[OPE-L] The growing global market for derivatives and swaps

From: Jurriaan Bendien (adsl675281@TISCALI.NL)
Date: Sun Oct 08 2006 - 07:28:36 EDT

(Thought I would crosspost this item by Marvin Gandall from PEN-L)

The International Swaps and Derivatives Association reported last month that
the outstanding nominal value of swaps and derivatives at the end of June
was $283 trillion - nearly ten times the combined GDP of the US, Canada, EU,
Japan, and China or of US home equity, each valued at about $34 trillion.

According to Standard & Poor's, world stock market capitalization is about
$41 trillion.

Of total swaps and derivatives, $26 trillion was in the fastest growing
area, credit default swaps. This represents about the same amount as the
total outstanding bond debt in the US, and about five times as much as the
underlying corporate debt ($5 trillion) on which the default swaps are
based. There is about $5 trillion outstanding in equity derivatives, which
like default swaps, are also a rapidly growing market.

These complex financial instruments which are used to hedge or speculate on
the lending and borrowing of money are mostly traded privately by hedge
funds and private equity firms outside exchanges and are therefore
unregulated - a persistent source of worry to central bankers and investors.
In particular, they're worried about the exposure the big banks have to the
private buyout firms and to hedge funds like Amaranth - or even how to
measure bank exposure because the value of the collateral they hold and the
assets held by the funds to meet margin calls are so opaque.

In general, the system's overseers feel the spreading of risk through
derivatives has cushioned it against relatively small and isolated failures
like Amaranth, but that the massive new financial architecture hasn't been
tested by a generalized financial crisis, which they fear would be
accelerated by the cascading collapse of highly-leveraged hedge funds. So
far the tightening of credit in the US, Europe, and elsewhere hasn't
noticably increased default levels. It should also be noted that while the
total values are astronomical, investors such as banks and hedge funds have
offsetting exposures, so the level of risk is less than the totals would

The September 21st Economist ("In the shadows of debt") and the September
23rd New York Times ("What's a Couple of Hundred Trillion When You're
Talking Derivatives?") has more information.

(See also http://www.isda.org/ which provides data from 1995)

This archive was generated by hypermail 2.1.5 : Tue Oct 31 2006 - 00:00:03 EST