What does "over-the-counter (OTC)" mean in relation to commodities trading?

The term "over-the-counter (OTC)" in commodities trading refers to transactions that are conducted directly between parties without the oversight or facilitation of a formal exchange. This means that buyers and sellers can negotiate terms directly, allowing for greater flexibility in pricing and contract specifications. OTC markets can include a variety of commodities and financial instruments, and they often provide more tailored solutions for participants.

This method of trading contrasts sharply with formal exchanges, where standard contracts with established terms are traded. In an OTC setting, the negotiations and personal dealings can result in customized agreements that might not conform to the rigid structures of organized exchanges. This characteristic of OTC trading is particularly beneficial for sophisticated traders and institutions that seek specific terms that meet their unique needs.