The statement that OTC derivatives are more efficient as they help reduce the credit risk or the systemic risk of the transaction is not true. In fact, it is the exchange-traded derivatives that are more efficient in reducing credit risk or systemic risk. This is because exchange-traded derivatives are standardized and backed by a clearing house, which acts as the counterparty to all trades and guarantees the performance of the contracts. This reduces the risk that a party will default on its contractual obligations. On the other hand, OTC derivatives are not standardized and are not backed by a clearing house. Therefore, they carry a higher degree of counterparty risk, which can contribute to systemic risk in the financial system. Furthermore, the lack of transparency in the OTC derivatives market can make it difficult to accurately assess the level of risk involved in these transactions.

Why the other choices are true:

• Choice A is correct (true statement): OTC derivatives are indeed more flexible as they allow market participants to negotiate the terms of the agreement, tailoring it to their specific needs.

• Choice B is correct (true statement): In order to unwind an OTC derivative transaction, a member typically has to interact with the original counterparty because these transactions do not go through an exchange or other intermediary.

• Choice D is correct (true statement): OTC derivatives can reduce basis risk because there are no standardized contracts in OTC derivative markets, allowing for more precise hedging strategies tailored to the specific exposure.