Explanation

Let's analyze each option:

A. The defaults of individual counterparties could lead to systemic problems.

• ✅ This IS a problem with bilateral OTC derivatives. The interconnectedness of financial institutions means that one counterparty's default can trigger a chain reaction of defaults, potentially causing systemic risk.

B. Bilateral OTC derivatives are often non-standard with exotic features.

• ❌ This is NOT a problem - in fact, this is one of the key advantages of bilateral OTC derivatives. The ability to create customized, non-standard contracts with exotic features is precisely why market participants choose OTC derivatives over standardized exchange-traded derivatives.

C. Closing out trades may be difficult.

• ✅ This IS a problem. In bilateral OTC markets, unwinding positions can be challenging due to the customized nature of contracts and lack of centralized clearing.

D. Loss mutualization may not spread all the losses among participants.

• ✅ This IS a problem. Unlike central clearing where losses are mutualized across all clearing members, bilateral arrangements may not effectively distribute losses.

Therefore, option B is the correct answer as it describes a feature rather than a problem of bilateral OTC derivatives.