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

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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...