The Real "Margin" Threat: $600 Trillion In OTC Derivatives, A Multi-Trillion Variation Margin Call, And A Collateral Scramble That Could Send US Treasurys To All Time Records...

Tyler Durden's picture

While the dominant topic of conversation when discussing margin hikes (or reductions) usually reverts to silver, ES (stocks) and TEN (bonds), what everyone so far is ignoring is the far more critical topic of real margin risk, in the form of roughly $600 trillion in OTC derivatives. The issue is that while the silver market (for example) is tiny by comparison, it is easy to be pushed around, and thus exchanges can easily represent the illusion that they are in control of counterparty risk (after all, that was the whole point of the recent CME essay on why they hiked silver margins 5 times in a row). Nothing could be further from the truth: where exchanges are truly at risk is when it comes to mitigating the threat of counterparty default for participants in a market that is millions of times bigger than the silver market: the interest rate and credit default swap markets. As part of Dodd-Frank, by the end of 2012, all standardised over-the-counter derivatives will have to be cleared through central counterparties. Yet currently, central clearing covers about half of $400 trillion in
interest rate swaps, 20-30 percent of the $2.5 trillion
in commodities derivatives, and about 10 percent of $30 trillion in
credit default swaps. In other words, over the next year and a half exchanges need to onboard over $200 trillion notional in various products, and in doing so, counterparites, better known as the G14 (or Group of 14 dealers that dominate derivatives trading including
Bank of America-Merrill Lynch,
Barclays Capital, BNP Paribas, Citi, Credit Suisse, Deutsche
Bank, Goldman Sachs, HSBC, JP Morgan, Morgan Stanley, RBS,
Societe Generale, UBS and Wells Fargo Bank) will soon need to post billions in initial margin, and as a brand new BIS report indicates, will likely need significant extra cash to be in compliance with regulatory requirements. Not only that, but once trading on an exchange, the G14 "could face a cash shortfall in very volatile markets when daily margins are increased, triggering demands for several billions of dollars to be paid within a day." Per the BIS "These margin calls could represent as much as 13 percent of a G14 dealer's current holdings of cash and cash equivalents in the case of interest rate swaps." Below we summarize the key findings of a just released discussion by the BIS on the "Expansion of central clearing" and also present a parallel report just released by BNY ConvergEx' Nicholas Colas who independetly has been having "bad dreams" about the possibility of what the transfer to an exchange would mean in terms of collateral posting (read bank cash payouts) and overall market stability, and why a multi-trillion margin call could result in the biggest buying spree in US Treasurys... Ever. 

First, for those who are unfamiliar, here is what happens when an exchange (or a Central Counterparties) proceeds to trade OTC derivatives with any given counterparty (from the BIS):

CCPs typically rely on four different controls to manage their counterparty risk: participation constraints, initial margins, variation margins and non-margin collateral.

A first set of measures are participation constraints, which aim to prevent CCPs from dealing with counterparties that have unacceptably high probabilities of default.

The second line of defense is initial margins in the form of cash or highly liquid securities collected from counterparties. These are designed to cover most possible losses in case of default of a counterparty. More specifically, initial margins are meant to cover possible losses between the time of default of a counterparty,8 at which point the CCP would inherit its positions, and the closeout of these positions through selling or hedging. On this basis, our hypothetical CCP sets initial margins to cover 99.5% of expected possible losses that could arise over a five-day period. CCPs usually accept cash or high-quality liquid securities, such as government bonds, as initial margin collateral.

As the market values of counterparties’ portfolios fluctuate, CCPs collect variation margins, the third set of controls. Counterparties whose  portfolios have lost market value must pay variation margins equal to the size of the loss since the previous valuation. The CCP typically passes on the variation margins it collects to the participants whose portfolios gained in value. Thus, the exchange of variation margins compensates participants for realised profits/losses associated with past price movements while initial margins protect the CCP against potential future exposures. Variation margins, typically paid in cash, are usually collected on a daily basis, although more than one intraday payment may be requested if prices are unusually volatile.

Finally, if a counterparty defaults and price movements generate losses in excess of the defaulter’s initial margin before its portfolio can be closed out, then the CCP would have to rely on a number of additional (“non-margin”) resources to absorb the residual loss. The first of these is a default  fund. All members of the CCP post collateral to this fund. The defaulting dealer’s contribution is used first, but after this other members would incur losses. The default fund contribution of the defaulting dealer would be mutualised among the non-defaulting dealers according to a predetermined formula. Some additional buffers may then be available, such as a third-party guarantee or additional calls on the capital of CCP members.

Otherwise, the final buffer against default losses is the equity of the CCP. In order to calculate initial and variation margins, CCPs rely on timely price data that give an accurate indication of liquidation values. Clearing OTC derivatives that could become unpredictably illiquid in a closeout scenario could impose an unacceptable risk on the CCP.

Table 1 summarises the risk management practices of SwapClear, ICE Trust US and ICE Clear Europe, which are currently the main central clearers of IRS and CDS.

The gist of the BIS paper focuses not so much on the inboarding costs and concerns of migrating hundreds of trillions of products to CCP - a topic evaluated much more in depth by Nick Colas - the BIS does instead look at a hypothetical example of what may happen in the case of a "risk flaring" episode, and how much variation margin G14's may need to post:

As shown in the left-hand panels of Graph 2, estimated initial margins can vary significantly with prevailing levels of market volatility, especially for CDS. The upper left-hand panel shows, for example, that Dealer 7 would need to post $2.1 billion of collateral to clear its hypothetical IRS portfolio in an environment of low market volatility, similar to that prevailing before the recent financial crisis. This would grow by around 50%, to $3.2 billion, if volatility increased to the “medium” level seen early in the crisis, just before the rescue of Bear Stearns. And it would grow by around 150%, to $5.3 billion, if volatility increased to the “high” level seen at the peak of the crisis, amidst the negative market reaction to the US Troubled Asset Relief Program (TARP) and before government recapitalisation of banks began in the United Kingdom. In comparison, the bottom left-hand panel shows that initial margin requirements for the hypothetical CDS portfolio of Dealer 7 would increase by around 160% or 325% from $0.6 billion if the prevailing level of market volatility increased from low to medium or high. The total initial margins that the CCP requires clearing members to post are $33 billion (low), $70 billion (medium) and $105 billion (high) for IRS and $6 billion (low), $20 billion (medium) and $35 billion (high) for CDS.


Nevertheless, it seems unlikely that G14 dealers would have much difficulty finding sufficient collateral to post as initial margin. The diamonds in the left-hand panels show collateral requirements relative to dealers’ unencumbered assets, with different colours again representing different levels of market volatility. Even the requirements based on high levels of volatility do not exceed 3% of the unencumbered assets of any dealer for which it was possible to estimate this figure. Although many unencumbered assets held by dealers do not presently qualify as acceptable collateral for initial  margins, some of these could be swapped for assets that do qualify.

By contrast, dealers may need to increase the liquidity of their assets as central clearing is extended. The centre panels of Graph 2 show similar patterns in potential variation margin calls as prevailing levels of market volatility change. In the worst case, variation margins could be several  billions of dollars, which would have to be paid in cash within a day. These margin calls could represent as much as 13% of a G14 dealer’s current  holdings of cash and cash equivalents in the case of IRS. A five-day sequence of large variation margin calls that could be expected with a probability of one in 200 would equate to around 28% of current cash and cash equivalents in the worst case.

These results also have direct implications for the liquidity provisions of CCPs, as they would have to pay variation margins in the case of default of  a clearing member. Access to central bank funds in distressed circumstances would help to ensure that CCPs could make substantial variation  margin payments in a timely manner.


With a probability of one in 10,000, non-margin resources at risk from the failure of one particular dealer, two particular dealers or any dealer with sufficiently adversely affected portfolios would respectively be 20%, 37% and 42% of total initial margins for IRS, and 36%, 46% and 65% of total initial margins for CDS. If prevailing levels of volatility were high, these figures would equate to $21 billion, $39 billion and $44 billion for IRS, and $13 billion, $16 billion and $23 billion for CDS. By comparison, the G14 dealers contributing to default funds had equity of around $1.5 trillion as of 30 June 2010.

Alas, the problem is that the bulk of this "equity" is, for lack of a better word, worthless, as it is based on such assets as intangibles, and MTM-locked up assets, whose true value is far, far lower than where banks carry these. And of course, the need to sell them would come precisely at a time when everyone else would be selling. Which means that in the event of a market lockup, there would be no one on the other side of the trade, meaning the entire CCP experiment would likely collapse spectacularly, as nowhere near enough cash is available.

Next, we look at one of the "percentile probability" charts to determine just where the system is weakest, because these uber-6 sigma events tend to become the norm when TSHTF. According to the BIS, the absolute worst case scenario from a risk management standpoint is a 0.002% probability event, at which dealers could see $160 billion in total margin shortfalls across the IRS and CDS book. And there are those who wonder why banks are stockpiling cash for a rainy day...

The BIS issues a rather ominous warning at this point:

Even after incorporating expected shortfalls into initial margin requirements, however, a sizeable gap remains between the total margin shortfalls (relative to total initial margins) that could be expected with very low probabilities for CDS and equivalent shortfalls for IRS. CCPs clearing CDS may wish to make an adjustment to default fund contributions to ensure that this is taken into account.

Will dealers do this? Of course not.

While there is much more in the full BIS paper extract (found here), we were less than impressed with the methodology used to construct hypothetical CDS and IRS portfolios. In a nutshell, the BIS assumed a hedged book and matched-maturity positions: something, which every OTC trader knows, absolutely never happens, as the whole purpose of derivatives is to take low margin risk positions that coincide with the herd, and thus, not hedge (otherwise what is the point?). As such, we believe, that the full potential shortfall on the up to $600 trillion in gross notional is the full net exposure in the market at any time. Which we are convinced is well over the $160 billion 0.002% case (according to some estimates, between CDS (this one is easy - just look at weekly DTCC data) and IRS (this one is far more complicated), the net notional at risk at any given moment is anywhere between $2 and 8 trillion. And this is capital that the G-14 supposedly have handy for a rainy day?

And next, moving away from dry academia, we shift to one of our favorite authors, BNY's Nicholas Colas, who coinicdentally, discussed precisely this issue in his Friday edition of his Mornina Markets Briefing:

Bad Nightmares and Good Collateral

Summary: The rulemaking around Dodd-Frank is far from over, but one area of new regulation drawing a lot of attention is what to do about over-the-counter derivates trading. It is a huge market – some $600 trillion at the end of last year – and dominated by interest rate contracts, where the notional value is $465 trillion. Just a little perspective – the entire value of the S&P 500 is $12 trillion. If even a portion of this trading moves to a quasi-exchange structure, it will require significantly more collateral than is currently used to support this market. That is strongly bullish for sovereign debt, should these changes come to pass. This dynamic got us wondering what “good collateral” really means anymore. U.S. dollars and Treasury securities are the bedrock of trading collateral, but those assets might not work as well for this function in the next financial crisis as they have in the past. The reason is that sovereign debt is increasingly losing its “risk-free asset” status as developed countries – not just the U.S., mind you – issue more debt to stimulate their economies and avoid taking the pain for previous mistakes.

My longest lasting repeat nightmare, which this year celebrates its third decade festering in my psyche, is that I have failed a class in business school and therefore don’t actually have my degree. For the first 10 years after graduating I kept my diploma under my bed, so vivid was that particular dream. The actual class that causes this lingering worry was ‘The Pricing of Illiquid Securities,” focusing primarily on exotic mortgage backed bonds. It was part fixed income analysis, part options math, and wholly difficult to understand. I almost failed it. Almost. Thankfully it was pass/fail, and the transcript clearly has a “P.”

But pricing illiquid assets has become a popular form of reality TV, from PBS’ Antiques Roadshow to Pawn Stars to Auction Kings . The formula is largely the same – walk in with something obscure, and an expert will tell you what it’s worth and/or give you cold, hard cash for the item. The analysis is a combination of authentication, historical sleuthing and market analysis of likely buyers and the price they will pay. The head of a rare doll might fetch $10,000. An entire motorcycle, even if owned by a minor celebrity, might only be $5,000. Every item is different and has to be appraised on its own history and merits.

There has been a recent flurry of activity in one capital markets dedicated to oddball illiquid securities – the pricing and trading of over-the-counter derivatives such as interest rate contracts. The reason for the attention is the Dodd-Frank Wall Street Reform and Consumer Protection Act, which gave the Securities & Exchange Commission and the Commodities Futures Trading Commission the power to restructure the ways in which OTC derivatives trade and settle. The new rules aren’t out yet, and likely won’t be available until July, according to various press accounts. That said, there are a few “Hard points” to consider:

  • The global market for OTC derivatives is huge. According to the Bank for International Settlements, the notional amount of total contracts was $601 trillion at the end of 2010.
  • It is primarily an interest rate market. Of the $601 trillion, just over 75% ($465 trillion) is tied up in interest rate contracts, most of which are swaps.
  • This interest rate swaps market is still growing. The poster child of troublesome OTC derivatives, Credit Default Swaps, is down to just $30 trillion in notional value from $42 trillion in December 2008. At the same time, the market for interest rate contracts continues to grow, up to the previously  mentioned $465 trillion from $433 trillion in December 2008.

The reason all is this is significant is simple: a change in how these instruments trade, from strictly OTC to something that more closely resembles an “exchange” could involve market participants posting consistent and predetermined collateral in order to clear trades. That’s not the way it is done now. The major banks that drive this market have freedom to determine what collateral is needed both to initiate a trading relationship and to keep it going. See here for more details:

All this brings up a whole host of interesting issues, such as how much collateral the major players in OTC derivatives will have to pony up in order to keep trading. It is impossible to come up with a number at this point, given that the rules are still being written and the market structures to support a new trading regime are not yet assembled. July 2011 was the initial target date for proposed rules, but it appears to be slipping. See

Underneath this bubbling surface of regulatory confusion, however, there is an equally interesting existential topic: what is “good” collateral, anyway? In some ways, it is probably easier for a pawn shop to determine the appropriate price for a used electric guitar than it is for an exchange to decide what assets a market participant needs to post in order to transact buy/sell orders. In the spirit of a thumbnail case study, we went to the CME Group website and pulled what kinds of assets they consider “Good Collateral” and the haircuts they give certain types of assets. Before we review that data, however, it makes sense to consider what makes some collateral better than others. A quick list:

  • Good collateral should be something that everyone agrees is valuable. Basically, it is anything that you would rush to pick up off the street before someone else got to it. Gold, developed country currency, and fixed income instruments are all good collateral.
  • It shouldn’t vary too much in price, regardless of market conditions. Ideally it would appreciate slightly in value when financial troubles strike, since that is most likely when counterparties fail and you need the collateral to ensure a trade can clear.
  • It should be very liquid. Again, markets only really worry about the value of collateral when things are going south. That’s not the time to find out that South Florida condo real estate isn’t anyone’s idea of solid collateral.

The attached chart shows some assets that the CME considers “Good Collateral” and the haircuts it gives to those assets. The bigger the haircut, the more of the asset you have to post to support your positions. You can find them here: A few observations:

  • U.S. Government and agency paper is “King of the Hill.” Only two assets get no haircut: U.S. dollar cash and U.S. Treasury bills. Agency debt is a 3% haircut, and longer dated Treasuries are 3.5-5.0%.
  • Then comes developed country currencies and debt, at 5-9% haircuts.
  • Gold and the Mexican peso aren’t often put in the same risk category, but they are here. Both receive a 15% haircut, which means that in the eyes of the CME they have equivalent appeal as collateral.
  • At the far end of the equation are the Turkish lira (20%) and equities (30%).

Two things pop out to me from this quick analysis:

  • If there ever is an exchange-like trading mechanism set up for OTC derivatives, there is going to be a real run on U.S. government paper. The CME’s list of assets and haircuts tells the story – Treasuries are the most efficient way to fund collateral. The notional amount of interest rate swaps alone – some $465 trillion – is enough to swamp the $14.3 trillion of total government debt outstanding, let alone the $9.7 trillion that is actually available for purchase.
  • The whole notion of good collateral is very much anchored in the thought that U.S. sovereign debt is “risk free.” Whether or not that is true in the absolute sense is irrelevant. Remember that collateral needs to be at least crisis-resistant and preferably negatively correlated to asset prices during financial stress. With the U.S. government currently at loggerheads over how to deal with the Federal Debt Ceiling and the most likely path is to simply issue a lot more government paper, the time could be coming where Treasuries no longer fulfill the purpose of “Good Collateral” during crisis. They are just as likely to be the cause of a financial storm rather than provide shelter from the rain.

Bottom line: instead of wondering how to nudge the silver market (lower) or the ES and TEN contracts (higher), perhaps it is time for the key exchanges, which are obviously captured by the very same G14s on whose tithes their existence depends, to actually proactively engage in some risk-mitigation when it comes to the one biggest threat: not that of the measly several billion dollar silver market, but of the $600 trillion IRS and CDS market, which is and continues to be the biggest ticking timebomb in capital markets.  And on the other hand, if anyone is wondering what will cause the biggest run on US government bonds... ever... then as soon as every dealer is forced to be on a CPP, all one needs to do is a massive "risk-flaring" collapse which sends everyone scrambling to provide collateral. And since there is a 40-to-1 ratio of notional outstanding in OTC derivatives to total US debt, well, readers can do the math.

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philgramm's picture

600,000,000,000,000? Seriously? It's like a video game. Yay!!!!!!!!

CPL's picture

Total worldwide derivatives market is around 1.4 Quadrillion dollars.


So when the governments of the world mention printing trillions to save themselves, it's true that it's just a drop in the bucket.

cat2's picture

Unwinding that is truly the end game.  Based on past performance it will be bailed out with QE printing.

Michael's picture

 G14 (or Group of 14 dealers that dominate derivatives trading including Bank of America-Merrill Lynch, Barclays Capital, BNP Paribas, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Morgan Stanley, RBS, Societe Generale, UBS and Wells Fargo Bank)

I'm glad they narrowed it down to just about 14 with their m&a activity.

It will make the guillotine processing facility job go that much smother.

cara leaf's picture

Here is the $64 question: 

If Dodd-Frank had been in effect, would it have prevented the '08 Crash.

I say....ummmm...No.

Transformer's picture

And here's the $128 question.  What happens to this $1.4 quadrillion mess when Hyperinflationary Depression comes a knockin?

TwoShortPlanks's picture

The system crashes and a new one is invented.

Mind-you, the real owners of this ICU-Bound dying fiat system left the building. They'll just skim while it's still breathing. But when they bothered to clean-out their Petty-Cash draw (US$1 Billion) you know it's gonna tank.
"On 8 January 2001, an Extraordinary General Meeting of the BIS decided to restrict the right to hold shares in the BIS exclusively to central banks and approved the mandatory repurchase of all 72,648 BIS shares held by private shareholders as of that date against payment of compensation of CHF 16,000 per share. The former private shareholders were informed by means of the Notes to Private Shareholders dated 15 September 2000 and 10 January 2001, which described the transaction in more detail; a further Note was sent on 27/28 November 2002 following the Tribunal's 22 November 2002 decision."

mayhem_korner's picture

It feeds a family of four for two weeks...

High Plains Drifter's picture

is it possible to unwind such a mess?    i heard a lot of talk a few years ago about this stuff and it was called the black hole of finance. it is easy to see why?  it is something that cannot be fixed.  even greenie himself said he did not understand it.

Greyhat's picture

They can not unwind it, thats why they "save Greece". Its all about the CDS contracts. They try to buy time.

YHC-FTSE's picture

Exactly. I was wondering when we'll be touching on this topic again, and it's far worse than I remembered. There is no way to fix this, ever. We'll need another planet full of suckers to shift this mess.

Doode's picture

I spoke with folks in charge of handling all of those positions at a major bank pondering why the numbers were so freakeshly high a few years back - it turns out this number is very deceptive. There is no central clearing house for derivatives so both buy and sell transactions are recorded as separate derivaties. The result that when a bank buys a derivative it records it as a transaction - then to unload that very same derivative they issue a hedge which is yet another separate derivative. Therefore net is 0 (spread), but on books it looks like they have 2 times the exposure - one on a buy side and one on a sell side. Now, the same derivative is recorded at each bank and each time it changes hands so the actual number the same derivative is recorded is equal 2 times the number of transactions this derivative had. Imagine if all that GE stock traded was always recorded as 100 shares bought and 100 shares sold as 200 shares in risk exposure - that is what is happening here. The actual market is much much smaller and does not represent nearly the problem one would derive from the absolute number itself - it is of several orders of magnitude lower than the absolute number.

Amish Hacker's picture

Yes, but when there is a triggering event and your counterparty defaults, you'll find that notional value becomes all too real.

traderjoe's picture

+ aig.

We were hours or days from a collapse of the
system if AIG went under. And what have they fixed since then?

High Plains Drifter's picture

AIG is not fixed. it is the gift that keeps on giving. we don't have any idea what was going on with that company, that is for sure.

Cheater5's picture

Totally agree with you.  Except for one thing.  When you sell a share after the trade clears you dont own any remaining exposure.  Since derivatives are contractural liabilities and are not generally novated when a trade occurs that goes through an intermediary it is booked as you have indicated - ie, in the case of CDS, contract written to the intermediary from "protection selling client" and contract written by the intermediary to "protection buying client."  Net/Net if you look at the intermediary banks book, they should be flat (with obviously their commisions, fees, etc. as a possitive).  And that is true up until the "protection selling client" goes belly up without posting enough collateral (which he is unlikely to be able to secure if SHTF systematically - ie not with one single name).  At this point the intermediary bank is still on the hook (and must post collateral) to the "protection buying client." 


bingocat's picture

Presumably that is why people think it would be a good thing that they all get cleared on an exchange. Banks don't want that because people like JPM make a LOT of money off the fact that trades are 'customized for you, the client, and therefore we require a higher spread.' The fear is that if trades are put through an exchange, the price transparency will kill their profits. This is not necessarily a valid fear - clearing is not the same thing as execution.

But if it all goes on the exchange, then the offsetting risks will all net out, and it will simply be the net open position of each party vis-a-vis the clearing exchange. This will wake a lot of people up, and this is the real reason why companies want special dispensation to not have to post so much collateral.

Concentrated power has always been the enemy of liberty.'s picture

Once upon a time a man told a small village, “I will buy monkeys for $10 each.”

Since there were many monkeys in the forest, the villagers caught them and sold them to the man.

As the supply of monkeys diminished, the villagers’ efforts slowed, so the man offered them $20 each.

They renewed their efforts but the supply of monkeys diminished further, so he increased his price to $25.

Soon no one could even find a monkey in the forest.

The man increased his price to $50, but announced, “Since I must go to the city on business, I authorize my assistant to buy monkeys on my behalf.”

As soon as his boss was gone, the assistant told the villagers, “My boss has collected lots of monkeys. I’ll sell them to you for $35 and then, when he returns, you can sell them to him for $50.”

The villagers rounded up all the money they could and bought as many monkeys as possible. Then they had monkeys everywhere…

… but they never saw the man or his assistant again.

And now you understand the workings of the stock market!


Moral of the story:  Promises to pay have lots of fine print and monkeys do not equal gold.

4horse's picture

monkeybusiness. yes


yet here to be seen, timestamped, are the same hourly everyday ZH nitpickers engaged in what is no longer mere communal grooming but, me no butts, the vacuous foreplay of something far more obscene . . . and constantly coming


fucked. one-at-a-time. while being caged


yes, by all means stall-crawl-and-caterwaul in your incessant goose-goose, grunt-grunt and alltalk



here is it so easily seen-- yeh. obscene --you all make your living with your mouths

decon's picture

After reading this it should be clear to everyone that the world's central banks will do anything, anything! to try and control interest rates!

Dolemite's picture


PMs stocks and oil heading lower?

This would certainly support the Treasuries to the moon thesis ;)


Monedas's picture

Troll alert ! Trying to talk silver down becuz you're short ? "Clever trick Captain !"....Das Boot. Monedas 2011

Dolemite's picture

Lol I wish I had that kind of power, or ability to see the future.

No, I am just a guy who looks at charts and puts in limit orders with stop losses if I am wrong.

I merely offer my opinion and trade it accordingly. (and for the record I am long physical silver... just short the paper for the time being)

Votewithabullet's picture

Danke monedas for the troll alert. I might have missed it otherwise. Even though the avatar has your name alongside, adding it again at the bottom  and with the year...pure genius.

Monedas's picture

I am over my head with this crowd....I'm just a peasant hoarder from the hinterland....but I do try to protect the PMs with "Capa y Espada" (with my cape and my sword) ! Monedas 2011 Genius is a little over the top, but thanks !

Manthong's picture

If you drink the whole bottle, you deserve to puke your guts out.

iNull's picture

Bukowski would disagree.

Reptil's picture

Belushi (John) too :-)

Manthong's picture

New paradigm I guess, and this is what we got now (0:37).

RobotTrader's picture

Like I said, the commodities are holding up well for now, especially copper which should be getting destroyed with the weak economic data.

The slightest whiff of weakness in copper, gold, oil, etc. could easily send stocks into an epic crash.

If that happens, they you could see the 10-yr. yield completely collapse to world record lows.

By that time, Interactive Brokers will be offering negative margin rates on listed big board stocks to entice more speculators to belly up to the NYSE casino.

Spitzer's picture

And how long do you expect this run to treasuries to last ?3 to 6 months ?

Copper is not getting destroyed, the TSX is up on days when the dow is down over 100 points, gold goes up no matter what, even in the summer.

Things are a changin.

DoctoRx's picture

A good Fight Club entry, Robo.  Tho you're wrong about gold.  And technically you overstated things re "the slightest whiff of weakness".  It'll take more than a whiff.  But as biflation bites in a deflationary direction, the 10 year has massive downside (yield) potential.

phungus_mungus's picture

a trillion....


from here on out everything will be known simple, as, a $$$shitload$$$ 

Belrev's picture

This $600T is a misleading discussion. If you credit default swap or interest rate swap contracts are each for $1B notional, then what is the total number of these contracts, what do they net out to? The notional catches the eye, but there is not as much wipe out power under it as people are led to beleive.

phungus_mungus's picture

Its not real money anyways.... is it.... 

cat2's picture

The owners of that (influencial rich folks with washington lobbists) will want the value paid to them in $.  Fire up the presses.

Pure Evil's picture

The money may be fiat, but the anarchy unleashed from pandora's box if everything "collapsed spectacularly" would be no illusion.

It would be Greece, Libya, Yemen, Syria, ad infinitim, on a roid rage.

And, that could be either hemorrhoid or steriod, which ever tickles your fancy.

Tyler Durden's picture

Thank you for pointing out gross vs. net notional 101 (which incidentally worked out how in Lehman Ch.11 when gross was net?). Regardless did you read this part: "we believe, that the full potential shortfall on the up to $600
trillion in gross notional is the full net exposure in the market at any
time. Which we are convinced is well over the $160 billion 0.002% case
(according to some estimates, between CDS (this one is easy - just look
at weekly DTCC data) and IRS (this one is far more complicated), the net
notional at risk at any given moment is anywhere between $2 and 8
And this is capital that the G-14 supposedly have handy for a
rainy day?"

Probably not since it took about 6 minutes form the moment the article appeared until your comment...

Dapper Dan's picture

It takes me 10 to 15 minutes to reply to a post,  spell check and all.

Tyler replys in less then 10 sec.

Check the time post on TD's reply. You got a delay button?

cat2's picture

Well 6 minutes or so.

Belrev's picture

Tyler, I am not disagreeing with your. But $2 to $8 Trillion of actual wipe out potential is shall we say "manageable" by the Central Bank standards. And they will not be deterred in defending their powerbase and life style.

Tyler Durden's picture

It will add up eventually. Dumping $5 trillion in USD in the market overnight will leave a mark.

Pure Evil's picture

Would tend to agree, even though the US with the largest GDP, approximately 14 trillion. Dumping $5 trillion overnight would more than just make a mark.

Could be the beginning of an event horizon presaging the implosion of the whole turd fest.

"over the next year and a half exchanges need to onboard over $200 trillion notional in various products, and in doing so, counterparites, better known as the G14  will soon need to post billions in initial margin, and as a brand new BIS report indicates, will likely need significant extra cash to be in compliance with regulatory requirements. Not only that, but once trading on an exchange, the G14 "could face a cash shortfall in very volatile markets when daily margins are increased, triggering demands for several billions of dollars to be paid within a day." Per the BIS "These margin calls could represent as much as 13 percent of a G14 dealer's current holdings of cash and cash equivalents in the case of interest rate swaps."

And, from that I have to suspect it's no coincidence that I read a recommendation somewhere suggesting that it was best to be in cash for the next six months. Of course that means that just possibly these turds are using my cash to back up their bets.

Of course, I'm just a paranoid schizophrenic that sees conspiracies around every corner, but if the proletariate were to start pulling cash from accounts, would there be enough to cover the margin calls for these contracts?

I realize drawing a straight line between these two points would take a hyperbolic curve, but nothing gets published without a hidden agenda behind it, except for Tyler, of course.

At the least, the FED has been pumping money into the banks to help, but even the FED would have to balk at entering $35 trillion at the keyboard at a moments notice.

My only question is, why would they only need to post billions in initial margin when they're onboarding some $200 trillion in notionals? The rubber just ain't hittin' the road on that one.

bigwavedave's picture

Just a skid mark. Embarassing only if you drop off your own laundry. Which these guys dont...