Tuesday, November 17, 2015

$10 Trillion in Risky Derivatives?

We have fully covered the warnings that have been issued by those both inside and outside the system with regard to risky derivatives that still reside on balance sheets around the world. So how much risk is out there? According to Senator Elizabeth Warren in this Bloomberg article, the number is $10 Trillion. Below are some quotes from the article.


"Two of Congress’s leading Wall Street critics have tried to put a price tag on one of the finance industry’s biggest wins in Washington in recent years, claiming that the 2014 rollback of a controversial swaps measure has allowed banks to keep $10 trillion of risky trades on their books.
Senator Elizabeth Warren and Representative Elijah Cummings based their calculation on letters from financial regulators that detailed the impact of the revision to the Dodd-Frank Act. While the two Democratic lawmakers failed to keep the change out of must-pass spending legislation at the end of 2014, they’re using their estimate to try to prevent the Republican-led Congress from giving banks similar relief this year.
In letters to the Securities and Exchange Commission and the Commodity Futures Trading Commission Warren and Cummings called on the agencies to counteract the legislative rollbacks as they complete rulemaking under Dodd-Frank, the law passed five years ago in response to the 2008 financial crisis. In a separate letter, they called on the Government Accountability Office to investigate the impact of last year’s reversal of a provision requiring banks to separate swaps trading from deposit-taking units."

. . . . . . .

"Banks have argued that those notional derivatives numbers, which represent the face value of transactions, overstate the actual risk to lenders. In a letter this year to Warren, Bank of America said the number “fails to account for how credit risk is managed and mitigated."

My added comments:  Whenever you have politicians involved you never know if they numbers they throw out are realistic or done for political impact. In this case we know there are huge amounts of derivatives out there in the system. The argument is over how risky they really are. The banks say the risk is overstated. Critics say the risk is real. What we do know is that if an entity fails that is a counterparty to large derivatives contracts, the full value of the derivatives come into play. So the real question is how likely is it that a big entity holding large derivative contracts will fail?


  1. Didn't Jim Sinclair say derivatives are over 1 quadrillion?

  2. I think Jim is talking about the notional value of all global derivatives as repoted by the Bank for International Settlements. Sen Warren is likely just talking about a subset of the total derivatives.