There are some significant differences that may result from the location where a derivative contract is traded. The two locations are either that the derivatives are traded on an over-the-counter basis, or an OTC basis, where the contract terms are negotiated between the two counterparties to the derivative, or that they are traded over an exchange and will be referred to as listed derivatives. Forwards are OTC products, whereas their equivalent, Futures, are always traded over an exchange and therefore are listed. Options can either be OTC or listed. If we have derivatives that are traded on an exchange, the exchange will determine, and therefore standardize the quality, quantity, and delivery dates of those derivatives. As a result of that, the liquidity of these derivatives is relatively high, because there will be a number of other products with similar contract terms allowing for ease of offsetting.

OTC derivatives however, because of their very tailored nature, are likely to have very low liquidity, it'll be much harder to offset an OTC derivative contract. If we're trading derivatives over an exchange, counterparty risk will be relatively low, because settlement through a derivatives exchange happens through a clearinghouse who assumes the counterparty risk to both sides of the trade. Counterparty risk on an OTC derivatives is higher, however, OTC derivatives can also be cleared through a clearinghouse, which will significantly reduce the counterparty risk on those centrally cleared OTC derivatives. Transaction costs tend to be higher on OTC derivatives as a result of a bank charging the client for the privilege of having their specific required contract terms included within their derivative contract. And in terms of margin requirements, so a requirement to pay money over to the accounts party, to the trade, or the clearinghouse, to show that you are good for any losses that you might suffer. This is required if we're trading derivatives over an exchange, we're trading those listed derivatives, whereas the requirement to pay margin for OTC derivatives is based on specific agreements in place between the counterparties to the trade. So there is a reasonable chance you may have to pay margin trading OTC derivatives, but it is not guaranteed.