According to the International Swaps and Derivatives Association (ISDA), there has been a rapid increase in the global derivatives bubble, which they report as through the end of June 2023, but it has undoubtedly continued since then. Global OTC derivatives notional value outstanding rose by 13% in the year ending June 30, 2023, to $715 trillion, BIS reports. This followed a period of decade or so in which there was little such growth; for example, in the year ending June 30, 2022 BIS claimed a growth of just 1.8% in the global total of OTC derivatives. (EIR estimates that the BIS figure for OTC derivatives is actually much higher.)
One factor clearly is the biggest hedge funds’ move into dominance in the shorter-term sections of the U.S. Treasury market—the huge growth of the derivatives called the “basis trade” in Treasuries (a form of interest-rate derivatives trading), which economist Mark Zandi of Moody’s Analytics (and many others) warned about in November and December, and the Securities and Exchange Commission (SEC} is “considering” restraining. Today, Bloomberg has a report that the SEC is, at some future date, going to require all Treasury trading to go through “a clearing house.” The SEC does not make clear when this will happen; but the announcement of intention reinforces the fact that the SEC is worried about the systemic dangers of the hedge funds’ massive “basis trading” in Treasury securities.
There was also a Jan. 20 account in The Financial Times, “U.S. pension funds worth $1.5 trillion add risk through leverage,” on the largest U.S. pension funds having resorted heavily to leveraged investment and to derivatives to generate “returns” in illiquid parts of their portfolios. This is the infamous LDI (leverage-driven investment) strategy exposed in the biggest British pension funds and causing the British bond crisis of December 2022, just over a year ago. At that time it was said that U.S. pension funds didn’t use LDI; for example, an analysis published by the Chicago Federal Reserve Bank said no major U.S. pension fund had debt leverage equal to as much as 10% of its assets.
Whether or not they did then, they do now, according to The Financial Times.
