Exchange-traded derivatives, or ETDs, are financial agreements created by one or more parties, either people or companies. Through these agreements, the parties determine a fixed price for the terms of the present and future asset exchange.
Unique Advantages And Benefits
ETDs are one of the best derivative instruments on the market. They are excellent sources of liquidity for investors. Let’s explore some of the most prominent benefits:
Intermediaries control ETD agreements, ensuring that both parties honour their contract ends. These parties are unbiased and objective, enforcing order and compliance on both sides of the agreement. Therefore, these agreements have little to no counterparty risk.
Standard Agreement Templates
All ETD agreements follow the same template, meaning the contracts are standardised across the board. While specific prices, periods, and contractual amounts can change, the nature of the contract is essentially uniform. Thus, investors will always know what they get from this agreement.
Elevated Market Accessibility
ETDs are very liquid and tradable on the open market. Investors can easily find counterparties to make these deals as matching orders are abundant. Thus, these contracts can be obtained without sacrificing optimal prices.
Closely Monitored By The Regulators
The ETD Industry is closely monitored, regulated and overseen by various government authorities across the globe. Thus, these instruments are relatively secure and free from fraud or other white-collar crimes. These highly reputable instruments are a great signal for investors, further increasing the liquidity metric.
How Do ETDs Stack Up Against OTCs?
While OTCs and ETDs are pretty similar, they have several key differences. Over-the-counter contracts are less standardised, which gives investors more flexibility to construct custom contracts. However, they are mostly peer-to-peer agreements, which means that the two parties do not have the luxury of intermediaries monitoring the contract’s progress. Thus, OTCs are more freeform and flexible, but they are also riskier and less regulated overall.