Earlier today, the BIS, which has been doing everything in its power today to defend the 1.27 support in the EURUSD since the market open this morning, released its H1 OTC derivatives presentation update. There was little of material note: total OTC derivatives were virtually unchanged at $639 trillion gross, representing $25 trillion in net outstanding (market value), and $3.7 trillion in gross credit exposure. Here the PhD theorists will say gross is irrelevant because Finance 101 said so, while the market practitioners will point to Lehman, counterparty risk, and less than infinite collateral to fund sudden implosions of weakest links in counterparty chains, and say that it is gross (which until a recent revision of BIS data had been documented at over $1 quadrillion) that mattered, gross which matters, and gross which will always matter until finally everything inevitably collapses in a house of missing deliverable cards. Because not even the most generous sovereigns and central banks can halt the Tsunami once there is a failure of a major OTC Interest Rate swap counterparty. And whereas Basel III had some hopes it would be able to bring down the total notional in derivative notionals slowly over the next few years with a gradual deleveraging across all financial firms, the bankers fought, and the bankers won, because the last thing the current batch of TBTFs can afford it admit there is any hope they can ever slim down. The will... but never voluntarily.
And in tabular form:
Some details from the OTC:
Total notional amounts outstanding of OTC derivatives amounted to $639 trillion at end-June 2012, down 1% from end-2011 (Graph 1, left-hand panel, and Table 1). The appreciation of the US dollar against key currencies between end-2011 and end-June 2012 contributed to the decline by reducing the US dollar value of contracts denominated in euros in particular. The overall decline was driven by interest rate contracts (–2%). Credit derivatives notional amounts also continued to decline (–6%). In contrast, foreign exchange contracts outstanding rose by 5% to $67 trillion.
Gross market values, which measure the cost of replacing existing contracts, dropped by 7% to $25 trillion (Graph 1, right-hand panel). This amounts on average to slightly less than 4% of notional amounts outstanding.
Gross credit exposures, which measure reporting dealers’ exposure after taking account of legally enforceable netting agreements, mirrored the decline in total market values, falling to $3.7 trillion, which represents 14% of the total market value of OTC derivatives. Since the end of 2008, gross credit exposures have tended to move in a narrow band of 14–16% of market values. This compares with a range of 19–24% in the mid-2000s. Gyntelberg and Vause (2012) calculate that about half of dealers’ gross credit exposures are covered by collateral.
Since gross notionals in most categories declined (boring) except for FX, here is the breakdown of what drove this rise:
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