An interest rate derivative that trades or is entered into over the counter, i.e., directly and privately between the two counterparties into the transaction. Examples of over-the-counter (OTC) interest rate derivatives include forward rate agreements (FRAs), interest rate swaps, interest rate caps, interest rate floors, and interest rate collars. Like exchange-traded interest rate derivatives such as interest rate futures and futures options, OTC interest rate derivatives entail the exchange of cash payments based on changes in market interest rates.

For instance, an FRA is a forward contract that involves the exchange of cash payments based on changes in the London Interbank Offered Rate (LIBOR). Likewise, interest rate swaps provide for the exchange of payments based on differences between two underlying interest rates, while interest rate caps, floors, and collars are option-like agreements that obliges one party to make payments to the other when an agreed interest rate, most often a specified maturity of LIBOR, moves outside of some preset range.