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Gross OTC Notional Picks Up, $605 Trillion (10% Increase) In Gross Notional Derivatives Outstanding
When we dissected the BIS OTC derivatives numbers two weeks ago, we were expecting the release of the updated semiannual report to be released shortly. Luckily the BIS did not make us wait too long: the latest data indicate that the progression toward wanton expansion of risk continues unabated. Total gross notional increased by 10% from the prior reading to $605 trillion, mostly as a function of an increase in Interest Rate derivatives. Yet courtesy of an artificially "stable" and undervolatile environment based on a unprecedented extra liquidity which drowns all secondary risk indicators, the net notional risk exposure (market values) declined by 21% to $25 trillion.
Notional amounts of all types of OTC contracts rebounded somewhat to stand at $605 trillion at the end of June 2009, 10% above the level six months before (Graph 1, left-hand panel). In contrast, gross market values decreased by 21% to $25 trillion (Graph 1, right-hand panel). Similarly, gross credit exposures fell by 18% from an end-2008 peak of $4.5 trillion to $3.7 trillion. Meanwhile, notional amounts of CDS contracts continued to decline, albeit at a slower pace than in the second half of 2008, and CDS gross market values shrank by 42%, following an increase of 60% during the previous six-month period.
A breakdown by the separate derivative categories:
- OTC interest rate derivatives. Notional amounts recovered to stand at $437 trillion at the end of June 2009, 13% above the level six months earlier (Graph 2, left-hand and centre panels; Table 3). The increase was concentrated in maturities greater than five years. Gross market values fell by 14% to $15 trillion, with swaps accounting for most of the decrease. Outstanding volumes of option contracts grew 18% to $49 trillion, but gross market values declined 2%. The amounts of outstanding forward rate agreements (FRAs) went up 34% to $47 trillion, while gross market values declined 7% to $130 billion.
- FX derivatives. Increased market activity was reflected in a 10% rebound to $49 trillion in notional amounts of foreign exchange derivatives outstanding. However, gross market values declined by 31%, partly reversing the 59% increase in the second half of 2008 (Table 2).
- Equity derivatives. In the first half of 2009, notional amounts of equity derivatives rose by 7% to $6.6 trillion, while market values remained 16% below the level of end-year 2008.
- Commodity derivatives. Amounts outstanding of commodity derivatives stabilised in June 2009 at $3.7 trillion, after a 71% drop in the second half of 2008. While gold contracts recovered 28%, to stand at $0.4 trillion outstanding at the end of June 2009, other commodity derivatives continued to slide, falling 5% to $3.3 trillion. Gross market values of commodity contracts declined further (by 17%).
- Credit default swaps. Notional amounts outstanding of CDS contracts continued to shrink (by 14%, after a 27% reduction in the second half of 2008), to $36 trillion at the end of June 2009 (Graph 2, right-hand panel; Table 4). The gross market value of CDS contracts declined by 42%, due to declines in inter-dealer business and contracts with other financial institutions.
A more granular look at the breakdown by category:
The key question is what is the reason for the divergence between the gross and net notional. Ironically, the artificial environment in risk pricing is likely the cause for the divergence, which means that once the government pulls back the wool from everyone's eyes and risk is priced properly once again (we are beginning to doubt that will ever happen due to the Fed's procyclical intent of making risky assets purchasable into infinity due to the need to pump the market ponzi in perpetuity), the true market value of net risk exposure will skyrocket and catch numerous financial institutions unprepared again. As the net variation is likely about $5-10 trillion, this sets the seeds for the next major black swan. Moody's shares some thoughts on this observation.
The decline in the market value of OTC derivatives can be viewed as a reduction in systemic risk insofar as it has contributed to market-wide deleveraging, a reduction in counterparty credit exposures and contract replacement costs in the event of potential dealer failure. However, the nature of this decline in systemic risk is transitory, not structural. It is explained by the fall in market indicators that drive derivatives pricing – interest rates, credit spreads and volatility.
Because derivative receivables and payables are a big component of dealers’ balance sheets, the fall in their market values has helped dealers de-lever (or, at least, avoid re-levering). For example, for Goldman Sachin the first six months of 2009, derivative receivables declined 31% to USD 90 billion (10% of total assets), while the size of the balance sheet stayed flat. Reduced dealer receivables also mean that dealers are exposed to lower (although, obviously, still very large) counterparty credit risks, while, symmetrically, lower dealer payables mean that individual dealers pose a directionally lower credit risk to the rest of the system.
It would take structural changes, such as targeted central clearing and potentially higher capital requirements, before one could conclude that the systemic risks in the OTC derivatives market have been reduced for good. The market – and regulators – appears to be headed in this direction, but final implementation details are as yet unknown. For now, while we recognize the deleveraging that has occurred at major investment banks, we remain mindful that conditions can change and that risks still remain.
The key issue here: unless Bassel III or IV or whatever the latest version of the risk doctrine is, manages to factor out net/market variations even in the face of obviously counterintuitive gross exposure increases, then banks like Goldman (see example above) will be able to hide under the rug that they are on the hook for a whole lot more in risk exposure than they disclosed in their SEC filings. This sets the seeds for the next round of risk flaring, as the amounts represented by the mountain of OTC derivatives, even when netted out, are enough to wipe out a firm like Goldman Sachs in minutes, if not seconds. One thing that is sure, is that neither Geithner, not Frank or Kanjorski will address this issue in any approach to systematic risk regulation: the first, because he does not want to impair his favorite investment bank's profit generating potential, and the latter, because frankly they have no idea what any of the abovementioned means. Thus as nothing will reasonably change, and the inflection point for gross notional rerisking is already upon us, from here on out it is just a matter of time before the entire financial system is on ropes once again, this time however with TARP and other gimmick bailouts an impossibility.
Some definitions courtesy of the BIS:
Notional amounts outstanding: Nominal or notional amounts outstanding are defined as the gross nominal or notional value of all deals concluded and not yet settled on the reporting date. For contracts with variable nominal or notional principal amounts, the basis for reporting is the nominal or notional principal amounts at the time of reporting.
Nominal or notional amounts outstanding provide a measure of market size and a reference from which contractual payments are determined in derivatives markets. However, such amounts are generally not those truly at risk. The amounts at risk in derivatives contracts are a function of the price level and/or volatility of the financial reference index used in the determination of contract payments, the duration and liquidity of contracts, and the creditworthiness of counterparties. They are also a function of whether an exchange of notional principal takes place between counterparties. Gross market values provide a more accurate measure of the scale of financial risk transfer taking place in derivatives markets.
Gross positive and negative market values: Gross market values are defined as the sums of the absolute values of all open contracts with either positive or negative replacement values evaluated at market prices prevailing on the reporting date. Thus, the gross positive market value of a dealer’s outstanding contracts is the sum of the replacement values of all contracts that are in a current gain position to the reporter at current market prices (and therefore, if they were settled immediately, would represent claims on counterparties). The gross negative market value is the sum of the values of all contracts that have a negative value on the reporting date (ie those that are in a current loss position and therefore, if they were settled immediately, would represent liabilities of the dealer to its counterparties).
The term “gross” is used to indicate that contracts with positive and negative replacement values with the same counterparty are not netted. Nor are the sums of positive and negative contract values within a market risk category such as foreign exchange contracts, interest rate contracts, equities and commodities set off against one another.
As stated above, gross market values supply information about the potential scale of market risk in derivatives transactions. Furthermore, gross market value at current market prices provides a measure of economic significance that is readily comparable across markets and products.
Current credit exposure and liabilities: Current credit exposure represents the gross value of contracts that have a positive market value after taking account of legally enforceable bilateral netting agreements. Liabilities arising from OTC derivatives contracts represent the gross value of contracts that have a negative market value taking account of legally enforceable bilateral netting agreements.
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No worries.
They will be trading these electronically soon, and the Hi-Fi traders will start gunning them 1000 times a day.
Resulting in yet another hurricane of trading volume on Wall St.
Just picture of huge whirl of buys and sells of more toxic paper fueled by the Fed's Atomic Particle Accelerator.
More income for the intermediaries.
Synchronicity.
The Large Hadron Collider (LHC) could restart as early as this weekend after more than a year of repairs.
http://news.bbc.co.uk/2/hi/science/nature/8364964.stm
Beautiful summary, RT! Too bad the black holes that form have virtually zero odds of consuming the matter surrounding them--would that our odds were so good.
Opps
+1
I don't think the Fed can print enough fix this one.
Okay boys, we only have room in the life boat for one. GS get to the life boat, the rest will just have to fend for themselves......
nice how they refuse to give a date for the restart.
Everyone needs to see the actual numbers. Click the link below for .pdf file.
Or go to www.bis.org > Statistics > Derivatives > Table 19
There is a wealth of info at the Bank of International Settlements. In my view, the BIS is the central bankers central bank, where the Ponzi is administered world wide. Between the BIS and the Fed, the Ponzi is there for all to see.
http://www.bis.org/statistics/otcder/dt1920a.pdf
Wow... is that Goldman's fiber optic pipe right into the NYSE?
How did you get in there to photograph that?
Pull off your top?
Any Black-Scholes anomalies inadvertently appearing are expected to be small and evaporate quickly
within the Large Headless Super-Duper Colluder.
http://www.slate.com/discuss/forums/post/1840279.aspx
This is good news, right ? It's not friday...
One thing that is sure, is that neither Geithner, not Frank or Kanjorski will address this issue in any approach to systematic risk regulation: the first, because he does not want to impair his favorite investment bank's profit generating potential, and the latter, because frankly they have no idea what any of the abovementioned means.
because frankly they have no idea what any of the abovementioned means.
True, and very sad..
H2 2008 547,371
H1 2009 This is beginingt to add up.
Don't forget the sandstorms that entirely cover Mars.
mo money!
So, the short story is they actually print the money in the derivatives market with the understanding that if things go south, kamikaze Ben will actually issue the money.
Benny is just a tool in this game.
Is it true the Somali pirates are using CDS to hedge their ransom demands for hostages?
If they weren't before you posted that, they certainly will be soon. It's about time the Somalian pirates took the next logical step up the criminal ladder.
Perhaps we can ship off all of our Harvard MBA's to Somalia?
Perhaps the 2012 apocolypse thing is fixed and they're just making the most of the time they have left?
It may be too darn intuitive, but does anybody ever think derivatives should be outlawed and risk kept bound to underlying value? I think we could work out the fine line between life insurance and roulette wheel.
Not even the the apocalypse can pull Benny out of this mess...
This is why GS thinks they're doing God's work.
An extinction level event is coming. Not everyone will survive, so who cares about long-term sustainable monetary policy? Who cares about the middle class? The important thing now is to siphon as much money as possible into the hands of the chosen few, to allow them to better prepare for whatever is coming.
The entire world financial system has been pushed into survival mode. Not for the survival of the system, but for the literal survival of those running it.
Tyler: Glenn Beck did a show based on Zero Hedge truth today. It was amazing...
Did ZH make Glenn Pecker cry?
this is nucking futs
Five out of two people think so.
90% of putts that are short don't go in
...
43 X the GDP, Shouldn't take the taxpayer long to flush this out MUHAHAHAHAHAHA
When my great grandkids get out of high school.. Jubilee time, cancel it all...
Damn......$ 605 Trillion in notional OTCs.
Now ain't that some bizaarre shit.....??
You could like totally buy a few outer planets for that amount, man.....Venus, Mars, etc.
"One thing that is sure, is that neither Geithner, not Frank or Kanjorski will address this issue in any approach to systematic risk regulation: the first, because he does not want to impair his favorite investment bank's profit generating potential, and the latter, because frankly they have no idea what any of the abovementioned means."
+1 quadrillion.
This isn't fractional (fractal?) banking, it's exponential. And how is this different from anything trading betwixt and between the the TBTFs? Looks like balance sheit to me.
$437 trillion in interest rate swaps pretty much explains why there's no end in sight to ZIRP. The Fed is just trading one catastrophe for another.
Interesting point.
The danger with the ZIRP/QE policies currently being executed, is that an uncontrolled dollar devaluation can spike volatilities and risk destabilizing BOTH the fx AND interest rate derivatives markets.
Bernanke is playing some ulta high stakes of chicken with our currency, and so far he's winning. But one big score for volatility will result in "game over".
When screwing up one city isn't enough. Katrina world wide 2009-2010
HAARP--High Frequency Active Auroral Research Program.
What would a country due with the "God particle"? Would someone spend over 6 billion to find one? Why is it built in Switzerland? Last time it fired up was early in september of 2008. If you could see the photos of the complex piping that runs some 17 miles around, you would agree the above stated cost seems very low.
I am tin foil hat man.
Maybe the "God Particle" will make Europe's HFT servers just a nanosecond faster than Lloyd Blank-dick's...
And UBS will rule the world!!
See, research pays...
I just can't help but think that a .1% move in the wrong direction is $600 billion. It just ceases to be.
They truly have reached their coffin corner.
When I read these derivative posts, i can't help but think that maybe i am the dumb one. Perhaps i don't get it. Because inside all the numbers, all i see, is guaranteed mutually assured destruction.
There is truth in numbers, that must be respected.
There was a moment in time (long passed in my opinion) when something could have been done. I suspect that by the time we revisit "proper pricing of risk" (when we least expect it) what currently passes for western civilizationwill no longer exist.
Sadly, I must concur with you, lizzy36.
Many have compared the U.S. with the Roman Empire, and they have always been wrong.
Except....utilizing ancient economic data which eventually came to light, Prof. Joseph Tainter ("Collapse of Complex Societies" and other writings) examined the final period and ....yes....it appears remarkably similar to the present time.
Naah, you guys have it all wrong.
Nowadays we have complicated computer programs to quantify risk and compute that everything's OK.
And really, when have complicated computer programs ever been wrong?
Tainter's theories on collapse are very compelling. If the derivitives situation isn't an example of a society getting too complex and failing under its own weight, I don't know what is.
Hey Lizzy....you get it just fine. Except there is no MAD policy, but rather just Greed Unbound. I believe there is no fix available, we all know it, and the ones perpetuating derivatives are just going to work it, until it all turns to absolute zero.
We are all intelligent here....ahem..:-)
How would you fix this? I have thought about the $1.4 Quadrillion derivative problem for over a year now......I got nothing except a complete global financial collapse, World War, and starting over with barter, authoritarian govt, and the old, "strong survive by eating the weak and eating the dead."
Entire world GDP - $45 Trillion (NOT...$80)
Entire Global Derivative exposure and risk - $1.4 Quadrillion
45,000,000,000,000
1,000,000,000,000,000
Once GDP falls to $23.8 Trillion (assuming stable derivative level (ha,ha,ha), then the leverage factor will be....................
"What is the answer to the meaning of life, the universe, and everything?????
Why, it's 42.
LOL....The real secret is just to keep laughing and laughing and laughing and...laug...
The bang just got 10% bigger.
Does JPM still pack $88 trillion mostly Int.Rate Swaps and which side of what contracts are they on ??? Until we know I don't believe ANYTHING.
Black Swan 2.0 ?
JPM is not a single trader or geographical locations. So saying that which side of position its on is plain idiotic. Its composed of multiple traders in multiple locations whose views and position will often run counter to each other.
From what i know from an OIS swap ( an Interest Rate swap ) trader of mine ( I trade in bond ) that gross exposure in OIS swap atleast can be very very misleading.
Ex:
1)Suppose he recieves some notional position X and then covers it through the same ounterparty through the day. The books will show a gross 2X position while the net position is zero. The settlement is usually done on an annual basis unless you want to more frequently in case you have limit issues. There is no interest rate or counterparty risk here. However gross exposure will show up.
2)Now suppose you have a a position with counterparty B, however you cover the position through counterparty C. Now my frend tells me that biggest banks use an agency called TriOptima to net out positions. So suppose teh 5-6 big banks sit out once a year and net out positions. This I think happens annually in December. In this case there will no net exposure but 2X gross exposure. Also there wont be an interest rate risk, however there will be a counterparty risk. In case of counerparty risk when the net due from one bank to other exceeds a limit they have to post a collateral under CSA until the annual netting off happens. So in this case also the counterparty risk is much much lesser than what gross exposures shows.
3)The third case would be open positions in which there would there would be both counterparty and interest rate risk.
The net positions for most trader is a miniscule fraction of the supposed gross positions.
So being a alarmist over gross positions is uncalled for. There might be other reasons for doomsday , but large gross IRS positions wont be one of them.
Black Hole Sun wont you come
and wash away the Capitol pain
Black Hole Sun wont you come
...wont you come
Ben drowns his fears
his eyes filled with the Jamie Diamond's
and G$ gears
All await the judgment to come
...as Soros and Buffet cheer
hide away ...oh hide away the pain
...with the shadow banks claim
no one sinned on this scale before
Black Hole Sun Black Hole Sun
Black Hole Sun Black Hole Sun
....wont you come.