When most Australians think of financial markets, the ASX—with its bustling open auctions and live trading floor—comes to mind. But beyond the public exchanges lies a quieter, less regulated world: the over-the-counter (OTC) market. In 2025, as digital platforms and regulatory reform reshape Australian finance, OTC markets are seeing renewed attention from both sophisticated investors and businesses looking for tailored funding solutions.
What Is the Over-the-Counter (OTC) Market?
Unlike the ASX or Chi-X, the OTC market isn’t a centralised exchange. Instead, trades happen directly between parties—typically via broker-dealer networks or specialist OTC platforms. OTC markets encompass a huge range of assets, from derivatives and corporate bonds to foreign exchange (FX) and even certain unlisted equities.
- Decentralised structure: Trades are negotiated privately, often allowing for custom terms.
- Asset variety: Common OTC instruments include FX contracts, interest rate swaps, commodity derivatives, and unlisted debt.
- Participants: Banks, institutional investors, hedge funds, and increasingly, sophisticated retail investors.
In Australia, OTC transactions are governed by the Corporations Act and overseen by ASIC, but with less transparency and fewer reporting requirements compared to listed markets.
Why Do Investors and Companies Use OTC Markets?
The OTC market fills several critical niches in Australia’s financial system. Here’s why participants are drawn to it:
- Flexibility: OTC products can be tailored to fit specific risk management or investment needs—for example, a company hedging a unique foreign currency exposure.
- Access to specialised assets: Many derivatives, credit products, and structured investments are only available OTC.
- Liquidity in less-traded assets: For securities or derivatives that aren’t heavily traded on the ASX, the OTC market may offer better pricing or execution.
For example, a mid-sized mining company might use OTC derivatives to hedge against commodity price swings, while an institutional investor could negotiate bespoke fixed-income deals unavailable on exchanges.
2025: Regulatory Changes and Technology Drive OTC Evolution
This year, Australia’s OTC markets are undergoing significant change. Driven by global trends and local policy, 2025 brings several noteworthy developments:
- ASIC’s expanded reporting rules: As of March 2025, OTC derivatives reporting requirements have tightened, aiming to align with international best practices. More counterparties must now report trades in near real-time to trade repositories, boosting transparency and systemic risk monitoring.
- Rise of electronic OTC platforms: Digitalisation is transforming how OTC deals are struck. New fintech platforms, some leveraging blockchain, are making price discovery and settlement more efficient—especially for FX and interest rate products.
- Focus on counterparty risk: Regulatory guidance now encourages the use of central clearing for certain OTC derivatives, reducing the risk that a deal will unravel if a party defaults.
These changes are especially relevant in Australia’s energy sector, where OTC derivatives are commonly used to manage wholesale electricity and gas price volatility. The push towards greater transparency and automation is likely to continue, with implications for both costs and compliance.
Risks and Rewards: What to Consider Before Trading OTC
While OTC markets offer flexibility and access, they also carry unique risks:
- Counterparty risk: No central exchange means the risk of a party defaulting is higher—highlighted by recent global events and regulatory crackdowns.
- Liquidity risk: Some OTC instruments can be hard to value or sell, especially in turbulent markets.
- Transparency concerns: Prices and terms are not always public, so investors must rely on their own due diligence.
Still, for sophisticated investors and corporates, the OTC market remains a powerful tool—especially as new platforms and regulation improve market integrity.
