In the first 6 months of 2011, the total outstanding notional [amount] 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.
10 Replies to “$707,568,901,000,000: How (And Why) Banks Increased Total Outstanding Derivatives By A Record $107 Trillion In 6 Months | ZeroHedge”
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O.K. I’m a novice at this.
What would cause the $708 trillion in derivatives to unravel? How likely it to occur and when might this to occur?
I am interested & any help would be most appreciated.
It would require the default of a major bank. When is more difficult — it would have to be systemic, where government cannot afford to bail out the collapsing bank. Otherwise like Dexia, the collapse would prompt a govt. bailout.
Notional is an adjective and you are using it as a noun. Please define your use. Are you saying the amount is imaginary or the source or what?
“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”
You still have not defined notional. According to investopedia:”The total value of a leveraged position’s assets. This term is commonly used in the options, futures and currency markets because a very small amount of invested money can control a large position and have a large consequence for the trade”.
This definition does not make sense with your usage. I still have no idea what you are writing about.
How does “notional over the counter (read unregulated)” jive with the definition given?
Are you making up your own word usage?
Am I the only one that has no idea what you are talking about?
Read more: http://www.investopedia.com/terms/n/notionalvalue.asp#ixzz1fDATNtho
Steve, I suggest you go to the original article at ZeroHedge.
Seeing S&P downgrading US banks last night indicates that all is not well with US banks.
http://www.bbc.co.uk/news/business-15955173
2 Chinese banks were upgraded at the same time so we are moving closer to the Yuan becoming our reserve currency.
why does the comment box delete what I just typed in ??
Your comment was published.
The 700 trillion is like the amount of water in the sea – there’s a lot of it, but the likelihood of all of it jumping into your bathtub at the same time is very low.
The notional referred to is the simple measure of how much OTC Derivatives business has been done, and is still active. For instance, if a global firm like Google were to use an OTC Interest Rate Swap to change their interest payments on a loan from variable to fixed, on a total borrowing of $100m, the notional involved is counted towards the 700 trillion, in this case an additional $100m BUT the loan that Google took out, remains where it is, there isn’t a movement of $100m, just that Google used a rate swap to fix the interest they pay on the loan.
So counting all the OTC trades which are done, means counting the notional amounts of the various types of contract – what the number doesn’t tell you at all, is for a given bank, or firm like Google, are their contracts working in their favour (‘in the money’) or not? If you do the maths on the *value* of these OTC contracts and also include a measure of the credit-worthiness of each of your counter parties, you then begin to find who is at risk of a loss. Those numbers are not usually published because they fluctuate a lot, some banks publish a number called Value at Risk, which is a clue.
Best wishes, Bill