BIS: $601 Trillion OTC Derivatives Are Outstanding (Notional Value As Of December 2010)

Here's a fun fact. According to the Bank for International Settlements, at the end of 2010 the total notional amount of over-the-counter (OTC) derivatives outstanding stood at $601 trillion! The gross market value stood at at 21.1 trillion.

"The notional amount (or notional principal amount or notional value) on a financial instrument is the nominal or face amount that is used to calculate payments made on that instrument. This amount generally does not change hands and is thus referred to as notional." (wikipedia)

Of this amount there were $465 trillion interest rate contracts ($364 trillion interest rate swaps, $51 trillion forward rate agreements, $49 trillion interest rate options), $57 trillion foreign exchange contracts ($28 trillion forwards and forex swaps, $19 trillion currency swaps, $10 trillion options), $29.8 trillion credit default swaps ($18.1 trillion single-name instruments and 11.7 trillion multi-name instruments, $7.4 trillion index products), $5.6 trillion equity-linked contracts ($1.8 trillion forwards and swaps, $3.8 trillion options) and $39 trillion unallocated (????). Is it just me, or does this have black swan written all over it. Hopefully I'm wrong.

If you remember, continuous collateral calls on distressed counterparties (investment banks, insurance companies) that held and sold credit protection on deteriorating subprime CDOs, slowly bled the financial system to death and led to Lehman's bankruptcy (which then hit CDS sellers on Lehman debt).

History: In Unforgiven Margin Call, Bear Funds Failed on Merrill CDOs 1/3/2008, Morgan Stanley, Merrill, Lehman Ratings Cut by S&P 6/2/2008 ("In its last quarterly filing, Merrill said a one-notch downgrade of its credit rating would require it to post an additional $3.2 billion of collateral on over-the-counter derivative trades. Morgan Stanley estimated in a regulatory filing that a single level downgrade would mean posting an extra $973 million. Lehman said a one level downgrade requires about $200 million of additional collateral" BOOM), JPMorgan, Citigroup Helped Doom Lehman, Report Says (Update3)Blood On The Street: JP Morgan Pushed Merrill Lynch Into Bank of America MergerThe AIG Collateral Call Domino EffectBehind Insurer’s Crisis, Blind Eye to a Web of RiskGoldman defends its collateral calls to AIGWho Got Nailed on Lehman's Credit Default Swaps?Goldman admits it had bigger role in AIG deals.

Interest rate swaps used to hedge against higher interest rates have hit municipalities pretty hard recently. I remember reading that Detroit had an unrealized loss of $400 million on IRS contracts (High-risk investments cost Detroit $408 million). Read this report for more info: Big Banks Squeeze Billions in Profits from Public Budgets (

What is preventing this from happening again? All it takes is bad bets on a large scale, right? Also, the lack of transparency in the OTC credit and derivative markets distorted every other market. It looks like things are about to change on that front, but it won't stop margin calls. BIS report from August: Report on OTC derivatives data reporting and aggregation requirements.

2.1 The role of TRs in the implementation of OTC derivatives market reform

As highlighted by the CPSS and IOSCO, measures to enhance market transparency are particularly important for OTC derivatives markets, given their decentralised structure and the still developing state of trading infrastructure.

In addition, the lack of adequate information on OTC derivatives exposures is widely seen as having exacerbated a number of corporate distress situations in the recent crisis, including the demise of Lehman Brothers and the near-default of AIG and Bear Stearns.

At the Pittsburgh meeting of G20 leaders in September 2009 (“Pittsburgh Summit”), G20
leaders agreed that OTC derivatives contracts should be reported to TRs in response to the lack of adequate information available during the crisis. This recommendation was aimed to ensure the collection, maintenance and reporting of comprehensive data for all
OTC derivatives in order “to improve transparency in the derivatives markets, mitigate systemic risk, and protect against market abuse.

TRs are entities that maintain a centralised electronic record or database of OTC derivatives data.
By centralising the collection, storage, and dissemination of data, TRs can play an important function in providing information that supports risk reduction, operational efficiency, and cost savings for both individual entities and the market as a whole. Reporting OTC derivatives data to a TR enables authorities to have accurate information concerning an OTC derivatives contract shortly after it is entered into, as well as information concerning any changes to the contract throughout its existence. In addition, given their centralised role, TRs are in a position to provide information on OTC derivatives markets that could serve to (i) enhance the transparency of information to relevant authorities and the public, (ii) promote financial stability, and (iii) assist in the detection and prevention of market abuse."

Lastly, these over-the-counter derivatives markets are a joke if they can't protect against extreme unforeseeable events and end up destroying the financial system. Hopefully the trillions of derivatives outstanding know what they're doing and are not just assembly lines of fee income for banks like CDOs.


"The Real "Margin" Threat: $600 Trillion In OTC Derivatives, A Multi-Trillion Variation Margin Call, And A Collateral Scramble That Could Send US Treasurys To All Time Records..." (Zero Hedge)

SwapClear Membership Hits 57 With Danske Bank (Futures Magazine)

Rob Daly: OTC Algo Trading? Not Quite Yet (Waters Technology)

Regulators Look To Scrutinize Swaps Data (WSJ)

New OTC Derivatives Rules to Send Data Levels Soaring 400 Percent -Tabb Group (AdvancedTrading)

ISDA's OTC Derivatives Market Analysis Year-end 2010 (ISDA PDF)

Liberalisation push on ‘listed’ derivatives (

Obstacles facing dealers' dream of a global OTC data repository (

EMCF to push into OTC clearing (

LCH.Clearnet at centre of bid battle (

Credit Safest Since ’08 as Clearinghouses Control Swaps (BusinessWeek)