What is an OTC transaction and how is it different from an automatic price-matching transaction?
The OTC approach refers to spot foreign exchange transactions between participants of the inter-bank foreign exchange market through independent bilateral price inquiry and bilateral settlements based on bilateral credit authorization.
There are major differences between OTC and automatic price-matching transactions. The first is in credit basis. An OTC transaction is based on credit-worthiness of the two parties, with the parties undertaking credit risks on their own, and the transaction takes place only after bilateral credit authorization is conducted. In an automatic price-matching transaction, the China Foreign Exchange Trading System acts as the counter party to all participants and takes credit risks for all of them. Secondly, price is formed differently. The two parties of an OTC transaction shall negotiate a price while in an automatic price matching transaction, a price is formed through matching by a computer system. The third difference lies in settlement arrangement. The two parties in an OTC transaction shall settle it with their own arrangement while in the latter, the China Foreign Exchange Trading System provides centralized settlement.