KW: The time bomb that should it explode will destroy major institutions over night. The volume of over-the-counter (OTC) interest rate derivatives has increased dramatically. The total amount that trades in global markets has soared 141% in three years, according to the Bank for International Settlements’ (BIS) latest Triennial Survey of Global Derivatives Markets. And since 2001, it has surged by a factor of 13.
Typically, OTC derivatives are securities traded through a dealer network as opposed to a centralized exchange such as the New York Stock Exchange. Because they don’t trade on centralized exchanges, OTC options can have greater risk and less transparency.
One type of derivative, credit default swaps, were at the core of the 2008 financial crisis. But the U.S. government continues to cave to Wall Street’s cries for reduced regulations. Unfortunately, the risk posed by OTC options will grow and possibly trigger another financial crisis.
A gigantic spike in three years. The UK dominates.