Deutsche Bank had 42 Trillion Euro at end 2016 in Derivatives, 48 Trillion Euro end 2017 https://annualreport.deutsche-bank....xposure/credit-exposure-from-derivatives.html They have cut exposure by a lot in 2018 supposedly, but will have to wait a few weeks to get the 2018 annual report. Here is a image showing DB exposure They are really exposed to a deeper fall in China, European banks are already on shaky grounds about to explode in Spain and Italy, Santander is high risk for DB
https://www.bis.org/statistics/derstats.htm In Q2 2018 OCC's report found, 4 banks on Wall Street had over 90 % of 200 Trillion Derivatives sector in US. Citi had 56.6 Trillion and GS had 59.2 Trillion https://www.trustnodes.com/2018/06/...t-90-200-trillion-derivatives-says-occ-report What are realistically the dangers of this going forward, especially towards the end of a business cycle... Current derivatives with 2018 estimated growth, is easily between 250-300 Trillion
That looking at gross notional of OTC derivatives is silly (netted exposures is what matters). For example, a billion dollars in 2s/5s spread option is much less risk than a 100 million in 30 year interest rates swap. Both interest rate products, so they fall in the same category.
If you wish... Interest rate swaps by the way are OTC Derivatives. OTC derivatives can serve a straightforward role as financial insurance policies covering real business risks. In a hedging scenario, an investor that has exposure to a variable interest rate can transfer the risk to a second investor (the counterparty) by entering into an interest rate swap. A swap is simply an agreement to exchange cash flows. If the interest rate goes up, the second investor pays the difference while the first investor pays the original rate (to the second investor) along with the cost of the swap. Of course, if the second investor becomes insolvent, the original investor is still liable to the lender and will have lost the insurance from risk provided by the second investor as well as any net amount paid to the second investor. Taken in isolation the risks to both investors are limited, but the second investor can offset their risk through a third investor, and so forth, giving rise to a web of interconnected risks. Other types of OTC derivatives include currency exchange rate swaps and forwards, which are essentially non-standard futures contracts, as well as credit default swaps (CDS). OTC derivatives can be used for speculation, as well as hedging. You typed looking at OTC Derivatives is silly, it's net exposure that matters ? I am trying to understand how typing such a thing is even possible. There was over 4 Trillion just in US CDS held by the Top 4 banks last year, with the corporate bond market getting rocked in next recession, looking at 4 Trillion of CDS is silly ? Speculation in OTC derivatives involves no connection to an underlying asset or to a real business risk, but the liabilities and risks they create are real. Under state gaming laws the speculative use of OTC derivatives, such as naked CDS (similar to naked shorts) and synthetic CDOs, was illegal in the US until state gaming laws were preempted by the federal government's Commodity Futures Modernization Act of 2000 (CFMA). Officially, roughly $604.6 trillion in OTC derivative contracts, more than ten times world GDP ($57.53 trillion), hang over the financial world like the sword of Damocles, but to the average investor the derivatives bubble is invisible. From the perspective of those outside the bubble, the explosion of OTC derivatives is a mania. https://www.businessinsider.com/bubble-derivatives-otc-2010-5
If every market actor seeks to hedge their risks in a like manner, the total notional value of all OTC derivatives can grow exponentially. Considering the notional values of existing contracts, speculation clearly represents a substantial portion of all OTC derivatives. As the number and total notional value of OTC derivatives grows, systemic risk increases because more interdependencies, complexity and credit exposure are created, i.e., the systemic impact of a particular party's failure grows, simultaneously becoming less predictable. Rather than distributing risk, it became clear in 2008 that OTC derivatives increased the magnitude of financial system instability and the probability of systemic failure due to the complexity and lack of transparency of the contracts, disproportionate leverage exposure and dependencies on other markets vulnerable to disruptive forces. It also became clear in 2008 that the reasons OTC derivatives promote systemic instability are fundamental.