Total Outstanding Notional Value of OTC Derivatives Tops $700 Trillion (BIS, 6/30/2011)

Total Notion Amounts Outstanding of OTC Derivatives
(Source: BIS, click for OTC FX Derivatives chart as well)
In November, the Bank for International Settlements reported that the total notional amounts outstanding of OTC derivatives stood at $707.569 trillion at the end of June 2011, up 17.7% from $601.046 trillion at the end of December 2010. Read the full report here: OTC derivatives market activity in the first half of 2011. Of this total, $441.615 trillion were interest rate swap contracts, up 21.2% from $364.377 trillion at the end of 2010. At the end of June, the total gross market value of OTC derivatives outstanding was $19.518 trillion, down from $21.296 trillion at the end of 2010.

More from BIS:

"Key developments in the first half of 2011:

*After an increase of only 3% in the second half of 2010, total notional amounts outstanding of over-the-counter (OTC) derivatives rose by 18% in the first half of 2011, reaching $708 trillion by the end of June 2011. Notional amounts outstanding of credit default swaps (CDS) grew by 8%, while outstanding equity-linked contracts went up by 21%.

*Gross market value of all OTC contracts declined by 8%, driven mainly by the 10% reduction in the market value of interest rate contracts. CDS market values were almost unchanged.

*Overall gross credit exposure dropped by a further 15% to $3.0 trillion, compared with a 3% decrease in the second half of 2010."

OTC derivatives are off-exchange trades, or "customized, bilateral agreements", that allow a customer (hedge fund, bank etc.) to off-load credit or interest rate risk to a dealer (broker-dealer, bank or insurance company like AIG) for a fee. And then these dealers off-load the risk over and over again, which increases the "notional value" of contracts outstanding. Read this post by Washington's Blog at Derivatives Ownership Even More Concentrated Than Ever (by the top 5 banks). So, will another financial crisis affect the $700 trillion of derivatives outstanding? The sovereign debt crisis in Europe is already having an affect on sovereign CDS exposure (Greece could see a hard default in Q1 2012 - Bob Janjuah of Nomura). And if there is no backstop, distressed banks holding sovereign debt and CDS counterparties exposed to bank debt could also be affected! But, what will happen to counterparties on the wrong side of interest rate swap trades if, or when, interest rates spike in the U.S. and Japan?

FYI, @BIS_org just linked to this release on Twitter. Kind of interesting.
"From June 2011, the BIS credit derivatives statistics provide more granular information on the types of risks transferred through credit default swaps by different groups of counterparties. The new data suggest that reporting dealers have used some hard-to-value credit derivatives to transfer credit risk to shadow banks, possibly exposing these counterparty groups to valuation risks. The data also show that some financial counterparties have sold protection against defaults in the same sector on a net basis." (source:

I'm going to write about the corporate bond market next, which appears to be stuck in the 1800s. It changed for the worse back in the 1940s when exchange traded bonds were transferred to the illiquid, non-transparent OTC market, for whatever reason. They appear to be making a big comeback though. Developing...

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