Global derivatives market reaches $710 trillion

Since the United States was held hostage during the tumultuous financial crisis a few years ago, Wall Street’s biggest financial institutions have gotten bigger. Over the past five years, the six largest U.S. banks’ assets have grown 37 percent with total assets nearing $15 trillion: Goldman Sachs, Morgan Stanley, Wells Fargo, Citigroup, Bank of America and JPMorgan Chase maintain two-thirds while close to 7,000 banks hold one-third of assets.

Not only are the nation’s largest banks performing quite well, the total number of U.S. banks has declined to a record low. According to the Wall Street Journal, there were more than 18,000 financial institutions in 1985 and now that number has dipped to below 7,000 for the very first time since the federal government kept track of the amount of banks since the Great Depression.

More banks are continuing to shut down. By the third quarter of 2013, the number of U.S. bank branches decreased by 390 and it is estimated that the total amount of bank branches in the country could diminish by as much as 40 percent over the next decade.

In addition, the number of active banks continues to drop. Figures published by the Federal Deposit Insurance Corporation (FDIC) show that the total number of bank branches in the U.S. has fallen by 3.2 percent between 2009 and 2013.

Why are these important statistics to iterate? This month, the Bank for International Settlements (BIS) announced that the OTC derivatives market continues to expand as it has become a $710 trillion business, up from $693 trillion last summer and $633 trillion at the end of 2012.

“Even as notional amounts rose, the gross market value of outstanding OTC derivatives declined to $19 trillion at end-2013, from $20 trillion at end-June 2013 and $25 trillion at end-2012. The decline was driven by interest rate derivatives and, in particular, by a narrowing between market interest rates on the reporting date and the rates prevailing at the inception of the contracts,” the BIS said in a statement.

“In credit default swap (CDS) markets, central clearing and netting made further inroads. Contracts with central counterparties accounted for 26 percent of notional CDS outstanding at end-2013. Bilateral netting agreements reduced the net market value of outstanding CDS contracts, which provide a measure of exposure to counterparty credit risk, to 21 percent of their gross market value.”

Office of the Comptroller of the Currency (OCC) has published a detailed list of how the top 25 banks in the U.S. have been exposed to close to a quarter of quadrillion dollars of derivatives, but four banks control a substantial majority of it (in order of derivative exposure):

JPMorgan Chase

Total Assets: $1,945,467,000,000

Total Exposure to Derivatives: $70,088,625,000,000


Total Assets: $1,346,747,000,000

Total Exposure to Derivatives: $62,247,698,000,000

Goldman Sachs

Total Assets: $105,616,000,000

Total Exposure to Derivatives: $48,611,684,000,000

Bank Of America

Total Assets: $1,433,716,000,000

Total Exposure to Derivatives: $38,850,900,000,000

According to Investopedia, a derivative is defined as:

“A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.”

Speaking in an interview with King World News, David Stockman, former Reagan budget director and bestselling author of “The Great Deformation,” warned the derivative market threatens the global economy. He noted that no one realizes how bad it has become and how the whole bubble will pop and “unravel” the marketplace.

“All those positions have been put on over a period of years, or even decades, in which the price of bonds has been rising steadily for the last 30 years.  But I think we’ve reached the end of that long 32-year interest rate cycle,” explained Stockman earlier this year. “We are in the turning zone and rates are going to revert to more normal levels over time, and that’s going to fundamentally change the valuation of all of those massive positions ($500 trillion worth) that have been put on.  I don’t think anyone has any idea how that will unfold, unravel, and dislocate, but I don’t think it’s neutral.”

Financial expert Michael Snyder has written if interest rates remain where they are, the stock market continues to soar and the international economy doesn’t undergo a collapse then the derivatives bubble could last for a long period of time. However, if the opposite takes place, then the aforementioned banks could plunge into insolvency and fail all at the same time.

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