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

## 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.

Author: LeetQuiz Editorial Team