"That's 22 trillion!! , even if thats "Notional" it's a mind boggling number. Considering much of it has MBS as it's collateral and considering the "collateral" i.e. Real Estate values are falling, what 15%,20%"
No its only $13.40 trillion but the nominal value got from $8.74 trillion at the end of 2006 to to $13.40 trillion in only a year.
Most are Swaps (on whatever they are) only around $1-4 trillion (cant remember) are exchange traded, the rest is OTC.
The amounts are huge for a little firm. This contract amount is around 2%-2,5% of the estimated total $500-$600 trillion derivatives market of the world.
Counterparties may have all contracts hedged, but by BSC going down some counterparties would have huge open positions due to BSC going in a lengthy and messy BK, until its sorted out. Too much leverage! When the OTC trading due to counterparty risk would ground to a halt, nobody could unwind or hedge his positions any more at reasonable prices, this could be similiar to CDS spreads increasing and hard to trade now. Perhaps due to OTC trading and marking the holdings as level 3 assets, many losses could be still hidden at banks/brokers in derivatives.
Therefore i would consider BSC going down a system risk/system shock to the OTC derivates market and maybe even to the derivatives exchanges.
Neverthelesse even after the BSC rescue, i expect more stress in the derivatives market, due to wild prices swings in underlying equities and volatility exploding, many hedge fonds should be caught on the wrong side coupled with leverage going down, due to hair cut increasing, this is a very fast deleveraging, which could result in a panic to the exits.
The life time of BSC swap contracts (~$10 trillion) is distributed over next 5 years. Some OTC counterparties would only find out in maybe a few month or years, that BSC cant pay them. 2-5 years is a very long time for fast moving market.
At LEH/GS/MER/C i couldnt find a number for the nominal/contract amount of derivatives skimming over the Q10.
Perhaps the number is hidden somewhere in the Q10. All/most brokers have a table with open gain positions in OTC not covered with margin collateral and some table with the counterparty ratings. The numbers are huge for nearly every broker. Everything could be ok or not, the devil is in the details.
Many OTC derivates will be level 3 assets due to price calculated after some models. Most brokers and banks have huge level 3 assets on their balance sheets. |
