(OTC) Over-the-Counter vs. Exchange-Traded Segment
There are generally two different market segments within the foreign exchange market: “over-the-counter” (OTC) and “exchange-trade”.
In the OTC market, banks indifferent locations make deals via telephone or computer systems. The market is largely unregulated. Thus, a bank in a country such the USA does not need any special authority to trade or deal in foreign exchange. Transactions can be carried out on whatever terms and with whatever provisions are permitted by law and acceptable to the two counter-parties, subject to the standard commercial law governing business transactions in the respective countries. However, there are “best practice recommendations” such from the Federal Reserve Bank of New York with respects to trading activities, relationships, and other matters.
Although the OTC market is not regulated as a market in the way that the organized exchanges are regulated, regulatory authorities examine the foreign exchange market activities of banks and certain other institutions participating in the OTC market. Examinations deal with such matters as capital adequacy, control systems, disclosure, sound banking practice, legal compliance, and other factors relating to the safety and soundness to the institution.
The OTC market accounts for well over 90 percent of total U.S. foreign exchange market activity, covering both the traditional products (spot, outright forwards, and FX swaps) as well as the more recently (post 1970) OTC products (currency options and currency swaps). On the “organized exchanges”, foreign exchange products traded are currency futures and certain currency options.
Trading practices on the organized exchanges and the regulatory arrangements covering the exchanges, are markedly different from those in the OTC market. In the exchange, trading takes place publicly in a centralized location and products are standardized. There are margin payments, daily marking to market, and a cash settlement through a central clearinghouse. With respects to regulations in the USA, exchanges at which currency futures are traded are under the jurisdiction of the Commodity Futures Trading Corporation (CFTC). Steps are being taken internationally to harmonize trade regulations and to improve the risk management practices of dealers in the foreign exchange market and to encourage greater transparency and disclosure. More about Exchange Traded
Useful Information about forex trading
Useful Information about forex trading with german language
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