YouTube – Interest Rate Derivatives Beast Part 1

YouTube – Interest Rate Derivatives Beast Part 2

We examine the Interest Rate Swaps Derivatives Beast, the $180 trillion monster that is at the heart of the entire collapse of our financial systems.Here is some of the raw data used in my presentation:

Interest rate swap – Wikipedia, the free encyclopedia:


Being OTC instruments interest rate swaps can come in a huge number of varieties and can be structured to meet the specific needs of the counterparties. By far the most common are fixed-for-fixed, fixed-for-floating or floating-for-floating. The legs of the swap can be in the same currency or in different currencies. (A single-currency fixed-for-fixed rate swap is generally not possible; since the entire cash-flow stream can be predicted at the outset there would be no reason to maintain a swap contract as the two parties could just settle for the difference between the present values of the two fixed streams; the only exceptions would be where the notional amount on one leg is uncertain or other esoteric uncertainty is introduced).


1995 report Office Comptroller of the Currency


The notional amount of derivatives in commercial bank portfolios decreased by $778 billion in the fourth quarter to $16.86 trillion. (This figure excludes spot foreign exchange contracts, which decreased by $299 billion to $305 billion as of December 31, 1995.) Although notional amounts have increased steadily over the last few years, this quarter’s slight decline is consistent with a pattern of stabilizing or declining notional amounts that have been present in previous fourth quarter numbers.

During the fourth quarter, the notional amount of interest rate contracts fell by $234 billion, to $11.10 trillion. Foreign exchange contracts fell by $555 billion, to $5.39 trillion, while commodity and equity contracts grew by $12 billion, to $378 billion. The number of commercial banks holding derivatives decreased by 37 in the fourth quarter to 558. [See Tables 12, and 3.]

Off-balance sheet derivatives are concentrated in the largest banks. Nine commercial banks account for 94 percent of the total notional amount of derivatives in the banking system, with 9 percent accounted for by the top 25 banks (these figures include spot foreign exchange). For the years 1991 through 1994, the concentration of derivatives in the top nine banks was 86 percent, 91 percent, 91 percent, and 92 percent respectively. [See Table 3 for concentrations excluding spot foreign exchange.]

Approximately 66 percent of the notional amount of derivative positions were comprised of interest rate contracts with an additional 32 percent represented by foreign exchange contracts. Commodity and equity contracts were only 2 percent of the total notional amount. The composition of contract types remains relatively unchanged since 1991. [See Table 3.]


Over-the-counter (OTC) and exchange-traded contracts comprised 86 percent and 14 percent, respectively, of the notional holdings as of fourth quarter, which is virtually the same as third quarter. OTC contracts tend to be more popular with banks and bank customers due to the flexibility in tailoring them to meet risk management needs. However, OTC contracts tend to be less liquid than exchange-traded contracts, which are standardized and fungible. [See Table 3.]

The notional values of short-term contracts (i.e., with remaining maturities of less than one year) are down $829 billion, or 9.1 percent from third quarter, to $8.27 trillion. Medium-term contracts (i.e., remaining maturities of one to five years) increased by $53 billion, or 1.5 percent, to $3.59 trillion, and long-term contracts (i.e., maturities of five or more years) increased by $62 billion, or 7.6 percent, to $876 billion. [See Tables 1011, and 12.]


In 1990, interest rate derivatives were less than $4 trillion.  By 1998, it was almost $24 trillion.



The 2004 survey took place during a period of heightened interest in foreign exchange as a separate asset class. A return to steadier trends and higher volatility led to increased volumes largely due to momentum trading by investors. In addition, a widening of interest rate differentials encouraged growth in the so-called “carry trade,” where investors finance positions in high yielding currencies by borrowing in low yielding currencies. The growth in the number and variety of electronic trading alternatives available to market participants also contributed to the increase in reported turnover as they reduced trading costs and other barriers to entry while enhancing pricing transparency. This in turn led to an increase in the number of leveraged accounts, commodity trading advisors (CTAs), and currency overlay managers focusing on foreign exchange as an asset class, many of which regularly engage in high volume programmed and algorithmic trading strategies.







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  1. if

    The Fed also purchased $7 billion on Tuesday. Professor Fil Zucchi on Minyanville had this succinct comment:

    “Today the Federal Reserve printed $7 billion dollars and used it to buy an equivalent amount of 7 and 10 year Treasury bonds. As I publicly asked before, if Mr. Fed can’t rig the price of an asset by buying it with printed money, why should anyone else buy it?”

    Those wishing to keep an eye on these price rigging attempts can follow the Federal Reserve Bank Permanent OMOs: Treasury link.

    Bernanke’s Hubris

    It is ridiculous for the Fed to think it can control the vast $trillion treasury market with pea shooting efforts at $7 billion a pea. However, as the charts above show, the Fed announcement hugely distorted the market in smaller timeframes.

    As Prof. Zucchi says “If Mr. Fed can’t rig the price of an asset by buying it with printed money, why else should anyone else buy it?”

    Other than the initial pop, the Fed’s silly attempt to game the system may have caused so much mistrust that it is putting upward pressure on yields.

    What we do know for sure is that Bernanke’s efforts to prevent deflation have failed spectacularly as documented in Bernanke’s Deflation Preventing Scorecard.

  2. Timothy

    Are you saying HSBC is in trouble?

    that would really bring the dampener to the Asian decoupling story

  3. David

    Enjoyed the videos….learned a little more about derivitaves….con men using computers to create frantic market activity, all the while knowing that the markets must eventually crash, but hoping to skim huge amounts of wealth while the bubble exists…and creating and using derivative bets to assure investors that all is well, but hockey stick proves otherwise….what goes up so sharply must crash quickly and sharply, but Obama co. advisors want to ease us down slowly, but the gnomes still want to keep shooting the hockey stick, like the tower of Babel, higher and higher into heaven itself.
    Video looking great….loved the lighting and your skin tone in these…you’re an absolute hottie. Video background looks good and interesting….fits your personality.

  4. Is malware impacting your quality of life? Think it might be time to reboot the system? Google “Want REAL CHANGE in the Federal Government NOW?” to find out how to press Ctrl-Alt-Delete without causing bloodshed.

  5. One can only hope that efforts to inform those interested of the nature and scale of things like interest-rate derivatives, and others of the financial exotica developed under the rubric of financial innovation, will lead to some proper protection-type measures to ease the financial burden on average Americans as we approach the down-low.
    Let them what dealt it, eat it.
    My only word of caution in the dialogue about Lincoln creating currency, and in setting up the OCC, has to do with the comment that went something like – “we all know what happened during the revolution”.
    Do we?
    What was it?
    Following the best-informed source I can find, which is the Leslie Brock Center for the Study of Colonial Currency at the University of Virginia, it appears there were minor governmental transgressions in the quantity of monies created. But the real hyper-inflation of the Continental during the war was the direct cause of British counterfeiting of the currency on a massive (thousands-times) scale.
    This is also covered in Chapter 16 of Steven Zarlenga’s book, The Lost Science of Money.
    As a monetary reformist I often hear of the plague of government excess in managing the monetary system, almost exclusively wrong-headed repetition of propaganda on failure of government.
    I was hoping that I hadn’t heard it repeated in the otherwise valuable piece you have put together.

  6. emsnews

    I should talk about the Revolutionary war more. The point is, it is easier to degrade paper via counterfeiting than to degrade metals even though degrading metals has been done by both governments and outsiders since about 4,000 years ago.
    About the video: I am still struggling to figure out things. The music is for covering up annoying sounds but it came out DIFFERENT in the You Tube rendition compared to on my computer. This is because I am using iMovie.
    I have to buy the Pro version which costs a little over $100 but donations have dried up due to the very bad economy. On the other hand, I plan to make a DVD and T shirt offer in about two months for fundraising purposes. I do appreciate all the great help I got in the past.
    Making videos, by the way, is lots of fun once I get over natural confusion and insecurities because finding a format to use each time is unsettling, to say the least.

  7. This isn’t about the Derivatives beast but may be China’s plan to protect itself from it:{DFCB68AC-8BC2-4359-A1CA-76542EAFBA1E},/a href>


    This article is substantially in alignment with Elaine’s reporting of the Chinese 50-year plan, but it looks like “They be bank” 15 years early. The writer reports that China intends to make Shanghai a world financial centre by 2020.

    And what will London and Manhattan be? Slums. HAHAHAHAHAHAHAHAHAH

  9. David, shooting the hockey stick (yes, this has a sexual connotation) gives the gnomes excitement and power.

  10. the fool on the hill

    The fuzzy monster made me laugh. I don’t laugh much anymore. Life got away from me somehow.
    But your description of the graph relative to the environment and population has some pretty disturbing connotations.
    Personally, I’m ready to get on with it. I can’t see that I am doing anyone much good here anyway. But I tried to be good.

  11. Martin

    Elaine, is the background music necessary – you’ve mad a lot of progress with your videos and that’s about the only point that still irritates me.

    I’m not sure if you really need ‘pro’ software for this kind of video. What exactly can’t you do with your version of iMovie?

  12. I prefer this particular site very much, It’s a new real nice spot to examine as well as incur info .

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