractual terms.
For example, many derivatives like options and forward contracts trade actively via telephone in the Over-the-Counter or OTC market, including those based on interest rates and currencies. Furthermore, an OTC market exists for smaller stocks that often cannot qualify to be listed on a major stock exchange like the New York Stock Exchange. Over- the-Counter trading also predominates for state and municipal bonds in the United States. In general, Over-the-Counter contracts will contain a mutual agreement for the two contracting parties to perform on a particular future transaction that may depend on the value of an underlying asset in the case of OTC derivative instruments.