What Is the Trade-off between Standardization and Contract Customization in Derivatives?

Standardization provides high liquidity, transparency, lower counterparty risk due to CCP clearing, and easier regulatory oversight. Customization, typical of OTC, allows users to precisely tailor contract terms (e.g. expiration, size, underlying asset) to hedge very specific risks.

The trade-off is sacrificing the benefits of standardization for the precision and flexibility of a bespoke hedge.