There is a poison that pollutes the world markets in the shape of “Over the Counter (OTC) Derivatives” that is obligations of specific performances which entails a payment for doing something financially, to accept or give something. This is all performed without money involved but via the transaction of paper and what is shown on the balance sheets, an adjustment of the accounting ledger.
Largely the ability of the “OTC Derivative” to function depends on the losing side of the transaction because that is the side that needs to perform, without a clearing house as an intermediate.
Thus, there is no guarantee that the loser can fulfill their obligations.
The “OTC Derivative” situation has grown and continues to grow way out of control in the effect of hundreds of trillions of dollars which boggles the mind at the catastrophe waiting as the ‘domino effect’ takes shape…
Here is where the liquidity of U.S Dollars meets the overgrown derivative situation we have. A market which is totally unregulated and non-transparent, bordering on the fraudulent with no money involved. One has been created to sustain the other.
Because once the spread and commissions are removed it only remains as an obligation for specific financial performance whose integrity financially is the responsibility of the loser in the transaction.
Thus the liquidity cannot be withdrawn and the derivative affect will not go away. They simply continue to grow larger and larger and larger with time …
The results is that there already exists in the system items that are going to have an affect at some point in time as they are happening all around us today. Items which cannot remain hidden in either significant period of contraction or expansion, when by definition would have to get larger.
To summarize “OTC Derivatives” have the following characteristics inherent in every single one, without any exceptions.
1. They are totally unregulated.
2. They are not listed on any major exchange.
3. They are not transparent.
4. They are not clearing house guaranteed. That means that there is no true accounting or payment by the loser to the winner on any time basis via a clearing house. Therefore, the loss builds up to a crescendo until the only option is a complete bailout or bankruptcy.
5. They have no money in them.
6. Their performance depends on the balance sheet of the losing side of the transaction.
7. They are not financial instruments, but rather are specific performance contracts.
8. They have no standards.
9. They have no ready market.
10. They are valued by calculation made using assumptions of conditions prevailing at an assumed future period and thus, can be valued at whatever you want, simply by tweaking the parameters.
11. They have grown and continue to grow beyond belief, in which their replacement value is many more multiples than the total US National Debt.
12. They are issued generally by subsidiaries of good name International Investment firms or banks, not the parent corporation. Generally, there is no flow-through guarantee of that subsidiary as it applies to trade debts, which is the category that a derivative would fall into.
Mr. Sinclair believes that the “OTC Derivatives” and not the exchange listed derivatives with clearing house guarantees are the greatest risk to the U.S economy, the World economy and the U.S Dollar.
This problem will start to show itself at the time when major change in either the equities market or the market assumptions regarding interest rates.
The following data was reported by the Bank for International Settlements in its 2004 review of derivative activity:
Between April 2001 and April 2004 global “daily” turnover in foreign exchange and interest rate derivatives contracts including traditional instruments such as outright forwards and foreign exchange swaps rose by an estimated 74%, to $2.4 trillion.
For more insight to such figures please refer to the following web page: http://www.bis.org/press/p050316.htm#pgtop
