Derivatives datapoint of the day

By Felix Salmon
September 28, 2009
OCC -- page 9 of this pdf. Using second-quarter numbers for each year, I looked at the total nominal derivatives exposure of end users -- the people for whom derivatives are meant to exist -- and for dealers.

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Here’s a little table I put together with numbers from the OCC — page 9 of this pdf. Using second-quarter numbers for each year, I looked at the total nominal derivatives exposure of end users — the people for whom derivatives are meant to exist — and for dealers.

The results are pretty startling: while end-users have pared their derivatives exposure to a seven-year low, dealers have increased theirs to yet another all-time high. And as the OCC notes, when we say “dealers”, we really mean four banks in particular: JP Morgan Chase, Goldman Sachs, Bank of America, and Citibank.

Oh, and did I mention? The amounts here are in trillions.

Year End Users Dealers Ratio
2003 2.6 62.4 24.0
2004 2.5 76.9 30.8
2005 2.5 96.2 38.5
2006 2.6 110.1 42.3
2007 2.6 138.1 53.1
2008 2.8 163.9 58.5
2009 2.4 187.6 78.2

What has happened in recent years that derivatives dealers now need $78 in nominal derivatives exposure for every $1 in end-user exposure? When Adair Turner talks about “profitable activities so unlikely to have a social benefit, direct or indirect, that [banks] should voluntarily walk away from them”, this is surely a prime example of what he has in mind.

When the OCC tells us that total derivative notionals are now above $200 trillion, we can’t really help but go blank: the number is so many orders of magnitude divorced from any conceivable reality that it’s almost impossible to work out what it could possibly mean. But clearly that kind of exposure wasn’t necessary a few years ago. So why is it now?

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