I'm trying to make sense of this BIS September report, so, please bear with me and my ramblings.
Toni, from Prudent Investor had this wonderful piece about the size of the derivatives markets, which for December 2007 stood at $596 trillion --what an alarming figure!
It's important to understand that these are notional values, which are leveraged with good faith deposits of around 1.25%, or $7.2 trillion for each side of the trade.
Trouble is, that the 4 to 7% daily movements that we have been experiencing lately in the underlying stock markets, send shocks of 3.2 to 5.6 times their derivative stakes in one day! Worse, CDS involved in debt defaults, which are occurring at a brisk pace, represent much larger payouts, in the order of 833 times!
Now, if you've been paying attention, the above $596 trillion are the more shadowy counterparty OTC derivatives, which do not include an additional $84.3 trillion from the less riskier exchange traded derivatives (from page A108 Table 23A).
Another salient issue is that the interest rate derivatives are the heaviest item weighing in the derivative's total, with $393 trillion outstanding notional value, and a net trade stake of $3.6 trillion by the end of last year.
Courtesy of Economagic
If (the short term) Libor violent movements are a reflection of the interest rate sector derivatives, with an enormous 170% rate increase during the last month or so, then, holder's of interest rate derivatives are making a 136 (170 / 1.25) times profit or loss --depending on the holder's side of the trade, which if outstanding deposit volumes had unwound an estimated 50% to $1.8 trillion by September, would represent a $244 trillion payout to clear these trades (= 136 x $1.8 trillion).
Of course I'm thinking out loud. But, the above figures are reasonable. If these numbers are close to reality, then, someone has been either clearing their positions out of $200 trillion or so, has gotten horrible margin calls, or is praying to all gods and the devil that these rates come down while holding to what can only be called staggering unrealized losses!
In any case, it's definitely a mess out there.
Update October 24:
Ok, so $244 trillion is too much. On a spike in voltage, breakers should go off. Since we can't tell where these stop limits or margin calls are, let's suppose an average stop at 10%. Then, losses would be in a more sanish $14.4 trillion (= $1.8 trillion x 10 / 1.25), which is quite distressing anyhow.