Derivatives Bounce Back

by: Tim Iacono

It’s nice to see the derivatives market has bounced back so nicely from the beating it took after playing a major role in causing the financial crisis a few years ago. This item at the Economist helps to explain how there has yet to be much financial market reform and probably won’t ever be, these “weapons of mass destruction” again “cocked and loaded”.

The notional amount of outstanding over-the-counter (OTC) derivatives stood at $601 trillion in December 2010, up from $583 trillion six months earlier, according to the Bank for International Settlements (BIS). That is marginally below December 2009’s figure of $603 trillion, but far lower than the record $684 trillion outstanding in June 2008. Interest-rate contracts, which make up the bulk of the market, reached $465 trillion in December 2010, exceeding their pre-financial-crisis level. While notional amounts are one measure of market size, the BIS says that gross market values, which measure the cost of replacing all existing contracts, more accurately assess the amounts that are actually at risk. The gross market values fell by 13% in the six months to December 2010, to $24.5 trillion….

Well, as long as it’s only $24.5 trillion and not $601 trillion, we’ll probably be OK.