$707,568,901,000,000: How (And Why) Banks Increased Total Outstanding Derivatives By A Record $107 Trillion In 6 Months

Tyler Durden's picture

While everyone was focused on the impending European collapse, the latest soon to be refuted rumors of a quick fix from the Welt am Sonntag notwithstanding, the Bank of International Settlements reported a number that quietly slipped through the cracks of the broader media. Which is paradoxical because it is the biggest ever reported in the financial world: the number in question is $707,568,901,000,000 and represents the latest total amount of all notional Over The Counter (read unregulated) outstanding derivatives reported by the world's financial institutions to the BIS for its semi-annual OTC derivatives report titled "OTC derivatives market activity in the first half of 2011." Indicatively, global GDP is about $63 trillion if one can trust any numbers released by modern governments. Said otherwise, for the six month period ended June 30, 2011, the total number of outstanding derivatives surged past the previous all time high of $673 trillion from June 2008, and is now firmly in 7-handle territory: the synthetic credit bubble has now been blown to a new all time high. Another way of looking at the data is that one of the key contributors to global growth and prosperity in the past 10 years was an increase in total derivatives from just under $100 trillion to $708 trillion in exactly one decade. And soon we have to pay the mean reversion price.

What is probably just as disturbing is that in the first 6 months of 2011, the total outstanding notional of all derivatives rose from $601 trillion at December 31, 2010 to $708 trillion at June 30, 2011. A $107 trillion increase in notional in half a year. Needless to say this is the biggest increase in history. So why did the notional increase by such an incomprehensible amount? Simple: based on some widely accepted (and very much wrong) definitions of gross market value (not to be confused with gross notional), the value of outstanding derivatives actually declined in the first half of the year from $21.3 trillion to $19.5 trillion (a number still 33% greater than US GDP). Which means that in order to satisfy what likely threatened to become a self-feeding margin call as the (previously) $600 trillion derivatives market collapsed on itself, banks had to sell more, more, more derivatives in order to collect recurring and/or upfront premia and to pad their books with GAAP-endorsed delusions of future derivative based cash flows. Because derivatives in addition to a core source of trading desk P&L courtesy of wide bid/ask spreads (there is a reason banks want to keep them OTC and thus off standardization and margin-destroying exchanges) are also terrific annuities for the status quo. Just ask Buffett why he sold a multi-billion index put on the US stock market. The answer is simple - if he ever has to make good on it, it is too late.

Which brings us to the the chart showing total outstanding notional derivatives by 6 month period below. The shaded area is what that the BIS, the bank regulators, and the OCC urgently hope that the general public promptly forgets about and brushes under the carpet.

Try not to laugh. Or cry. Or gloss over, because when it comes to visualizing $708 trillion most really are incapable of doing so.

Total outstanding gross market value by 6 month period:

There is much more than can be said on this topic, and has to be said, because an increase of that magnitude is simply impossible to perceive without alarm bells going off everywhere, especially when one considers the pervasive deleveraging occurring at every sector but the government. All else equal, this move may well explain the massive surge in bank profitability in the first half of the year. It also means that with banks suffering massive losses, and rumors of bank runs and collateral calls, not to mention the aftermath of the MF Global insolvency, the world financial syndicate will have no choice but to increase gross notional even more, even as the market value continues to get ever lower, thus sparking the risk of the mother of all margin calls: a veritable credit fission reaction.

But no matter what: the important thing to remember is that "they are all hedged" - or so they say, a claim we made a completely mockery of a few weeks back. So ex-sarcasm, the now parabolic increase in derivatives means that when the bilateral netting chain is once again broken, and it will be (because AIG was not a one off event), there will simply be trillions more in derivatives that no longer generate a booked cash flow stream for the remaining counterparty, until at the very end, the whole inverted credit0money pyramid collapses in on itself.

And for those wondering what the distinction is between notional and

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.

Well, no. It is logical that the BIS will advise everyone to ignore the bigger number and focus on the small one: just like everyone was told to ignore gross exposure and focus on net... until Jefferies had to dump all of its gross PIIGS exposure or stare bankruptcy in the face; so no - the correct thing to say is "gross market values provide a more accurate measure of the scale of financial risk transfer" if one assumes there is no counterparty risk. Because once the whole bilateral netting chain is broken, net becomes gross. And gross market value becomes total notional outstanding. And, to quote Hudson, it's game over.

As for the largely irrelevant gross market value, which is only relevant in as much as it will be the catalyst which will precipitate margin calls on the underlying notionals, all $700+ trillion of them:

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” indicates 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.

And here again, what they ignore to add is that the measure of economic significance is only relevant in as much as the world's banks don't begin a Lehman-MF Global tango of mutual margin call annihilation. In that case, no. They are not measures of anything except for what some banks plug into some models to spit out a favorable EPS treatment at the end of the quarter.

Expect to see gross market value declines persisting even as the now parabolic increase in total notional persists. At this rate we would not be surprised to see one quadrillion in OTC derivatives by the middle of next year.

And, once again for those confused, the fact that notional had to increase so epically as market value tumbled most likely means that the global derivative pyramid scheme (no pun intended) is almost over.

Source: OTC derivatives market activity in the first half of 2011 and Semiannual OTC derivatives statistics at end-June 2011

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dark pools of soros's picture

and all of it backed by one ounce of gold

Atlas_shrugging's picture

Normalcy bias?  What's normalcy bias?

Turd Ferguson's picture

This is incredible! $107T in just the past six months?
It's obvious that they don't even care anymore!
Everyone knows that the whole system will completely fucking explode before any new CDS would have to be paid off so why care? Sell those fuckers like there's no tomorrow because, frankly, there isn't going to be a tomorrow. Get your bonus and party like it's 1999.

flacon's picture

Is $707T greater than the value of all the earth and every thing in it combined? What happens when we hit that point - if we haven't already? We really will need some sort of extra-terresterial cosmic something to add more value to all those imaginary binary digit "money".

Temporalist's picture

In Zimbabwe $707T wouldn't buy you a mousetrap to catch dinner.

JustObserving's picture

We are all Zimbabweans now. Ich bin ein Zimbabwean, if you prefer.  We need a Mugabe ..... never mind.

nope-1004's picture

Like I said before:  When I was a kid, $1 trillion was alot of money.

Today?  Meh .. ~~~

So how do u want your default?  Fast?  Or slow?



strannick's picture

$Is 707T greater than the value of all the earth and every thing in it combined?

Not if paid in USD


markmotive's picture

And the finance bubble keeps expanding. 2008 didn't end it.

According to Steve Keen, the only answer to the inevitible great depression is to write down all debt:


GMadScientist's picture

Only if it actually gets paid!

The core lesson of Greece is defaults are whatever TPTB say (pure Calvin Ball).


$107T? ...just the bellwether of moral hazard.

Manthong's picture

I thought margin calls were voluntary.

Kayman's picture

Zero Reserves, collect the premiums, and stiff-arm the insured. Who wrote this script ?

Oh, and if something goes wrong, get the Gubmint to bail us out, like in 2008.

Oh, gee, Gubmints broke too.....

What's plan C ?

MeelionDollerBogus's picture

oh, I got this one

So how do u want your default?  Fast?  Or slow?

at a medium pace!

trav7777's picture

Cmon Tyler, that's the credit growth the system needs, right there in synthetic debt spun from nowhere.

the consumer sector sure isn't levering, so they have to pile fantasy debts atop everything to keep the numbers churning.

People lost sight of the fact that since the 2000 bubble burst, the only way to grow the debt pile, which had increasingly become off-books and in phantom shit was this way.  The 80s started this and the GLB financial bill along with accounting reform act were necessary to ensure the continued growth of this paper system

Coke and Hookers's picture

This is a part of the reason for the unholy alliance between bankers and politicians. Real economies (you know, the part of the economy that creates wealth) stop growing or contract. That's not good because hardship pisses people off and politicians get voted out. The solution is either to reverse globalism & outsourcing (not fucking way!) or falsify all the economies. Bankers come to the rescue and create a huge debt bubble to fake economic growth and prosperity. As a reward for their trouble their huge derivatives engine acts as a gigantic real-wealth transfer mechanism sucking people's posessions into the banks. Politicians are now dependent upon banks and take orders from them. Bankers now control the USA and the EU throught this deal. If bankers need to find new territitories for new bubbles or neutralize pesky goldmongers like Gaddafi they tell their politicians/bitches to mobilize NATO. Politicians create united front against the people to defend their bank handlers and we turn into slaves with the glorious purpose in life to work to service the debt bubble created by the banks and be sacrificed like cattle if the bankers need to liberate some middle-eastern country.

macholatte's picture

The solution is either to reverse globalism & outsourcing (not fucking way!) or falsify all the economies.

You may have hit the nail, old man. The economies are being falsified, we know that, and will likely end up with "every man/country for himself" will mean the end to the globalism crap. The so called emerging markets will sink back to where they were circa 1950, Europe will have to dig itself out of the Euro Zone because none of them will want to do it again, the USA will have to go into isolation and hunker down and re-learn what manufacturing real stuff is all about, the ME will have its one last huge war, Russia & China will gasp for air and will want to stay out of any conflicts.


 It is pretty obvious that the debasement of the human mind caused by a constant flow of fraudulent advertising is no trivial thing. There is more than one way to conquer a country.
Raymond Chandler

Lord Koos's picture

It'll be hard for the US to get manufacturing to scale that was in say, 1970... no cheap oil this time around.  

Reformed Sheep's picture

The labor costs are probably comparable, tho...

GMadScientist's picture

a) Try 1850.

b) Russia takes a chunk out of Europe.

c) China buys the rest for a song.


Silver Kiwi's picture

New Zealand has just reelected John Key as our Prime Minister with a mandate to sell all the countries state owned assets to raise NZD$4b to pay down part of our debt. Jonkey is old school bankster through & through. From his own website  http://www.johnkey.co.nz/pages/bio.html   

"John launched his investment banking career in New Zealand in the mid 80s. After 10 years in the New Zealand market he headed offshore, working in Singapore, London and Sydney for US investment banking giant Merrill Lynch. During that time he was in charge of a number of business units including global foreign exchange and European bond and derivative trading. In 1999 John was invited to join the Foreign Exchange Committee of the Federal Reserve Bank of NY and on two occasions undertook management studies at Harvard University in Boston.  "

I thought us kiwi's were 'safe' down here out of the way. Unfortunately we're about to be fucked just like the rest of the planet...



gangland's picture

end neoliberalism before hard fascism becomes inveitable and deeply entrenched. all of this is neoliberalism.





Sean7k's picture

Too late. Fascism was becoming entrenched in 1942. Now, we are used to it.

MolotovCockhead's picture

Kiwi are flightless birds. You let loose a snake among your midst? Worst you make him the head kahuna!! Sorry for those gullible kiwis, they are destine for extinction

Tompooz's picture

@silver kiwi. You might also have mentioned that a certain David Farrar, a figure behind the scenes of Key's National party, takes credit for having mentored John Key and introduced him to his subsequent political career.

Frankly, I don't know if it isn't better to elect a bankster openly, than to see one take power through a coup d'etat or a forced resignation..

Or.. have the banksters install a teleprompter puppet.

Pegasus Muse's picture

It is time to go Mauri Warrior on his John Key's ass.  Same same for other banskter scum:


There was a time, not so long ago, when the New Zealand's First Inhabitants considered honkey white meat a delicacy.

Fozzy Slippers's picture

NZ is the Brit Empire. Owned by the crown. Key is part of the illminati Joo banker system. Fact he is a Joo. He does what the Queen tells him to do. Just like that ass eater Harper.

No Brainer

DavidAKZ's picture

Banking occupation. Here in Oz Labour government trying to erradicate (low) public sector debt by 2013. THe irony is, they have 10 years of conservative party rule to thank for that !

Tao 4 the Show's picture

"that's the credit growth the system needs"

At more than 20% per annum (based on the past 6 months of data), it would seem like a bit more than what is "needed" from the perspective of various growth rates around the world.

Let's see, 20% puts planet earth somewhere between Italy and Greece on the defaulting curve.

CPL's picture

Ta da!!!  For my next magic trick of math....

- Any of TPTB


Good thing nobody has noticed what England is doing yet.  Might mean they end up put into the Junk box with Hungary.

BurningFuld's picture

So, you always like to get down to the bottom of this shit. Like who are the people truly getting screwed by this. Well it is anyone that is trading their hard work or natural resources for all the funny money being created by this giant ponzi. That is the insane amount of money being "loaned" into existence by this scheme. So the people really in the end who are getting screwed are the people in the third world countries that have worked their ass off for over a decade now that will end up with zero for all their effort and the countries trading their oil and minerals will end up with zero. Never kid yourselves boys and girls the big big benefactor here is the good old USA!

Gold standard anyone?  Be careful what you wish for.

RiverRoad's picture

Re "trav7777" 11/26/11 @ 22:43:   You are quite correct that this derivitives mess started in the '80's:  I distinctly recall reading at least one article in the MSM, after the precipitous plunge in the markets in the Crash of "87, that "derivitives" had played a large role there, however little was offered in regard to an explanation of the concept at the time.  Shortly after that crash I came across the word again in several Vanguard funds prospectuses referring to the fact that they would not be using derivitives in the operation of the funds; no definition of the term was provided. Then the word itself virtually disappeared from print for the next couple of decades..... 

Caviar Emptor's picture

No but in Zimbabwe $707T could buy you one very skinny hooker

trav7777's picture

stop trying to impose your culture on them, you rayciss

OldPhart's picture

"Some of those victims are too young to walk, much less protect themselves."

Tough to find a virgin in Zimbobwe

CPL's picture

Both boys and girls, not just girls, the folklore extends to both sexes.  All that counts is a virgin is used.

Kayman's picture


Honest politician myth...the more you screw the middle class, the more likely criminal bankers will return your tiny little soul...

sessinpo's picture

That $707T is based upon the fake currency reserve of the us dollar and not tye  Zimbabwe dollar . It is Zimbabwe dollars that won't buy you a mousetrap to catch dinner.. The overall lesson is that all fiat currency backed by nothing are doomed.

In Fed We Trust's picture

Now the only thing you need to know about derevatives is that they have legal precedent over stock and bond holders.

I littlte not so mentioned fact. So that said, which domino's are still on tge table? Tyler?

And the pot goes too...........JPMorgan!!!

ozziindaus's picture

In the end, it doesn't matter to them how much they nominally have but rather how much more than you they have. It's all about percentages. 

midtowng's picture

Good point. How do you hedge $707 Trillion when everything in the world doesnt' equal that? It's mathematically impossible.

SOMETHING has to be unhedged.

margaris's picture

We are surface dwellers, and we do surface business.

If you could count all gold, silver, iron, copper, diamonds etc that is INSIDE the earth at great depth (>50 miles and deeper)....

you might get a number that is far higher than just XXX trillions. Might not even be expressed in septillions.

Its just freaking impossible to mine the shit that is down there.

CPL's picture

Don't know why you got junked for stating a fact.


We can dig a hole that deep, it's just the people going down them don't come back out of them.  Between the pressure and heat, a human cooks to medium-well in under 15 minutes.