$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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sessinpo's picture

Keep in mind that whatever fiat currency is used, that is just a way to exchange values of assets (which banks use to their advantage). In other words, what if there were no dollar or pound or lira and just gold. Instead of an ounce of gold being valued at $2000 us dollars, an ounce of gold might be worth so many ounces of copper, or so many hours of labor or so many ......    The point is that the dollar is simply a different way to calculate exchange values and the banks and governments either control or manipulate  those numbers.

virgule's picture

It's mathematically impossible.

=> Not really. Just circular relationships in a Finite Group (http://en.wikipedia.org/wiki/Finite_group). Just like the total money annual turnover is more than the total stock of money, due to velocity of money.

What happens globally is that instead of simply hedging positions, the "Total Group Risk" becomes stirred around the entire Group. Thus everyone becomes exposed to all the risks, via counterparty cause & effect relationships.

gangland's picture

Market observers are watching the current rally closely since it has lasted about 10 days, or about the same as the technical rally starting in late April that gave way to a renewed bear movement.

It’s believed “ability of the rising trend to carry on for several days more would strengthen indications of a definite turn in the main trend of prices.”  Wall Street Journal June 16 1931


If income is to grow, the financial markets … must generate an aggregate demand that, aside from brief intervals, is ever rising. For real aggregate demand to be increasing, … it is necessary that current spending plans, summed over all sectors, be greater than current received income and that some market technique exist by which aggregate spending in excess of aggregate anticipated income can be financed.

It follows that over a period during which economic growth takes place, at least some sectors finance a part of their spending by emitting debt or selling assets. - Minsky 1982


Only a Fisher-Keynes-Minsky vision of the macroeconomy can make sense of this crisis, and the need for a fully fledged Minskian monetary dynamic macroeconomic model is now clearly acute.

there has not been a sustained recovery in economic growth and unemployment since 1970 without an increase in private debt relative to GDP.


Debt-financed growth is also highly unlikely, since the transference of the bubble from one asset class to another that has been the by-product of the Fed’s too-successful rescues in the past means that all private sectors are now debt-saturated: there is no-one in the private sector left to lend to. minsky 1982


Stability—or tranquility—in a world with a cyclical past and capitalist financial institutions is destabilizing - Minsky 1982


the source of the Circuitist conundrums: the stock of money has been confused with the amount of economic activity that money can finance over time. A stock—the initial amount of notes created in this model—has been confused with a flow.


This is possible because the stock money can circulate several times in one year—something that Marx accurately enunciated over a century ago in Volume II of Capital (damned commie!)

In the real world banks extend credit, creating deposits in the process, and look for the reserves later - Moore 1979

loans drive deposits rather than the other way around - Disyatat 2010

The final debt-driven collapse, in which both wages and profitability plunge, gives the LIE to the neoclassical perception that crises are caused by wages being too high, and the solution to the crisis is to reduce wages. (NEOLIBERALISM)


What their blinkered ignorance of the role of the finance sector obscures is that 

the essential class conflict in financial capitalism is not between workers and capitalists, but between financial and industrial capital.

The rising level of debt directly leads to a falling worker share of GDP, while leaving industrial capital’s share unaffected until the final collapse drives it too into oblivion. (END FINANCE CAPITAL DOMINATION)


The macroeconomic performance before the crisis would also fool any economist who ignored the role of the finance sector and the danger of a rising debt to GDP ratio–as indeed neoclassical economists did in the runup to this crisis, when they waxed lyrical about “The Great Moderation”:

    As it turned out, the low-inflation era of the past two decades has seen not only significant improvements in economic growth and productivity but also a marked reduction in economic volatility, both in the United States and abroad, a phenomenon that has been dubbed “the Great Moderation.”

    Recessions have become less frequent and milder, and quarter-to-quarter volatility in output and employment has declined significantly as well.

    The sources of the Great Moderation remain somewhat controversial, but as I have argued elsewhere, there is evidence for the view that improved control of inflation has contributed in important measure to this welcome change in the economy. (Bernanke 2004)


Wages decline BEFORE a deflationary collapse.

Instead of a sign of economic success, the “Great Moderation” was a sign of failure.

It was the lull before the storm of the Great Recession, where the lull was driven by the same force that caused the storm: rising debt relative to GDP in an economy that had become beholden to Ponzi finance.






Sean7k's picture

Nice explanation, I prefer "there's no such thing as a free lunch". Yours is much more impressive, but mine is catchy! :)

RiverRoad's picture

Madoff was the tip of the iceberg.

Kayman's picture

And when the music stops....there is an unknown singularity.

In Fed We Trust's picture

Technically it is illegal to be long and short the same contract. But obvioulsy the big banks can .

Enron sold contracts back and forth between itself to create velocity.

natty light's picture

All assets and labor X 100 years into the future.

Sean7k's picture

That would be us- zerohedge.

mkkby's picture

Not to worry.  The end isn't even close.  Take the value of the world and leverage it 100-200x.  That's where we're going.  And when that happens, the banks can assume they own the whole universe and start leveraging that.  It's just another accounting "adjustment".

Westcoastliberal's picture

So then Krugman was right.

Seriously, what a tragic situation for the Human race.  What utter bullshit. Brooksley Born has to be laughing her ass off!

Maximilien Robespierre's picture

Seriously, what a tragic situation for the Human race


Or, the end of the "Darwinian Cheat"


Fiat Currency is about to come to term with nature.

Taint Boil's picture



Or, the end of the "Darwinian Cheat"

That's a good one - very, very true


scatterbrains's picture

I wish she would speak up and publicly ridicule and humiliate the likes of Rubin and Summers.

VyseLegendaire's picture

Brooksley Born is indeed sharting herself with glee atm. 

Sound of Silence's picture

If and when the parabolic rise crests, the wave crashes and wipes out the system. At that point the $700tr (or however much it rises) becomes meaningless. There will be radical structural change one way or the other, be it be legislative of revolutionary. It will then get better, stay the same or suck. Total uncertainty at that point. Better hedge with physical.

Lord Welligton's picture


Total uncertainty at that point. Better hedge with physical.

Seems to be the only option left.

Can't trust futures markets.

Can't trust hedging instruments (CDS).

Can't rely on segregated client funds.


It is surely game over at this stage.

Just a matter of waiting for the big shoe to drop.

The system cannot be saved.

mayhem_korner's picture

Can't trust hedging instruments (CDS)


Interesting that the CDS facade will come full circle, and that those "hedging instruments" are a failed vehicle for transferring credit risk that should never have arisen if interest rates were not monkey-hammered down.  There'd be a lot less junk debt outstanding and much more compensation for creditors embedded in the original credit terms.

But no!  Let's not lend money at a real price...we'll give it away and rely on the Carnegie-Mellon elites to craft some derivatives to save us all!

What a ruse...

Better hedge with physicals - got that right.  The ultimate hedge against price risk is to be positioned to not care about it.

Lord Welligton's picture

are a failed vehicle for transferring credit risk that should never have arisen if interest rates were no monkey-hammered down.

Yes. Though I interpret it in a slightly different way.

Default risk was taken out of original coupon because it could be "hedged".

Now that CDS are no longer trustworthy yields must rise to account for default risk.

I think you are correct in suggesting that yields were artificially lowered by the creation of CDS.


Michael's picture

Bingo TF. The worldwide credit bubble bust is the big kahuna I've been waiting for.

The Japanese stock and housing bubble bust was the start of my interest in major worldwide bubble busts. I must say I've been thoroughly entertained in the past 30 years with economic calamity porn but the biggest one has been very elusive till now. The self destruct sequence has been initiated with no failsafe.

Michael's picture

New York Times announces breakup of the Eurozone.

"The Royal Bank of Scotland is one of many banks testing its capacity to deal with a euro breakup. “We do lots of stress-test analyses of what happens if the euro breaks apart or if certain things happen, countries expelled from the euro,” said Bruce van Saun, RBS’s group finance director. But, he added: “I don’t want to make it more dramatic than it is.”

Like the Rothschild's have their genius psychologists and psychiatrists probing the mindset of the sheeple on a daily basis.

Banks Build Contingency for Breakup of the Euro


chubbar's picture

Here's a slightly dated article by Rob Kirby explaining how the FEDs are using derivatives to control interest rates. He also had an article on the rapid growth of PM derivatives for the same purpose.


The Big Ching-aso's picture



Beyond incredible.    Galactic in scope.   Unraveling this twine-ball of derivative bullshit is impossible for mere humans much less bankers.

DeadFred's picture

Sorry Turd this is just for the first 6 months of the year, before the market volatility went through the roof, before the people really really believed in sovereign debt problems. Just try to imagine the amount sold in the last half when they had obvious reasons to get insurance.

Sudden Debt's picture

That's indeed a freaking scarry thought man. Shit.... Is all i can say...

Smiddywesson's picture

Yes, we approched the event at what seemed a steady state, but in reality, it is accelerating.  A 15% increase in six months means we are experiencing far more than a 30% increase year over year.  The edge of the cliff is coming up fast and we are making everything increasingly interconnected so the idea of avoiding contaigen is utterly ridiculous.


That $707 trillion is a measure of counterparty risk, and once it reaches such levels, everything is connected and anything will bring it all down.

VyseLegendaire's picture

Contagion. And yup, the percentage rise has gone exponential.  This is an Orlovian black swan event in the making. 

midtowng's picture

Not to worry. I'm sure that all the banks are perfectly hedged.

Michael's picture

OT, but you know they want to cover up the current economic catastrophe with WW3, so this is what will happen if they try;

"Earlier Saturday, another Iranian defense official threatened retaliation against Israel if any of its nuclear or security sites are attacked.

"If Israeli missiles hit one of our nuclear facilities or other vital centers, then they should know that any part of Israeli territory would be target of our missiles, including their nuclear sites,"[Think Damona] General Yadollah Javani of the Revolutionary Guards told ISNA news agency.

"They (Israel) know that we have the capability to do so.""

Iran to hit Turkey if nuclear program targeted by Israel, U.S., general says Threat by senior Revolutionary Guard commander comes after another Iranian general says Tehran would strike Israel's nuclear facilities if it was attacked.


Smiddywesson's picture

Unfortunately, Michael is right, and they will blame the collapse on the war rather than their own actions.  The reset will be hidden within a war nobody wants, like the assassination of some obscure Archduke in Serbia.  All of our assets will be transferred to TPTB and everyone will say, we never saw it coming.

RiverRoad's picture

While we're on the topic of lobbing nukes around the Middle East and/or Europe, has no one in Asia wondered about where the prevailing winds will blow that fallout?  Or why we dropped the bomb on Japan rather than Germany? 

StychoKiller's picture

Look at the timeline of A-bomb development, ya dumb cluck!


BurningFuld's picture

You just need to invent the ultra super hedge to rehedge the hedges. Come on this ain't rocket science.

piceridu's picture

Agreed. At this point it's Monopoly money to these mother fuckers. There down 40-0 with 6 minutes left in the game. Does it really matter if they lose 50 or 100 zip?

Idiocracy's picture

and buy gold with the bonus money.  Cynical salesmen bastards

knight99's picture

the only thing i can say is what can't be paid back won't be paid back. The numbers now are just so ridiculous that it just doesnt matter anymore. Banks will fail net exposure will keep getting bigger causing more banks to fail etc etc. keep gold and do some banking with safe banks who dont have exposure to this bullshit.

living on the edge's picture

Maybe more than an ounce but certainly not 8000 plus tons. 

I now understand why the Senate wants to pass a bill to authorize the use of the military against it's own civilians. This bitch is ready to blow...

ozziindaus's picture

Iraq and Libya could have been as much about gold than it was about oil. Syria has a nice pile too but Iran, well that's another story all together


DosZap's picture

living on the edge

I now understand why the Senate wants to pass a bill to authorize the use of the military against it's own civilians. This bitch is ready to blow...

My two Senators, got a ass chewing from me tonight, and a HEADS up tonight.I give them hell on anything I hate their cronies are up to, and do not like, and tell them what they should do from my perspective.

The Sword cuts both ways. Esp when you know their coming.They are both pretty good Senators, as Senators go, they know me on a first name basis after all these years. IF the SHTF, and they do the pushing first,(for no reason)it will be interesting what the military folks, will do,they took an Oath, and MOST take it damned serious.

They will be civies again, and their families are LIKE US. Someone may be in for a very RUDE ass awakening,and not us.

Westcoastliberal's picture

Right there with you bro; I emailed Feinstein & Boxer for the good it will do.  Maybe this is connected to what Spc Millay up in AK is in the brig for; espionage charge for warning his family to head for the hills 'cause the wheels are coming off and it's about to blow sky high.

john39's picture

All it did was get you guys on a terrorist watch list, like most of us here anyway.

Westcoastliberal's picture

Who give a fuck. Come get me bitchez!

In Fed We Trust's picture

Zero Hedge could gave written a book by now! A slam shut case on rhe banks. But instead he writes 15 pieces a day for 3 years,

Maybe to keep the audience so busy they wont have time to read any books.

living on the edge's picture


I appreciate your trying to talk some sense to the two senators. I can assure you they will not listen nor care to hear what you may have to say. You would be better served to tell them to go fuck themselves.


Kopfjager's picture

Look no further than the usual relationship commanders of JSOC often have with politicians.  

Alexmai's picture

Vote on Nov. 28th: A bill that would define the USA as a battlefield and Citizens as the enemy and would authorize indefinite detention of anyone anywhere WITHOUT trial


SheepleLOVEcheddarbaybiscuits's picture

and total gold mined to date= 9.1Tn


anyone else see a problem there?