The Derivatives Time Bomb

The Derivatives Time Bomb

In the forthcoming text, I delve into the evolution of derivatives and their transformation into the world's largest market. This narrative encompasses the profound influence of human incentives and highlights how unchecked avarice has led to the emergence of a market of unprecedented magnitude, poised to disrupt the very core of our financial system. A significant portion of our discussion revolves around the regulatory gaps that have transpired. These deficiencies underscore the imminent perils looming over contemporary financial markets, potentially igniting a crisis surpassing the magnitude of the 2008 financial downturn.

A Brief History Derivates have been around for millennia with accounts of use occurring as far back as the time of Antiquity1. Originally employed by farms to protect against the volatile price swings of agricultural commodities2 . There use intended to add stability to a profession containing variables that were far from predictable. However, speculation in the derivatives markets is the precursor of all issues we currently face in modern financial economies in the 21st century. Instead of derivatives being used to add stability, it morphed into speculation where participants bet on the movement of the underlying asset. Whilst such derivatives are still used as originally intended all of the risk comes from the latter.

The following excerpt from Christian Pauletto's work unmistakably alludes to the functioning of speculation through derivatives when employed correctly, shedding light on the elements that render them so appealing: In Aristotle’s Politics. Aristotle tells the story of Thales, another philosopher but also mathematician, who lived from around 625 to 550 BC in Miletus, which was one of the major cities of Ancient Greece.

During wintertime, Thales predicted an unusually large olive harvest. He seized the opportunity to negotiate with the olive press owners the right, but not the obligation, to hire all the olive presses in the region for the following autumn. To secure this right, Thales made a cash deposit. It happened that the harvest was as predicted and the demand for the use of olive presses soared. Thales was then able to lease the presses at a substantial premium and made a fortune3.

The above illustrates the potentially lucrative results of working with derivatives. However, it's essential to acknowledge that such outcomes are rarely realized. While significant profits are attainable, the forthcoming discussion will delve into the associated risks of derivatives.

Speculators started to appear within the derivatives market as some recognised that such contracts did not need to be held to maturity. Similar to the above example of Thales, profits could be made 1

Christian Pauletto, The History of Derivatives: A Few Milestones (2012), https://www.researchgate.net/publication/349485381_The_History_of_Derivatives_A_Few_Milestones, Page 6, Access Date: 19/10/2023 2 The Next Black Swan Will Come Out of the Derivatives Market., https://www.youtube.com/watch?v=p8Ve0_iZgO8, Access Date: 05/10/2023 3 Christian Pauletto, The History of Derivatives: A Few Milestones (2012), https://www.researchgate.net/publication/349485381_The_History_of_Derivatives_A_Few_Milestones, Page 3, Access Date: 19/10/2023. Please note that the original body of work references the following as the source used for this information (referencing has not been adjusted form the text to avoid mistranslation): Sources: Geoffrey Poitras, The Early History of Financial Economics, 1478-1776 (Edward Elgar Publishing Ltd: Cheltenham, 2000) 340. Robert E. Whaley, Derivatives: Markets, Valuation, and Risk Management (John Wiley & Sons: Hoboken, New Jersey, October 2006) 11.

speculating on the price of the derivative itself by correctly interpreting the direction of price in the underlying asset. During the renaissance era King Charles V allowed for the transferability of forwards contracts to third persons before their maturity. Whilst this came into law in 1537 it was subsequently banned in 1541 due to the damage caused from their speculative nature 4. This is a clear demonstration of how speculation has damaging consequences and allowed the derivatives market to rear its ugly head. It is important to recognise human incentives throughout human history as being the principle dictating all of this. If there are the possibilities of fortunes, there will always be those willing to chase after it.

Throughout history the acceptance of derivatives has waned and expanded, with tight and loose policies being applied to their usage. It is my interpretation that such acceptance and distrust has come from experience – much of which has been lost to history, but much of which still exists. As with all things their usage seems to come in cycles. The use of derivatives back in the 16th century was restricted swiftly over the course of a few years in an attempt to hamstring speculation. It is my belief that such actions should have happened in present day financial markets. However, their use has now become widespread, and their implications have now become systemic. Interwoven with the very fabric of financial markets, and have rendered the ability of an outright ban impossible. If derivatives were to unravel, much of the perceived value of financial markers would be destroyed.

The problem is much more severe when one stops to consider that most western modern economies are highly financialised. The modern development of derivatives can be seen in the following passage. Arguably a King Charles V style ban would have been possible towards the beginning of this period but that time has long since passed.

Recent History In recent history the use of derivatives has accelerated. After the US dollar removed its convertibility into gold in 1971 the entire global financial system transition to a fiat standard 5. With no peg to a scarce asset, currencies tried to peg themselves to each other between 1971 and 1973 but failed.

Thereafter governments were easily able to manipulate their currencies which drove the first real wave of financial derivatives in an attempt to protect against such manipulation. Thereafter, in the late 1980s and 1990s banks started to get more heavily involved with derivatives. From this, banks transacted with one another and lead to the wide use of ‘over the counter’ derivatives (OTC derivatives) which is the cause of major problems within the derivatives market today. To add fuel to the fire, artificially low interest rates were used to save and spur the economy after the 2008 financial crisis. In a search for yield, derivatives were used to a greater extent as market participants were forced out further on the risk curve. This has added systemic risk to the financial system.

If you are wondering why the derivatives market has not been regulated one needs only to follow the money. It is not in banks interest to have the market reduced through regulation, large profits and bonuses are based on the selling of such derivatives and it is clear that politicians have been

4

Christian Pauletto, The History of Derivatives: A Few Milestones (2012), https://www.researchgate.net/publication/349485381_The_History_of_Derivatives_A_Few_Milestones, Page 6, Access Date: 19/10/2023 5 Prior to 1971 all currencies had been linked to the dollar as a result of the Brettonwoods agreement in an attempt to retain a gold standard after World War 2.

6 The Next Black Swan Will Come Out of the Derivatives Market., https://www.youtube.com/watch?v=p8Ve0_iZgO8, Access Date: 05/10/2023 7 Global gross domestic product (GDP) at current prices from 1985 to 2028, https://www.statista.com/statistics/268750/global-gross-domestic-product-gdp/, Access Date 21/10/2023

captured by the financial system6. It is also clear that when the stability of hard currency was lost, derivatives proliferated. A clear observation that can be witnessed from this is the attempt derivatives have made to provide stability. However, time has unfortunately shown that derivatives have been the underpinning several financial crises since the 1970s.

Exchange vs Over the Counter (OTC) For the purpose of this article a simple summary of the two classes of derivatives is justified. For those with an understanding of derivatives the following section can be missed.

OTC derivatives are exchanged directly between two parties without a centralised exchange. The contracts that are traded between parties tend to be customised to meet the specific needs of the parties involved. As two parties transact directly there is far less oversight into these transactions resulting in less regulation. Finally, more risk is involved as both counterparties are directly responsible for upholding responsibilities and there is also the added risk of less liquidity.

Exchange traded derivatives exist on regulated exchanges instead of directly between two counterparties. This allows for greater safety as contracts are ‘novated’ this is when the contract is taken on by the exchange/clearing house and guarantees both parties involved are not at risk directly with each other. This is possible as the contract is taken on and split into two separate contracts. The first is between the exchange and the first counterparty and the second is between the exchange and the second counterparty. Therefore, each party has more safety that the contract will still be fulfilled if the other decides not to fulfil their end of the contract. There is also increased transparency as all transactions are accurately recorded by the exchange. The centralisation of activity also increase liquidity which makes exchange traded derivatives less volatile.

Why Are Derivatives Dangerous?

When assessing the potential for damage the first point of reference I look towards is the size of the market itself. The larger the market, the more likely it is that any issues will become systemic.

Unfortunately, the derivatives market has a notional value that exceeds all other markets many times over. With global GDP coming in at $100.2 trillion in 20227 the notional value of derivatives towers over this coming in at $618 trillion according to the BIS 8, and even coming in higher than the global real estate market at $379.7 trillion9; however, it must be noted, that such value is likely much lower when calculating the gross value coming in at $20.7 trillion10. That being said the calculation provided by the BIS is just a floor and the actual difference between the notional value and gross value are likely different. Due to the lack of transparency, this is an answer we will never truly know.

8

OTC derivatives statistics at end-December 2022, https://www.bis.org/publ/otc_hy2305.pdf, Page 1, Access date: 02/10/2023 9 Total Value of Global Real Estate: Property remains the world’s biggest store of wealth, https://www.savills.com/impacts/market-trends/the-total-value-of-global-real-estate-property-remains-theworlds-biggest-store-of-wealth.html, Access Date: 21/10/2023 10 However this is still not that far off the largest economy in the world in terms of size – the US had a GDP of $25.47 trillion: Annual Gross Domestic Product and real GDP in the United States from 1929 to 2020, https://www.statista.com/statistics/1031678/gdp-and-real-gdp-united-states-1930-2019/, Access Date 21/10/2023

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No matter how you cut it, the numbers clearly show that if the derivatives market runs into trouble the whole world will feel it. As the years go by the derivatives market grows ever larger at breakneck pace. For instance, the gross value of derivatives grew at 13% in 2022 which is far higher than global growth or that of the US. Such an imbalance is likely to cause disruption if it continues to persist12 – the answer unfortunately will not be known until the event is at the front gates and crisis is once again upon us.

The disruption of derivatives is supported in the following article from 2013 referencing the destabilising nature of derivatives 13. The problem could be much worse than what we currently know. Due to the complexity and the lack of transparency of derivatives market the true value could be much higher with an upper estimation topping $1 quadrillion dollars. The $638 trillion referenced by the BIS in 2013 is only a floor14. Back in 2013 the gross value of derivatives came in between $10 $20 trillion dollars (not much different than 2022). This means each dollar in the derivatives market was supporting between $35-$70 dollars of nominal value which would wipe out most derivatives traders with only a small loss of face value. The following paraphrased extract sums up the interconnected nature of derivatives which provides the domino catalyst governments around the world are trying to prevent: If you buy a stock for cash, you can’t lose more than you invest, but if you sell $1,000 of derivatives and collateralize it by purchasing $900 of another offsetting derivative, how much are you really at risk? In theory, you can only lose $100. But if the person from whom you purchased the $900

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OTC derivatives statistics at end-December 2022, https://www.bis.org/publ/otc_hy2305.pdf, Page 1, Access date: 02/10/2023 12 For all we know, imbalance is already here.

13 Why Derivatives May Be the Biggest Risk for the Global Economy ,https://business.time.com/2013/03/27/why-derivatives-may-be-the-biggest-risk-for-the-global-economy/ ,Access Date: 03/10/2023 14 In other words it is a conservative valuation.

derivative ends up defaulting, then you’re on the hook for all $1,000 you sold. So are you at risk for $100 or $1,000? It’s hard to know. Regulators try to assign weights and probabilities to determine capital requirements. But the bottom line is simple: If the whole market comes apart, everyone is at risk for a lot more than they expect.

Warren Buffett also spoke about the dangerous nature of derivatives and what makes them so in his 2002 annual shareholder letter referring to them as time bombs 15. Reference to the actual value of derivatives is put under scrutiny as large profits are recorded by counterparties without so much as a penny changing hands16. Because of this, earnings are often overstated as human tendency is to take an optimistic view and to cheat when accounting them. Errors when they occur do not show up for many years which also encourages the former17. The only real winners are the CEOs who want to show impressive earnings by using the overstated estimates imposed by their derivatives exposure and the trader who also wants an eye watering bonus 18. Concern is also given as with prior article that derivatives are not transparent with governments and central banks finding no effective way of controlling them19.

The prophetic nature of Warren Buffett can now be seen as the world was later thrown into chaos when mortgage-backed securities were revealed as poor-quality assets during the 2008 Financial Crisis. Many were marked as AAA rated when in reality default rates within these derivatives revealed unforeseen risks as ratings agencies turned a blind eye. Some have gone so far as to suggest the entire introduction of quantitative easing (QE) was the result of a need to prop up asset prices to support the derivatives market back in 200820.

From insurance contracts for farmers to the grotesque monstrosity derivatives have now become, it is clear that Charles V Well intentioned ban on derivatives is well found. The biggest problem that now exists from what has been reviewed above is the size has made the issue systemic. Systemic risk is also closely associated with the propensity of the financial system to suffer from domino effects 21 due to the interconnected nature of counterparties. The genie is effectively out of the bottle with no clear way of restraining it and the value each dollar commands effectively means the underlying collateral cannot fall without a domino like catastrophe unfolding. Derivative prices cannot be determined accurately, the notion that tools are available allowing perfect risk management is an illusion. As a result, excessive confidence occurs due to the “illusion of control” that derivatives bring.

This leads to unforeseen risks existing. As mentioned by Gunther Capelle-Blancard, derivatives cannot be reduced to a purely mathematical discipline22. Market participants are still human, even if much is now automated, leading to the lack of human psychology being present. Lack of human emotions misses the erratic price moves that often occur in market meltdowns. If anything, price

15

2002 Chairman's Letter, https://berkshirehathaway.com/letters/2002pdf.pdf, Page 13, Access Date: 04/10/2023 16 ibid 17 Ibid 18 2002 Chairman's Letter, https://berkshirehathaway.com/letters/2002pdf.pdf, Page 14, Access Date: 04/10/2023 19 ibid 20 Derivatives Could Explode Like A Bomb!, https://seekingalpha.com/article/4046338-derivatives-explode-likebomb, Access Date 01/10/2023 21 Systemic Risk in the Financial System, Acharya, Engle, and Richardson (2017), Page: 8, Access date 13/10/2023 22 Gunther Capelle-Blancard, Are Derivatives Dangerous? A Literature Survey, International Economics 123 (2010), p. 67-90, Page: 79, Access Date: 12/10/2023

moves are accelerated through the use of derivatives, the fast transmission of information, and the heightened anxiety that this results in when combined with the normal human psyche.

A good way of visualising what I have discussed about derivatives is given by John Exter’s upsidedown pyramid documented below. The sheer size of the numbers in question make sense when so much weight lies at the top of the system. The foundation of real scarcity/ base money is inverse:

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The Increasing Speed of Information If derivatives were not exacerbated enough by the forgoing observations the ever-increasing speed of information as a result of telecommunications throws another accelerant into the equation.

‘Market disturbances’ have only increased due to the advancements of telecommunications (Becketti, 1995)24. This has all come about with rise of the digital age. The digital age has also led to financial innovation within the space: Philippe Jorion in his book ‘Big Bets Gone Bad’ (1995) notes that there are well over hundred varieties of derivatives, many with difficult names. Examples of these include caps, diffs, floors, swaptions, inverse floaters, knock-outs, step-ups and binaries. He indicates that the development in IT, modern microelectronics and software were the tools that have allowed mathematicians and even physicists to create some highly sophisticated financial instruments 25. From this, the ability for regulators to get a grasp on financial innovation has increased exponentially. Not only has technology increased the speed and therefore severity of market meltdowns caused by derivatives but the ability to provide a blanket approach is much harder to achieve. To me, the term 'agitator' aptly characterizes the influence of derivatives on financial markets, as explained by (Dodd 2002)26. This cycle appears destined to persist indefinitely, 23

John Exter, https://en.wikipedia.org/wiki/John_Exter, Access Date: 05/10/2023 Simon Grima & Eleftherios Ioannis Thalassinos, Financial Derivatives Use: A Literature Review, 2020, Page 32, Access date: 14/10/2023 25 Simon Grima & Eleftherios Ioannis Thalassinos, Financial Derivatives Use: A Literature Review, 2020, Page 35, Access date: 14/10/2023 26 Simon Grima & Eleftherios Ioannis Thalassinos, Financial Derivatives Use: A Literature Review, 2020, Page 42, Access date: 14/10/2023 24

as novel and inventive strategies to govern and mitigate risk spawn new risk management tools, which, in turn, become sources of fresh risks (Sharma, 2008) 27.

Regulatory Short Comings Difficulty in providing a blanket approach provides a good segway into the difficulty of legislating the space. As in the renaissance the speculative derivatives market did not dissipate with the ban imposed by Charles V. Despite the ban in Antwerp such contracts continued to exist in Hamburg, Rouen and Amsterdam28. The lack of a blanket policy offers a good insight into the possibility of traders continuing such speculative practices by utilising regulatory arbitrage. Regulatory arbitrage today, as it did back then, hampers the ability to regulate the space alongside the technological impacts which make regulatory boarders porous. Large banks who want to continue trading derivatives will do so by routing such activities through less prohibitive jurisdictions with next to no friction in the digital age29. Furthermore, differences in financial architecture and economic development act as a restraint on a blanket approach to regulation. The International Swaps and Derivatives Association (ISDA) conducted a survey on OTC derivatives in developing markets shedding light on this issue30. ISDA concluded that out of 44 jurisdictions only 9 had initial margin and variation requirements and only 17 had capital requirements. Basel III requirements are not mandatory in most emerging and developing economies as many emerging economies have difficulty implementing systems to monitor such transaction in a meaningful way. The difference in requirements, whilst reasonable, create fragmentation that is destined to be exploited by large multinational corporations with an interest in exploiting OTC derivatives for financial gain.

In conjunction to regulatory arbitrage the introduction of new CCP rules have somewhat backfired.

New regulation requires over the counter transactions to be reported through independent houses.

These are known as ‘Central Counterparty Clearing’ or CCPs 31. The intention here is to add transparency to the derivatives market. However, the new CCP rules require traders and post initial and subsequent margins so that more of the derivatives exposure is covered. This attempts to protect against contagion caused by the lack of collateralised transactions in the derivatives market.

However, the unintended consequences of the CCP rules are that the increased need for collateral hamstrings liquidity. The lack of liquidity creates larger movements in price which creates larger cash calls to meet loses, and the increased volatility creates the need for higher initial margins sucking more liquidity out of the derivatives market32. Additionally, as clearing is a product that is largely undifferentiated between providers, there are adverse incentives (opens a new window) for industry players to undercut each other on required margins or default fund contributions, undermining the 27

Simon Grima & Eleftherios Ioannis Thalassinos, Financial Derivatives Use: A Literature Review, 2020, Page 49, Access date: 14/10/2023 28 Christian Pauletto, The History of Derivatives: A Few Milestones (2012), https://www.researchgate.net/publication/349485381_The_History_of_Derivatives_A_Few_Milestones, Page 6, Access Date: 19/10/2023 29 The following article provides a good example of how regulatory efforts are sides stepped when regulaton tries to contain a global market. One simply moves to where the market is least restrict and cost prohibitive: Rachel Armstrong, https://www.reuters.com/article/us-banks-regulation-derivativesidUSBRE8B10F220121202, Access Date 16/10/2023 30 ISDA Survey on OTC Derivatives in Emerging and Developing Markets, https://www.isda.org/a/qfogE/ISDASurvey-on-OTC-Derivatives-in-Emerging-and-Developing-Markets.pdf, Access Date: 15/10/2023 31 The risks from derivatives have morphed, https://www.ft.com/content/917f8395-8fdd-4e8b-b3aeb6e1c7872f60, Access Date: 30/09/2023 32 ibid

integrity of the system33. Once again regulators are caught by a doubled edged sword, in an aim to create larger capital buffers by increasing margin requirements they have sucked liquidity out of the derivatives market resulting in larger and faster price moves. Furthermore, clearing acts like a commodity, the lowest cost wins meaning those who offer the lowest margins and need for default fund contributions win. This is fine when times are good but when collateral contagion strikes the low-cost clearing houses are in a position of weakness. This also counteracts the imposition of larger capital buffers. When all is considered, capital will flow the path most efficient similar to the way water flows down the path of least resistance – simply put, follow the incentives.

Here, a significant concern underscores yet another aspect of the derivative’s market, mirroring the broader financial system's challenges. The vast majority of the derivatives market lacks collateral backing, with only a minimal margin initially deposited. Put simply, the lack of equity causes the contagion and domino like consequences as most counterparties cannot afford the contracts in the first place. This also means that the overall derivatives market is bloated by contracts that will never be fulfilled. Speculation and the attractive prospects of large profits have driven the market to a size that cannot be sustained unless the collateral is backed up. As occurred in 2008 and in 2020 when the whole world came to as stop. Central banks stepped in with unlimited liquidity to hold the financial system together and kick the default of the market down the road yet again without fixing the underlying problem. The main issue here lies in the fact that the derivatives market has become so large it has to be sustained to prevent an incredibly painful collapse. A house of cards and paper wealth has clearly developed here. This also explains the large contrast in notional vs net value.

Unfortunately, the derivatives market is debt based, fragile and requires close attention to sustain asset prices that underpin the whole system. One would be forgiven if they saw Ponzi dynamics within the whole system as the pain of letting the system unravel and reset is too great to comprehend.

Views of a Central Bank Overall, the above regulatory shortcomings counteract points put forward by the Bank of England (BOE) which provides good insight into the current approach adopted by central banks 34. Due to the interconnected nature of derivatives the BOE has adopted to implement ‘Macroprudential regulation’ which is the approach of financial regulation to mitigate risk to the financial system as a whole. From the outset it seems that the paper points towards ‘Macroprudential Regulator’s’ judgement being applied to assist weaknesses vulnerable to systemic impacts of derivates by applying their ‘judgement’. The very fact a central body of regulators are trying to control a market as complex and opaque as the derivates market is doomed to fail. As seen above, current regulatory attempts have thrown curve balls right back at them.

Furthermore, emphasis is placed on calculating the ‘Systemically importance’ of institutions and how they are capable of creating risk in relation to how much damage an institution can inflict on others’35 this is a clear indication that the system itself is completely interlinked. Damage control is 33

ibid Robleh Ali and Nick Vause, Bank of England and Filip Zikes, Federal Reserve Board of Governors, Financial Stability Paper No. 38 – July 2016, Systemic risk in derivatives markets: a pilot study using CDS data, Access Date: 26/09/2023 35 Robleh Ali and Nick Vause, Bank of England and Filip Zikes, Federal Reserve Board of Governors, Financial Stability Paper No. 38 – July 2016, Systemic risk in derivatives markets: a pilot study using CDS data, Page 4, Access Date: 26/09/2023 34

now a discrete overtone in such regulatory writings. There is now a need to control and maintain, not stem or stop the derivatives market. A clear indication from the very source itself that what has been discussed prior is very true indeed.

Additionally, the paper focuses on a limited segment of the derivatives market. While I recognize the rationale behind studying this subset as a means for regulators to gain control and reduce risks across the entire derivatives market, there may be significant disparities between how this subset behaves and the broader derivatives market in reality.

The substantial volume of data generated due to derivatives reporting requirements necessitates the use of automated processing for data analysis36. In essence, the sheer amount of data now in existence surpasses human capabilities, making it exceedingly challenging to gain a comprehensive understanding of the derivatives market. Technology itself has run away with the ability for humans to fully understand the inner workings of this market. Outsourcing computation, whilst necessary, runs the risk that a glaring danger will stare us in the face and no one will notice.

Finally, the overall conclusion to this paper is that more systemic risk indicators could be created by acquiring even more data. This will allow systemic risk to be detected from derivates before issues occur.37 My worry with this is that complexity is added to complexity to reach certainty that will never be achieved. False confidence is a real possibility here similar to the quantitative geniuses that destroyed ‘Long Term Capital Management’ back in the late 1990s the same is likely to happen here.

As Mark Twain famously said: It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.

Conclusion In summary, the pervasive influence of human greed on our financial markets is evident throughout history. What sets the current state of affairs apart is its unprecedented scale. The adoption of a fiat standard, coupled with the explosion of derivatives, has been further exacerbated by artificially low interest rates and the relentless pursuit of yield. In this age of rapidly advancing technology, traditional safeguards are rendered obsolete, making it increasingly challenging to outmanoeuvre any developments within the market by implementing substantial regulation.

Regulatory measures, when implemented, have often yielded unintended and detrimental consequences. This example within this writing highlights the inherent difficulty in comprehending the outcomes of highly intricate systems. Instead of proactively averting potentially catastrophic outcomes, we find ourselves in a perpetual reactive mode, responding to each unfolding crisis.

Upon closer examination, the inherent risk in derivatives lies in their reliance on margin, low equity, and high leverage. Had we adhered to a hard money standard, stripped speculative activities from derivatives, and mandated extensive collateralization of contracts, our financial system might have been far more resilient. However, that ship has sailed, and our only recourse is to sustain the existing system for as long as possible.

Regrettably, the more we paper over the mounting issues, the more unstable our financial system becomes. Eventually, a correction is inevitable, the system will become so unstable that it will

36

Robleh Ali and Nick Vause, Bank of England and Filip Zikes, Federal Reserve Board of Governors, Financial Stability Paper No. 38 – July 2016, Systemic risk in derivatives markets: a pilot study using CDS data, Page 17, Access Date: 27/09/2023 37 Ibid

implode in on itself. The domino effect mentioned earlier is the best analogy to depict this, and when it arrives, it is likely to be far more painful than it needed to be.

Bibliography

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What is a clearing house? - MoneyWeek Investment Tutorials, https://www.youtube.com/watch?v=2hp9w-gXRjM, Access Date: 30/09/2023

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Financial Collapse? It's the Derivatives, Stupid!, https://www.youtube.com/watch?v=9TUjXYMBT-U, Access Date: 30/09/2023 Clearing houses reduce risk, they do not eliminate it, https://www.ft.com/content/974c2c4816a5-11e5-b07f-00144feabdc0, Access Date 30/09/2023 Derivatives Could Explode Like A Bomb!, https://seekingalpha.com/article/4046338derivatives-explode-like-bomb, Access Date 30/09/2023 Helga Zepp-LaRouche: Call for an International Emergency Conference to Reorganize the Bankrupt Financial System, https://schillerinstitute.com/blog/2023/03/14/helga-zepplarouche-call-for-an-international-emergency-conference-to-reorganize-the-bankruptfinancial-system/, Access Date: 30/09/2023 https://www.visualcapitalist.com/all-of-the-worlds-money-and-markets-in-one-visualization2022/ , Access Date: 30/09/2023 How Big Is the Derivatives Market?, https://www.investopedia.com/ask/answers/052715/how-big-derivatives-market.asp, Access Date: 01/10/2023 Why Derivatives May Be the Biggest Risk for the Global Economy, https://business.time.com/2013/03/27/why-derivatives-may-be-the-biggest-risk-for-theglobal-economy/, Access Date: 02/10/2023 OTC derivatives statistics at end-December 2022, https://www.bis.org/publ/otc_hy2305.pdf, Access date: 02/10/2023 2002 Chairman's Letter, https://berkshirehathaway.com/letters/2002pdf.pdf, Access Date: 03/10/2023 Why Derivatives Are So Dangerous to the Financial System, https://www.youtube.com/watch?v=rrPpBjqtn0E, Access Date 04/10/2023 The Next Black Swan Will Come Out of the Derivatives Market., https://www.youtube.com/watch?v=p8Ve0_iZgO8, Access Date: 05/10/2023 How the Central Bankers Plan to Come After Your Assets., https://www.youtube.com/watch?v=r4I6uqLuJfA&list=PLtbk62Ie_5SUhUTwVqtwaR1qAsE3jw 6T0, Access Date: 05/10/2023 John Exter, https://en.wikipedia.org/wiki/John_Exter, Access Date: 05/10/2023 Stormy Bond Clouds Hovering Over Financial System., https://www.youtube.com/watch?v=h0EnP7fq19o&list=PLtbk62Ie_5SUhUTwVqtwaR1qAsE3j w6T0&index=3, Access Date: 07/10/2023 The First Domino In the Subprime Auto Loan Sector Falls., https://www.youtube.com/watch?v=w_DDxISIpQo&list=PLtbk62Ie_5SUhUTwVqtwaR1qAsE3j w6T0&index=5, Access Dat: 10/10/2023 Gunther Capelle-Blancard, Are Derivatives Dangerous? A Literature Survey, International Economics 123 (2010), p. 67-90, Page: 79, Access Date: 12/10/2023

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Systemic Risk in the Financial System, Acharya, Engle, and Richardson (2017), Access date 13/10/2023 Simon Grima & Eleftherios Ioannis Thalassinos, Financial Derivatives Use: A Literature Review, 2020 Access Date: 14/10/2023 ISDA Survey on OTC Derivatives in Emerging and Developing Markets, https://www.isda.org/a/qfogE/ISDA-Survey-on-OTC-Derivatives-in-Emerging-andDeveloping-Markets.pdf, Access Date: 15/10/2023 Chairman Elisse Walter, https://www.sec.gov/news/speech/2013-spch040613ebwhtm, Access Date: 16/10/2023 Rachel Armstrong, https://www.reuters.com/article/us-banks-regulation-derivativesidUSBRE8B10F220121202, Access Date 16/10/2023 Global gross domestic product (GDP) at current prices from 1985 to 2028, https://www.statista.com/statistics/268750/global-gross-domestic-product-gdp/, Access Date 21/10/2023 Total Value of Global Real Estate: Property remains the world’s biggest store of wealth, https://www.savills.com/impacts/market-trends/the-total-value-of-global-real-estateproperty-remains-the-worlds-biggest-store-of-wealth.html, Access Date: 21/10/2023 Annual Gross Domestic Product and real GDP in the United States from 1929 to 2020, https://www.statista.com/statistics/1031678/gdp-and-real-gdp-united-states-1930-2019/, Access Date 21/10/2023