OTC Derivatives - and a great article from Prerequisite Capital

Patrick Reid

I've been taking time out from trading this week (please see previous post) but that doesn't mean i'm not learning. I caught a real handy deck from hashtag#DanielJWant at hashtag#prerequisitecapital when he was on Macro Voices last week. I encourage you to find out more. OTC Derivatives are monster like in risk. It's the only free way banks can make money (bypassing regulation because it's largely misunderstood and off balance) Also, "betting slips" (OTC D.) go straight to P+L not balance sheets because they are treated as sales tickets - which they are. As market makers the net net exposure "reduces" individual banks risk but it relies on the counterpart NOT to fail. We all know what happened when Bearn Sterns gave the markets a warning Lehman pre-GFC We currently stand at 595 trillion USD in notional exposure. hashtag#BIS has more. Why am i telling you this ? If you think banks now have systems to protect failures think again. Tell me I'm wrong. This along with many other things is the reason i remain a RISK BEAR for Q1 I'll leave you with this mustard quote from Fred Feldkamp: "The only thing worse than excessive leverage is excessive off balance leverage"