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1000x Systemic Leverage: $600 Trillion In Gross Derivatives "Backed" By $600 Billion In Collateral

Tyler Durden's picture


There is much debate whether when it comes to the total notional size of outstanding derivatives, it is the gross notional that matters (roughly $600 trillion), or the amount which takes out biletaral netting and other offsetting positions (much lower). We explained previously how gross is irrelevant... until it is, i.e. until there is a breach in the counterparty chain and suddenly all net becomes gross (as in the case of the Lehman bankruptcy), such as during a financial crisis, i.e., the only time when gross derivative exposure becomes material (er, by definition). But a bigger question is what is the actual collateral backing this gargantuan market which is about 10 times greater than the world's combined GDP, because as the "derivative" name implies all this exposure is backed on some dedicated, real assets, somewhere. Luckily, the IMF recently released a discussion note titled "Shadow Banking: Economics and Policy" where quietly hidden in one of the appendices it answers precisely this critical question. The bottom line: $600 trillion in gross notional derivatives backed by a tiny $600 billion in real assets: a whopping 0.1% margin requirement! Surely nothing can possibly go wrong with this amount of unprecedented 1000x systemic leverage.

From the IMF:

Over-the-counter (OTC) derivatives markets straddle regulated systemically important financial institutions and the shadow banking world. Recent regulatory efforts focus on moving OTC derivatives contracts to central counterparties (CCPs). A CCP will be collecting collateral and netting bilateral positions. While CCPs do not have explicit taxpayer backing, they may be supported in times of stress. For example, the U.S. Dodd-Frank Act allows the Federal Reserve to lend to key financial market infrastructures during times of crises. Incentives to move OTC contracts could come from increasing bank capital charges on OTC positions that are not moved to CCP (BCBS, 2012).


The notional value of OTC contracts is about $600 trillion, but while much cited, that number overstates the still very sizable risks. A better estimate may be based on adding “in-the-money” (or gross positive value) and “out-of-the money” (or gross negative value) derivative positions (to obtain total exposures), further reduced by the “netting” of related positions. Once these are taken into account, the resulting exposures are currently about $3 trillion, down from $5 trillion (see table below; see also BIS, 2012, and Singh, 2010).


Another important metric is the under-collateralization of the OTC market. The Bank for International Settlements estimates that the volume of collateral supporting the OTC market is about $1.8 trillion, thus roughly only half of exposures. Assuming a collateral reuse rate between 2.5-3.0, the dedicated collateral is some $600 - $700 billion. Some counterparties (e.g., sovereigns, quasi-sovereigns, large pension funds and insurers, and AAA corporations) are often not required to post collateral. The remaining exposures will have to be collateralized when moved to CCP to avoid creating puts to the safety net. As such, there is likely to an increased demand for collateral worldwide.

And there it is: a world in which increasingly more sovereigns are insolvent, it is precisely these sovereigns (and other "AAA-rated" institutions) who are assumed to be so safe, they don't have to post any collateral to the virtually unlimited derivatives they are allowed to create out of thin air.

Is it any wonder why, then, in a world in which even the IMF says there is an increased demand for collateral, that banks are making a total mockery out of such preemptive attempts to safeguard the system, such as the Basel III proposal, whose deleveraging policies have been delayed from 2013 to 2014, and which will be delayed again and again, until, hopefully, everyone forgets all about them, and no financial crises ever again occur.

Because if and when they do, the entire world, which has now become one defacto AIG Financial Products subsidiary, and is spewing derivatives left and right, may have to scramble just a bit to procure some of this $599 trillion in actual collateral, once collateral chains start breaking, once "AAA-rated" counterparties (such as AIG had been days before its bailout) start falling, and once the question arises: just what is the true value of hard assets in a world in which the only value created by financial innovation is layering of derivatives upon derivatives, serving merely to prod banker bonuses to all time highs.


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Mon, 12/24/2012 - 10:09 | 3092625 rahbii
rahbii's picture

So it's not just the metals markets then? 

Mon, 12/24/2012 - 10:26 | 3092657 GetZeeGold
GetZeeGold's picture



Try doing that with real metal.....and you'll get a hernia.

Mon, 12/24/2012 - 10:36 | 3092683 CPL
CPL's picture

One ounce bar hammered to a paper thin sheet the size of a 12x8 dinner table.


Probably need a new shoulder along with the hernia cup.

Tue, 12/25/2012 - 05:56 | 3094359 TwoShortPlanks
TwoShortPlanks's picture

I wonder if the Derivative market is even remotely capable of being wound-down. Perhaps it's so Ponzi that it requires constant growth?!

Mon, 12/24/2012 - 11:14 | 3092785 jekyll island
jekyll island's picture

The true value of the assets is what real people will pay for them, not the mark to fantasy world in which we live.   

Mon, 12/24/2012 - 22:59 | 3094115 ball-and-chain
ball-and-chain's picture

Was this article written by Reggie Middleton?

Middleton is great.

I love his work.

Mon, 12/24/2012 - 10:12 | 3092627 kindape
kindape's picture

but the vast majority of those are currency/interest rate swaps etc where the DV01 is puny. 100 mil contract might have 50-100k of risk. so UNLESS a counterparty goes under, these derivatives are not 'claims on natural resources' like the rest of our debt/money supply.  This is big mistake in aggregation of our debt. Financial debt is different than govt/corp/private/household/

Mon, 12/24/2012 - 10:16 | 3092638 Tyler Durden
Tyler Durden's picture

Lehman's CDS had a puny DV01 when it was trading at a 100 bps 2 months ahead of the Chapter 11. At or around that time, it proceeded to develop a monster DV01.

Mon, 12/24/2012 - 10:22 | 3092650 falak pema
falak pema's picture

TY TD/ZH for this luminous analysis and based on the IMF itself! SUpreme irony! 

Its a recurrent theme that mind boggles me.

Mon, 12/24/2012 - 10:40 | 3092694 kindape
kindape's picture

well thats why I highlighted 'unless' a counterpart goes under, which they will prevent again until it escalates to last man standing. Not saying it is safe or foolproof, just saying that all financial debt could be offset tomorrow aggregating to very small losses (to someone) and everything still functions. Same cannot be said for corp/govt/private debt. Different animals different risks

Mon, 12/24/2012 - 11:29 | 3092718 SafelyGraze
SafelyGraze's picture

tylers -- please 'splain 

if you and I enter into one of these arrangements, we pretend/posit/suppose that we each borrowed a zillion dollars. me at fixed rate. you at variable rate.

then we pay each other the difference between the rates on the imagined principal.

how does the hypothetical zillion dollars ever materialize? neither of us claimed to owe it to anyone. only the difference in interest rates on the zillion. 


Mon, 12/24/2012 - 11:29 | 3092829 Sudden Debt
Sudden Debt's picture

neither of you have it, but you resold it 10 times over to lemmings and in that way you can spend it all... unless the lemmings see it on cnbc that there's a problem 6 months later and when they dream of getting their money back.

Mon, 12/24/2012 - 11:53 | 3092902 fuu
fuu's picture

I stimulated the shit out of Belgium's economy over the weekend. Thanks for the "End of the World" sale Imageline.

Mon, 12/24/2012 - 12:17 | 3092979 Svener
Svener's picture


Mon, 12/24/2012 - 14:43 | 3093391 fuu
fuu's picture

Any VST for $45 was a pretty good deal.

Mon, 12/24/2012 - 11:57 | 3092916 max2205
max2205's picture

I am sure S&P will downgrade the US after reading this......

Mon, 12/24/2012 - 12:41 | 3093020 cranky-old-geezer
cranky-old-geezer's picture



Why do Tylers believe the same bullshit fantasies you bitch at bankers for believing?

Derivatives are gambling bets.   Gambling bets don't have collateral. 

There is NO collateral AT ALL.  There's just the appearance of collateral achieved with ACCOUNTING FRAUD that would land any of us in bankruptcy court ...and jail possibly.

It's $600 trillion of GAMBLING BETS.  Its why the financial world is huge damn CASINO, a place where you GAMBLE.

But its a RIGGED casino where there's never a "credit event" so nobody ever has to pay off when they lose, and if they go bankrupt like AIG did, the Fed comes along and pays off their bets.

I heard somewhere the Fed is now backstopping ALL the derivative exposure of the big Wall Street banks.   That's hundreds of trillions right there.

I wish I could go to a casino, bet all I want, keep my winnings, and have the Fed come along and pay off my losses. 

Damn, I picked the wrong career in life.  Should'a been a banker.

Mon, 12/24/2012 - 12:53 | 3093084 CPL
CPL's picture

600 trillion back with currency backed with nothing but an IOU redemable in the far future.



Mon, 12/24/2012 - 12:59 | 3093106 cranky-old-geezer
cranky-old-geezer's picture



The so-called "US dollar" has NO backing AT ALL.   It's just another damn DERIVATIVE, just another GAMBLING BET.

This is what happens when you go off a commodity standard.  When a currency isn't tied to ANYTHING tangible.

Mon, 12/24/2012 - 15:57 | 3093562 CPL
CPL's picture

What the real question is Why do they do it?


Why would they bother running an obviously vapour driven ponzi scheme when the outcome is inevidable every time in history it's been done.  It's not technology gains related either.  

Because all technology gains and education are usually erased in every reset.  Then require archeology majors to re-discover that we've had advanced engineering at the apex of other ancient civilzations that walked down the same path in various stages of technology progression.  Again.  

Anything not written in stone or maintained by the ancient version of a Hard Drive, monk memorization, literally is wiped nearly everytime.

Interesting thing about the monks of all churches/sects/cultures, they learned the secret to photographic memory.  Same mental hacks we use today for photographic memory were all adopted from the various places of worship.  Monks in training, if they were to be listed as a scribe or courrier involved the same techiques used by pilots today for the tachioscope.  Instant recall memory.  Lighting calculation (Think people stopped calculating Pi during the dark ages?  People had wars about it.  To the overly clever, pious and violent, Pi is considered to some as holy as the Trinity because it is unending.) 

That was the function of monks btw, they were walking hard drives of libraries of information, facts, figures and calculations that could be deployed anywhere with the information the organisation burned into their minds, like software.  The Training manuals left by St Mark and Augustine is pretty detailed about how to train your brain to absorb any piece of information and do lighting math.  And that was adopted from Indian Asetics and Hebrew scholars, who learned all those weird mental hacks from the ancient Persians.  Better private schools and parents everywhere pass these tools to their children.

So we know it's not technology or quality of life as a reason because misery with no progress is the outcome everytime in history that fiat and it's masters takes the helm.  

Only reason I've come up with is lunatics are managing this for the sake of doing it.

Mon, 12/24/2012 - 16:35 | 3093624 cranky-old-geezer
cranky-old-geezer's picture



Why would they bother running an obviously vapour driven ponzi scheme when the outcome is inevidable every time in history it's been done.

Because their ponzi scheme is a LOOTING SPREE, looting all the wealth from the American people and anyone else they can sucker into their ponzi scheme. 

Like China for example.  China has a couple trillion dollars of our so-called "treasury securites" that are completely fucking worthless ...or soon will be.

Mon, 12/24/2012 - 16:52 | 3093650 CPL
CPL's picture

China's in big trouble as well.  They mess around with their media and money as much as the US does.  Chinese leadership have been known for many things, being honest isn't one of them because of cultural concepts of honor, face, ownership and outcomes.  


But the looting sprees always end abruptly.  Usually ends up with most of the villains dead, and everyone gets to catch their breath for a century or longer.  I'm sure a couple sneak out to restart the process.  But why?  It's like locusts.  They consume until they all die off from starvation.  What good is the "loot" if you've got nowhere to spend it or anything of common value to show for it.  I know for certain that the ancient Mesopotamian had a flag.  But nobody cares or knows what it looks like anymore. 

So it's beyond a need to loot, their power vanishes and their lives usually in an upheaval.  They can't be that dumb to at least take a nod from history to determine the possible outcome of complete failure.


So why is the only question that needs an answer.

Mon, 12/24/2012 - 10:18 | 3092641 Winston Churchill
Winston Churchill's picture

Lehmans exposure was only $8bn.

That worked out well.

Mon, 12/24/2012 - 10:57 | 3092726 itstippy
itstippy's picture

JP Morgan lost $6B unwinding Bruno "London Whale" Iksil's derivatives position.  Despite all the hoopla, there wasn't much impact on JPM balance sheet or profits.  JPM is again doing stock buybacks and paying dividends. Their stock is way up; they're considered comfortably capitalized.

Obviously a broader derivatives collapse would still be little more than a fly hitting the windshield.   If derivatives posed any real risk to the financial system, guys like Jamie Dimon and Ben Bernanke would recognize it and take appropriate action.

Nothing to see here - move along to the mall. 

Mon, 12/24/2012 - 11:59 | 3092885 itstippy
itstippy's picture

MF Global hit an economic rough patch when their derivatives positions went pear-shaped, and regretably had to close up shop. Sometimes bad things happen to good financial institutions.

No big deal.  The Honorable Jon Corzine simply liquidated MF Global's collateral holdings and made JP Morgan whole on all outstanding derivatives contracts they were counterparty to.  The system absorbed the shock easily; nobody important got hurt.  A handfull of insignificant Nebraska wheat farmers experienced slight inconvenience, but that's about it.

Obviously, derivatives shocks are contained. 

Nothing to see here - move along to the mall.

Mon, 12/24/2012 - 12:21 | 3092987 earleflorida
earleflorida's picture

fail !

Mon, 12/24/2012 - 11:31 | 3092834 Sudden Debt
Sudden Debt's picture

the 2001 materialized because of a 10 billion sinckhole.
now we piss that kind of money away on a daily basis and still most people think everything is getting better.

Mon, 12/24/2012 - 10:39 | 3092690 CPL
CPL's picture

Doesn't matter, it still is represented as capital and therefore credit in an over saturated system already full of USD.


It's derivatives that trigger the hyperinflation scenario.  Wake up one morning and gum is $500 USD per pack because the derivative chain collapses.  Alternatively wake up and silver is 130k per ounce and gold is 3 million.


Of course referring to anything USD is going to be pointless, nobody will use it by that point.

Mon, 12/24/2012 - 11:33 | 3092839 Sudden Debt
Sudden Debt's picture

now your talking about a paper currency. we've passed that and are already fully into a digital currency where the flow can be much easier controlled.

Mon, 12/24/2012 - 12:57 | 3093095 CPL
CPL's picture

The control of currency was never an issue.  Currency is fungible.  It moves where it needs to be because of it's purpose.


The problem we are having is systemic corruption.  People controlling the currencies are at fault.  The blacksmith makes the chain.  The chain itself isn't bad.  The chain is merely a tool.  It can be used to secure something like a tractor to a wagon.  Or brake something, like a biker breaking bones as a whipping flail.  

Intention is the difference when the tool is used.

Mon, 12/24/2012 - 10:15 | 3092635 fuu
fuu's picture

Obama should just ban collateral so tragedies like this never happen again.

Mon, 12/24/2012 - 10:22 | 3092652 rehypothecator
rehypothecator's picture

Rather than ban it, he could just Corzine it.  

Mon, 12/24/2012 - 11:35 | 3092846 Sudden Debt
Sudden Debt's picture

YOU don't have that collateral!
Other people do! at least they think so...

Mon, 12/24/2012 - 12:00 | 3092923 max2205
max2205's picture

This situation will blow up even your safe money in checking accounts.

POOF and it gone

Mon, 12/24/2012 - 10:18 | 3092640 q99x2
q99x2's picture

That's quite an imagination.

Mon, 12/24/2012 - 10:42 | 3092698 CPL
CPL's picture

Explain.  Be verbose.  Math illustrating your position is good.  This isn't yahoo finance, we like details here.

Mon, 12/24/2012 - 10:18 | 3092643 fiftybagger
fiftybagger's picture

one ten thousandth of that money into silver is 2 billion ounces.  Endgame.....

Mon, 12/24/2012 - 10:24 | 3092655 rehypothecator
rehypothecator's picture

That will never happen.  First, silver is "too risky".  (Unlike, say, sovereign debt.)  Second, there aren't 2 billion ounces of silver anyway.  

Mon, 12/24/2012 - 11:13 | 3092780 fiftybagger
fiftybagger's picture

"Second, there aren't 2 billion ounces of silver anyway."

I believe that was my point

Mon, 12/24/2012 - 10:21 | 3092649 Savvy
Savvy's picture

AIG... Aaaaand It's Gone.

Mon, 12/24/2012 - 12:26 | 3093002 earleflorida
Mon, 12/24/2012 - 10:21 | 3092651 mrktwtch2
mrktwtch2's picture

when the shit hits the fan..all the debt will be reorganized..(rememeber the russian default in 98??) time buy any 5% pullbacks in the indices..i gave up being bearish in late 2009 once i fugred out that the fed was going to be there for many years..

Mon, 12/24/2012 - 10:27 | 3092658 Winston Churchill
Winston Churchill's picture

I agree it will be reorganised.Probably at Bretton Woods just as Hitler made Petain sign

at Versailles,with a new reserve currency that will not be the dollar.

Mon, 12/24/2012 - 10:33 | 3092675 SheepDog-One
SheepDog-One's picture

I find it funny that so many people somehow imagine when this monstrosity implodes, the worst that will happen to them is getting exchanged a new kind of 'money' at face value.

Mon, 12/24/2012 - 10:29 | 3092664 SheepDog-One
SheepDog-One's picture

There won't be any 'pullbacks' when this present shitpile collapses, suddenly everyone will be staring at -0-'s in their account balances and wondering how the fuck they got Corzined when really they gave plenty of warnings for all to see. This is 'fair play' to them....'hey, ya fucked up! Ya TRUSTED us!'

Mon, 12/24/2012 - 10:24 | 3092656 geno-econ
geno-econ's picture

Not to worry.  Derivatives diversify risk according to Greenspan and he is always right.  Right? If there is inadaquate collateral, then  there is less risk passed on.  Right?   WRONG!    Tick, tick, tick tick, BOOM!

Mon, 12/24/2012 - 10:28 | 3092661 NoDebt
NoDebt's picture

Biggest number in the pile..... INTEREST RATE CONTRACTS!  Everything else is pretty much trivia by comparison.

Sorta flies in the face of the Bearded Potato saying he can unwind all this money printing and ZIRP stuff quickly, doesn't it?  What if rates jumped 100 bps in say, 6 months?  You think that might cause a few problems?

Mon, 12/24/2012 - 14:08 | 3093296 rufusbird
rufusbird's picture

All waves can be made by adding up sine waves. The sine wave has a pattern that repeats.

Mon, 12/24/2012 - 10:29 | 3092666 azusgm
azusgm's picture

...and where is SAC in the midst of this? What happens if Stevie suddenly needs cash?

Mon, 12/24/2012 - 10:30 | 3092668 q99x2
q99x2's picture

Wile E Coyote finally made it to the front page of CNBC today. Can WilliamBanzai7 do it next year.

Mon, 12/24/2012 - 10:35 | 3092680 SheepDog-One
SheepDog-One's picture

While Bloomberg is trying to say investors 'lost' $300 billion because they sold stocks. Sad really, Bloomberg long ago used to be pretty good financial info, now they're just another blowhorn for Wall St.

Mon, 12/24/2012 - 10:58 | 3092745 edb5s
edb5s's picture

It's not entirely out of the realm of possibility, his work is already published on Wikipedia:  Click on the flow chart link.



Mon, 12/24/2012 - 10:32 | 3092673 CaptainAmerica
CaptainAmerica's picture

Always drink upstream from the herd.

Mon, 12/24/2012 - 10:32 | 3092674 Bicycle Repairman
Bicycle Repairman's picture

I had to pull out a 20th century version of the OED to find this word "collateral."  What's next from you guys?  Buggy whips?  That "constitution" thing?  Keep up.

Mon, 12/24/2012 - 12:00 | 3092925 DOT
DOT's picture

Tut tut, BR, must keep up appearances. Excuse me while I check the chattles and appertunances thereunto.

Mon, 12/24/2012 - 10:41 | 3092696 decon
decon's picture

"And there it is: a world in which increasingly more sovereigns are insolvent, it is precisely these sovereigns (and other "AAA-rated" institutions) who are assumed to be so safe, they don't have to post any collateral to the virtually unlimited derivatives they are allowed to create out of thin air"

In the interest in learning, what would be an example of a derivative created by a sovereign?


Mon, 12/24/2012 - 10:48 | 3092714 Tyler Durden
Tyler Durden's picture

Any IR, FX, equity or commodity swap or CDS written by a bank backstopped by its host government and/or a central bank, such as virtually all banks in Europe's periphery. But don't worry - those are all "contingent liabilities."

For any other directly underwritten swaps by sovereigns, speak to the BIS directly.

Mon, 12/24/2012 - 11:03 | 3092762 ekm
ekm's picture

This further proves my conjecture.

Mon, 12/24/2012 - 12:17 | 3092978 max2205
max2205's picture

Unfortunately the Fed could "print" swaps to a quadrillion and we'd never know it for years

Mon, 12/24/2012 - 12:33 | 3093024 ekm
ekm's picture

Not necessarily. That money would go to buying stocks like it is and basically end up buying up the whole stock market. That process is finite.


That's why NYSE bankrupted and had to be bought out. Not much stocks left to trade.

Mon, 12/24/2012 - 16:25 | 3093180 cranky-old-geezer
cranky-old-geezer's picture



"Full faith and credit of XYZ bullshit bankrupt govt".

THERE'S your so-callled "backing" and "collateral".

Stop drinking the banker koolaid Tylers.  Stop trying to rationalize a fucking fantasy.  Stop trying to make sense out of accounting fraud.  It makes you look stupid as them.

Tue, 12/25/2012 - 00:37 | 3094202 MeelionDollerBogus
MeelionDollerBogus's picture

Even a well-told, well-rehearsed fiction has a structured narrative. This is indeed well-told & well-rehearsed. We're better for dissecting it repeatedly.

Mon, 12/24/2012 - 10:46 | 3092710 ekm
ekm's picture

I've been telling you guys, but nobody is believing me so far.

This all shit is geostrategic and it has got not much to do with finance.


In 2008 when gov wanted to pay pennies on fannie and freddie bonds, both China and Russian which were major holders of those bonds said: No shit.

So Putin attacks the country of Georgia all of a sudden out of no reason as a claim toward bond default. So China starts telling USA to leave South China Sea as again a payment towards bond defaults.

Well, all of a sudden both China and Russia were paid in full.

And that is exactly the reason I have concluded of QE4ever. The counterparties of primary dealers for these derivatives are chinese and russian state owned banks.

If a country owes debt to its population, default is easy. If a country owes debt to a dangerous foreigner like Russia or China, things are quite a lot more complicated.

Mon, 12/24/2012 - 11:08 | 3092771 Bicycle Repairman
Bicycle Repairman's picture

So thinking geostrategicly collateral or payment can consist of  pieces from the "grand chessboard."  For example, Taiwan for boatloads of Chinese stuff.  Or a three-way deal:  Iran and $X trillion to the USA, Japan to China and the Caucasus plus a monopoly on gas to Europe for Russia.

Think Risk plus Monopoly.

Mon, 12/24/2012 - 11:54 | 3092906 shovelhead
shovelhead's picture


The new owners of Wall St. will rename it 'Glorious Shining Path.'

Goodbye Nathan's hot dog carts, hello noodle carts.

Mon, 12/24/2012 - 12:50 | 3093075 ekm
ekm's picture

Not a joke at all.

The very creation of the United States of America in the current form was a payment from Napoleon to USA with the Louisiana Purchase. Napoleon owed millions of dollars in gold and wanted to finance his wars in Europe. 

He couldn't wage war to Americans in order to cancel the debt, so he sold his US lands in exchange for debt erasure plus some gold.


Hong Kong was a payment to England from China, also, after England waged wars, the so called Opium Wars.


Mon, 12/24/2012 - 14:46 | 3093403 geno-econ
geno-econ's picture

Exactly how US got Alaska when Russian royal treasury ran out of cash.

Mon, 12/24/2012 - 14:53 | 3093428 ekm
ekm's picture


Mon, 12/24/2012 - 15:19 | 3093501 ekm
ekm's picture

Of course I can't prove it, but in my mind I have no doubt that China has asked USA to deliver Taiwan as debt payment.

And of course, all they got was the middle finger, basically Benny creating electrons - far.

Mon, 12/24/2012 - 11:34 | 3092842 game theory
game theory's picture

I respectfully disagree...this has everything to do with finance: when you dig down, there is no dividing line between finance and politics.  

We are in a financial war with the Fed playing a major role in the battle. Usually financial wars lead to real war...but that can take more than a decade to happen.  

Mon, 12/24/2012 - 12:13 | 3092968 viahj
viahj's picture

the financial war started in '71

Mon, 12/24/2012 - 12:34 | 3093029 ekm
ekm's picture

We are basically saying the same thing.

Mon, 12/24/2012 - 10:51 | 3092728 eddiebe
eddiebe's picture

So the IMF figures now can be trusted?       Good one!

Mon, 12/24/2012 - 10:53 | 3092732 DeficitAlchemist
DeficitAlchemist's picture

jargon help?


DV01 is?



Mon, 12/24/2012 - 11:41 | 3092866 SafelyGraze
SafelyGraze's picture

Dollar duration, DV01

The dollar duration or DV01 is defined as the derivative of the value with respect to yield: so that it is the product of the modified duration and the price (value): ($ per 1 percentage point change in yield) or ($ per 1 basis point change in yield)

The DV01 is analogous to the delta in derivative pricing (The Greeks) – it is the ratio of a price change in output (dollars) to unit change in input (a basis point of yield).

Dollar duration or DV01 is the change in price in dollars, not in percentage.

It gives the dollar variation in a bond's value per unit change in the yield.

It is often measured per 1 basis point - DV01 is short for "dollar value of an 01" (or 1 basis point).

The names BPV (basis point value) or PV01 (present value of an 01) are also used, although PV01 more accurately refers to the value of a one dollar or one basis point annuity.

(For a par bond and a flat yield curve the DV01, derivative of price w.r.t. yield, and PV01, value of a one-dollar annuity, will actually have the same value.)

DV01 or dollar duration can be used for instruments with zero up-front value such as interest rate swaps where percentage changes and modified duration are less useful.


Mon, 12/24/2012 - 12:05 | 3092941 GMadScientist
GMadScientist's picture

Bond price sensitivity for non-fixed cashflows.


Mon, 12/24/2012 - 10:59 | 3092752 shovelhead
shovelhead's picture

And yet, all we hear in the MSM is about the wrangling over what amounts to less than pocket change by comparison in a 'Fiscal Cliff'. worries. I'm sure this will all work out well.

As long as nobody defaults on anything...forever.

How hard can that be?

Mon, 12/24/2012 - 11:02 | 3092759 JackT
JackT's picture

It's just too horrible to look at, close the box and go back to the party. Point being this is the new Cold War. Everyone knows that this beast cannot pop because it guarantees the destruction of what has taken so long to build and all those involved.

I really think its a game of charades until the bitter end. No warning or build up..just *poof*

Mon, 12/24/2012 - 11:08 | 3092770 Seasmoke
Seasmoke's picture

Don't ever let the music stop playing.

Mon, 12/24/2012 - 11:09 | 3092772 Ignorance is bliss
Ignorance is bliss's picture

What is the collateral backing the system? Ask yourself what the "system" matrix controls.  All the sheeple, all their labor, and all their wealth. That is the collateral backing the system. 

That's why physical Gold and Silver will never be allowed to rise relative to the arbitrary relative value assigned to paper currencies. As long as the goods and services that we require are denominated in Dollars, then the system will maintain the status quo. 

There is a another game afoot within the derivatives markets, metals markets, etc. The game involves relative power plays by our current group of global masters. Control of fiat flow and distribution is how they control the sheeple. Example: If  you increase taxes then they decrease the amount of fiat that you have to pay for shelter, food, fuel, etc. Taxation creates an artificial demand for dollars.

IMHO if we really see Gold and Silver going parabolic, then we are in for systematic change signaling a change of overlords. Otherwise they would continue to preserve the status quo. They have fiat, and therefore they have a valuable system of control that they can use anytime to manage the population.

The only reason TPTB would ever allow a monetary change is to impoverish another group that was vying for control and power. Perhaps the Chinese and their power brokers are attempting to break the grip of current British and American masters of the Universe. A buy of Gold and Silver is a hedge against the current power brokers. We the people are simply collateral. Let's hope we don't become collateral damage.

Mon, 12/24/2012 - 11:41 | 3092868 alentia
alentia's picture

In this casino game, and this is exactly what it is, there will be the end, even if all central banks print $600T to deleverage.

The dealer (read GS or JPM or both) always wins.

The chain reaction will start, which will be impossible to stop. Central banks are doing everything now to avoid the start of "chain reaction" from possible candidates.


Most likely it will come unexpected, from the place no one [at central banks] had thought about.

Mon, 12/24/2012 - 11:39 | 3092860 Sudden Debt
Sudden Debt's picture

here's 1000$!
tweak it into a million and give me my McMansion Bitch!

Mon, 12/24/2012 - 12:58 | 3093103 kevinearick
kevinearick's picture

So, what you are saying is that leverage goes vertical when velocity goes an expected relationship between frequency and time...

Mon, 12/24/2012 - 13:06 | 3093126 evernewecon
evernewecon's picture



Adding to my own (I don't see my own to add to

as a reply to myself, so here it is, as it's not lengthy at all:)


I don't see selling

ever greater risk insurance 

for ever less premium, with

ever less loss coverage for

ever greater bonuses even being

a  legitimate  business absent 

run of the mill Schwab/

Ameritrade-Style net equity at

risk monitoring.


That would NOT be the case where

the banking sector were NOT 

oligopolistic, with which TBTF in name

is synonymous


  So I think a

"nuclear option" may exist

as to bank derivatives 

exposure.   So even where 

the financial and legal risk have

been passed to the taxpayer 

(people will see legal op's for

challenging that) I'd annul them

if/when they were to otherwise 

swamp the taxpayers.



Obviously, if such things as the authority to pass

the financial and legal losses/liabilities to the 

taxpayer can be successfully challenged, then the 

whole idea of the Fed and FDIC was independence-

depositors' protection and confidence (as to the Fed/

unemployment/inflation isn't relevant and where in

a TBTF and revolving door environment it will be 

free reserves and raising reserve requirement later

with employment never rating, the banks themselves

turned back by the Liquidity Trap:   )


then I can see extending protection to depositor even beyond 

present FDIC coverage but letting the bank holding cos suck up their

losses in a hurry.

When someone falls off a cliff, after the first 90 ft. it might as well be a mile.

So if a TBTF bank holding co. is allowed to fail with $US100 Trillion in liabilities,

it won't matter.    People should've known to not do business with them.

Mon, 12/24/2012 - 13:36 | 3093200 williambanzai7
williambanzai7's picture

I don't understand how one can conclude gross is irrelevant because it is only relevant if there is a financial crisis. But if you are in a financial crisis it is very relevant.

Is this some kind of Zen koan?

Is the risk of an off-piste avalanche only relevent if you are already in one?

This reminds me of a growing pile of nuclear waste...Ignore the danger of a lethal disaster as long as there is no disaster.

Mon, 12/24/2012 - 14:12 | 3093306 Legolas
Legolas's picture

Looks like the perfect recipe to destroy the wealth of the United States and other countries.  Now all they need is to get the government behind the plan, you know, to make it all enforceable.

Hmmmm ........


Mon, 12/24/2012 - 17:14 | 3093678 alentia
alentia's picture

I beg you pardon... You are saying $16T in debt, malfunctioning economy and even more trillions in unfunded liabilities is WEALTH???

Mon, 12/24/2012 - 17:25 | 3093698 Hobie
Hobie's picture

We're all fucked! Merry Christmas!

Mon, 12/24/2012 - 23:11 | 3094124 EZYJET PILOT
EZYJET PILOT's picture

Can someone explain to me please? The banks have only .1% asset base, in creating these derivatives do they actually have to boorow the money or do they just invent them out of thin air? Does this apply to the MBS and the securitized crap they "created" prior to 2008 too? It seems essentially to me that these MBS/Derivatives are nothing more than a US dollar, ie backed by nothing!

Tue, 12/25/2012 - 00:38 | 3094203 resurger
resurger's picture

Did you check the Deleverage in the OCC?! see chart?
Kiss good buy to IR derivatives

Tue, 12/25/2012 - 00:41 | 3094210 MeelionDollerBogus
MeelionDollerBogus's picture

Nothing says stability like 1000:1 leverage.

In fact, that's how I think I balanced my boat out last time.

Not to worry, I made it back intact but you guessed it - somehow I lost all my gold again.

Tue, 12/25/2012 - 21:04 | 3095478 suckerfishzilla
suckerfishzilla's picture

.001% margin requirement or bust bitchez

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