Over-the-Counter (OTC) Desk

Enables large-scale investors (e.g., hedge funds, asset managers, venture capital firms) to execute trades of significant size (often $1M+) without causing slippage on public exchanges. Key features include:

• Price Discovery: Negotiated pricing based on volume and market conditions.
• Confidentiality: Trades are not broadcast to the public until settlement.
• Reduced Market Impact: Prevents front-running and price movement from visible large orders.

Serves corporations managing their balance sheets, including treasury diversification, M&A settlements, and employee compensation in digital assets. Common scenarios:

• Treasury Swaps: Converting a portion of corporate treasury (e.g., from USD to BTC/ETH).
• Token Vesting: Facilitating the off-market sale of vested tokens for employees or early investors.
• M&A Payments: Using digital assets as a settlement medium in acquisitions.

Creates custom financial instruments that are not available on standard exchanges. This includes:

• Non-Deliverable Forwards (NDFs): Cash-settled contracts on future asset prices.
• Basket Trades: Simultaneous purchase/sale of a portfolio of tokens.
• Option Collars & Hedging: Strategies to lock in prices or hedge existing positions against volatility.
• Cross-Chain Swaps: Direct exchange of assets native to different blockchains.

Assists blockchain projects and protocols with their liquidity and token distribution strategies. Services include:

• Token Launch Support: Managing initial distributions to strategic partners and market makers.
• Liquidity Bootstrapping: Helping projects establish initial liquidity pools without dumping on open markets.
• Stablecoin Swaps: Large conversions between different stablecoins (USDT, USDC, DAI) for operational needs.

Provides personalized service for wealthy individuals seeking direct, confidential access to digital asset markets. Key benefits:

• Personalized Execution: Tailored strategies and direct broker relationships.
• Tax & Estate Planning: Coordination with legal advisors for optimal structuring.
• Direct Custody Solutions: Often integrates with qualified custodians for secure settlement.

Supports professional trading firms that capitalize on price discrepancies across venues or provide continuous liquidity. The OTC desk acts as a counterparty for:

• Cross-Exchange Arbitrage: Sourcing or offloading large volumes to capture spreads between regions or platforms.
• Inventory Management: Allowing market makers to hedge or rebalance their positions off-exchange.
• Basis Trading: Facilitating trades between spot and derivatives markets (e.g., spot BTC vs. futures).

An atomic swap is a peer-to-peer, trustless mechanism that enables the direct exchange of one cryptocurrency for another across potentially different blockchains without an intermediary. It uses Hash Time-Locked Contracts (HTLCs) to ensure the trade either completes entirely for both parties or fails entirely, eliminating counterparty risk. This is a foundational technology for decentralized exchanges (DEXs) and cross-chain interoperability.

• Core Mechanism: Uses cryptographic hash locks and time locks to enforce the swap conditions.
• Key Benefit: No need for a centralized custodian or exchange.
• Example: Swapping Bitcoin on the Lightning Network for Litecoin directly.

Delivery vs. Payment (DvP) is a settlement model that ensures the final transfer of an asset occurs if and only if the corresponding payment is also finalized. This atomic linkage eliminates principal risk, where one party delivers the asset but does not receive payment (or vice versa). In blockchain, this is often achieved programmatically through smart contracts or specialized protocols like those used in security token settlements.

• Primary Goal: Simultaneous, irrevocable exchange of asset and payment.
• Blockchain Implementation: Enforced via smart contract logic that releases funds upon confirmation of asset transfer.
• Institutional Use: Critical for compliant trading of tokenized real-world assets (RWAs) and securities.

Netting is a settlement practice where multiple obligations between two or more parties are consolidated into a single, net amount. Instead of settling each transaction individually, only the net difference is transferred, drastically reducing the number of settlements, transaction fees, and liquidity requirements. It is a cornerstone of efficient institutional finance and is increasingly used in crypto for high-frequency trading firms and between large exchanges.

• Bilateral Netting: Aggregates obligations between two counterparties.
• Multilateral Netting: Aggregates obligations across a network of participants, often via a central clearing party.
• Benefit: Reduces settlement traffic and operational risk by up to 90%+ in active trading relationships.

Payment vs. Payment (PvP) is a settlement mechanism that ensures the final transfer of a payment in one currency occurs if and only if the final transfer of a payment in another currency also occurs. It is the foreign exchange (FX) equivalent of DvP and is crucial for eliminating settlement risk in cross-currency transactions. In crypto, this is relevant for cross-chain swaps and transactions involving stablecoins or wrapped assets on different ledgers.

• Risk Mitigated: Herstatt Risk (the risk one party pays but does not receive the counter-payment).
• Implementation: Can be orchestrated by centralized systems or decentralized protocols using interchain communication.
• Example: A smart contract ensuring USDC on Ethereum is released only upon confirmed receipt of EURC on Stellar.

The primary risk in an OTC trade is that the other party fails to settle. This includes:

• Credit Risk: The buyer's inability to pay or the seller's failure to deliver the asset.
• Settlement Risk: The "Herstatt Risk" where one side fulfills its obligation but the other does not, often due to time zone differences in finality. Trades rely on the desk's or the client's creditworthiness, often mitigated by collateral agreements, escrow services, or using a Prime Broker.

OTC prices are negotiated bilaterally, not set by a public order book. This creates risks:

• Information Asymmetry: The desk typically has superior market knowledge.
• Wider Spreads: Lack of transparent competition can lead to less favorable pricing, especially for large or illiquid blocks.
• Valuation Challenges: The lack of a public ticker makes independent mark-to-market valuation difficult for the asset recipient.

The manual, relationship-driven nature of OTC trading introduces execution complexities:

• Settlement Failure: Manual processes for transferring assets and fiat increase error risk.
• Smart Contract Risk: For crypto OTC, settling via on-chain transfer requires verifying wallet addresses and blockchain finality.
• Cybersecurity: Large, pre-announced transfers can make parties targets for phishing or hacking attacks during the settlement window.

OTC desks are subject to stringent financial regulations, and clients inherit this exposure:

• KYC/AML Obligations: Desks must verify client identity and source of funds. Failure can lead to frozen transactions or asset seizure.
• Reporting Requirements: In many jurisdictions, large OTC transactions must be reported to regulators.
• Jurisdictional Arbitrage: Dealing with a desk in a different regulatory region can create legal uncertainty and enforcement challenges.

While OTC is used for large, illiquid trades, it is not immune to market dynamics:

• Blockage Discount: A very large sale may only be executable at a significant discount to the spot market.
• Market Impact: Although OTC avoids public order books, a desk hedging a large trade on exchanges can still move the market, affecting the final price.
• Desk Capacity: The desk's ability to warehouse risk or find a matching counterparty is not guaranteed, especially during volatile markets.

Professional participants use several methods to manage OTC risks:

• Credit Support Annex (CSA): Legal agreement defining collateral posting for derivatives.
• Escrow Services: Using a trusted third party to hold assets until both sides fulfill conditions.
• Prime Brokerage: Leveraging a prime broker to handle settlement, custody, and credit intermediation.
• Bilateral Netting: Aggregating multiple trades with the same counterparty to reduce settlement exposure.

An OTC desk can operate on a principal or agency basis, defining its risk profile.

• Principal Trading: The desk uses its own capital to take the other side of a trade, acting as the direct counterparty. This provides immediate liquidity but exposes the desk to market risk.
• Agency Trading: The desk acts as a broker, matching a buyer and seller without taking ownership of the assets. It earns a commission and carries no inventory risk.

The financial risk that the other party in an OTC transaction will not fulfill their obligations. In crypto OTC, this is a primary concern mitigated through:

• Know Your Customer (KYC) and credit checks.
• Escrow Services or smart contract-based atomic swaps.
• Bilateral Agreements and netting arrangements with trusted institutions.
• This risk is absent in on-chain DEX trades, which are trustless.

A large, privately negotiated securities or cryptocurrency transaction arranged off-exchange, typically facilitated by an OTC desk. Key characteristics:

• Size: Significantly larger than average market order (e.g., 10,000+ BTC).
• Execution: Executed as a single order to avoid slippage and market impact.
• Privacy: Kept off public order books until after execution, if reported at all.
• This is the core service product of a crypto OTC desk.

The process of determining the fair market price of an asset. OTC desks contribute to price discovery differently than public exchanges.

• OTC prices are typically derived from a benchmark index (e.g., a volume-weighted average price from multiple exchanges) plus a negotiated spread.
• They reflect wholesale, institutional supply and demand, which can signal sentiment not visible in retail order books.
• Major OTC trades can influence the broader market price once reported or leaked.

A bundled suite of services offered to institutional clients (e.g., hedge funds, family offices). In crypto, services often include:

• Custody: Secure storage of digital assets.
• Lending & Margin: Access to leverage for trading.
• OTC Desk Access: Direct line to liquidity for large trades.
• Settlement: Clearing and post-trade services.
• An OTC desk is frequently one component of a larger prime brokerage offering.

OTC desks, especially serving institutional clients, operate under strict financial regulations.

• MiFID II (EU): Imposes transparency and reporting requirements for OTC trades, including transaction reporting to authorities.
• FATF Travel Rule: Requires VASPs (Virtual Asset Service Providers), including OTC desks, to share sender/receiver information for transactions above a threshold.
• AML/CFT: Mandates Anti-Money Laundering and Counter-Financing of Terrorism checks, including KYC on all clients.