Over-the-Counter Derivatives

OTC derivatives are custom-made contracts, such as interest-rate swaps, currency forwards and many options, negotiated between two parties instead of listed on an exchange. Banks and big companies use them to hedge very specific risks, like a payment in yen due on a particular day.

Before 2008 this market was huge and largely in the dark. The crisis showed how one firm's failure could ripple through the web of contracts, so regulators pushed many of them into central clearing houses and reporting regimes.