Derivatives: Darth Vader's Revenge
An SI Board Since August 1998
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Emcee:  Worswick Type:  Unmoderated
According to informed sources as of March of this year the Long TErm Credit Bank of Japan had approximately 50 trillion yen of derivative contracts $725 billion dollars as of the exhcange yen/dollar currency rates of August, 1998.

Now that LTCB is finally acknowledged to be broke what has happened to this exposure? Has $725 billion dollars gone to money heaven?

One worries.

What does this portend for our own banks where all derivative contracts appear to be cross linked?

Is the global financial system about to be swamped with between $100 trillion and $500 trillion in unresolvable derivative contracts?

Where does one hide in this scenario?

According to the Federal Reserve Bank of New York...."activities in the 1996 annual reports of a sample of the largest, internationally active banks and securities firms in the G-10 countries, and notes improvements since 1993. The analysis builds, in part, upon a framework used by the Federal Reserve in analyzing the trading and derivatives disclosures of major U.S. banking organizations.

In total, 79 major banks and securities firms in the G-10 countries comprised the sample reviewed for the 1993-1996 period, representing over $14 trillion in total assets and over $83 trillion in notional amounts of derivative instruments. Disclosures in the 1995 and 1996 annual reports of a major securities firm in Hong Kong were also reviewed.

The analysis revealed that there have been general improvements as well as voluntary innovations in the annual report disclosures of a number of the surveyed firms. In particular, there were notable improvements in quantitative disclosures about market risk in 1996 and 1995. However, despite encouraging advances in disclosure practices by a number of institutions in the G-10 countries, many institutions continued to disclose very little about their trading and derivatives activities".

Please See:

...for the full text of the 37 page report and the abstract.

Personally, I am worried about this.

I am surprised that a discussion of one of the most pressing questions of our time.... has not been addressed sooner.

Thanks for your consideration and, I hope, interest.

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