FRM Part I · FRM Exam Part I · Exchanges and OTC Markets
Which of the following is a recognized disadvantage of OTC markets relative to exchanges that regulators have sought to address after the 2007-2009 crisis?
Lower transparency about prices and aggregate exposures is the recognized disadvantage. Bilateral OTC trading obscured counterparty risk build-up, so post-crisis reforms promoted trade reporting and central clearing. Customization is an OTC advantage, and OTC markets trade interest rate products extensively.
- ALimited ability to customize contracts
- BLower transparency about prices and aggregate exposuresCorrect
- CMandatory daily price limits on all trades
- DInability to trade interest rate products
Explanation
OTC trading is bilateral and historically opaque, which obscured aggregate exposures and counterparty risk; reforms promoted trade reporting and central clearing. Customization is an advantage, price limits are an exchange feature, and interest rate products trade heavily OTC.
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