Just a comment on the $700 trillion in derivatives, this is the...

Just a comment on the $700 trillion in derivatives, this is the gross value of current outstanding contracts which isn't all that important.

I had a lecture on counterparty credit risk in October by Max Morley, head of Westpac Institutional Bank and according to him the net value or value of contracts that are 'in the money' is about $25 trillion which is calculated on a mark to market basis(his gross figure was $600 trillion but 600, 700 who really knows.....)

As long as no one goes spectacularly splat (institutions and governments alike) as the new regulations for transitioning all derivative trades to clearing houses and requiring holders to post collateral for net mark to market liabilities, financial institutions should close out their excessive positions over time. This was supposed to be complete by December 31st (transitioning to clearing houses that is) but back in October it didn't look like this was logistically possible; haven't looked into it myself so I don't know whether they made it or not.

By the way this is to stop the 'too big to fail' domino effect since losses on derivative contracts are based on the mark to market value at the time of a counter party's failure.

Question is, where does the $25 trillion in liquid assets to post as collateral come from... he wasn't exactly clear on whether contract holders must post their entire net position (if it's negative) or just a proportion of it.

Also, a big risk I see is in these ETF's that purely exist on derivatives, without actually buying and selling any real assets... but then again I'm sure whoever is running these funds has figured something out.

Interesting times ahead