Gold and derivatives expert Jim Sinclair has sent subscribers an alert this morning warning on the severity of the global derivatives market, which Sinclair has dubbed the Global Derivative Graveyard Problem.
The IMF, which currently estimates the global derivatives market to be approximately $600 trillion (rather than the true $1.26 QUADRILLION notional), has come out and stated that the entire derivatives market is a WMD time bomb.
From Jim Sinclair:
Here is the recent IMF conclusion on page #47 & #48 on the potential still remaining in the OTC derivative graveyard. This is not from me, but rather from the establishment itself.
The number the IMF is using is way below the huge number of the global problem, and still they conclude that the derivative market is a world class WMD time bomb.
The following is courtesy of CIGA DC browsing on our behalf. This should be a huge concern to any analyst with their eyes open.
TITF – Too Important to Fail Risk
SIFI – Systemically Important Financial Institution Risk
Topology (from the Greek τόπος, “place”, and λόγος, “study”) – A major area of mathematics concerned with the most basic properties of space, such as connectedness. (wikipedia)
A major hallmark of SIFIs is their activity in financial derivatives markets. The analysis of this paper has one clear message. The global derivatives markets in the post Lehman period, despite considerable compression of bilateral positions, are unstable and they can bring about catastrophic failure. Quite simply, a threat of failure to any of the SIFIs is an immediate threat to the others. The network topology where the very high percentage of exposures is concentrated among a few highly interconnected banks implies that they will stand and fall together. This topological fragility of the derivatives markets as risk sharing institutions has an implicit moral hazard problem that undermines their social usefulness. The empirically calibrated network for derivatives liabilities manifests a highly clustered core- periphery structure and extreme form of TITF as seen in Figures 5.a- 5.f. The implied socialized losses are very large (to the tune of US$350 billion) and the liabilities arising from extant derivatives network structures cannot be supported by the existing capital base. The good news is that the highly clustered network structure permits targeted management of systemic risk. One of the main contributions of the paper is to use network analysis to design a set of surcharges that will enable the SIFIs in the derivatives markets to internalize the costs imposed on other FIs and also the tax payer by their failure.