Parts of the chain break regularly. Individuals, companies, and even banks go bankrupt. These outcomes are expected and swap agreements are protected by collat

Parts of the chain break regularly. Individuals, companies, and even banks go bankrupt. These outcomes are expected and swap agreements are protected by collateral under an ISMA agreement to mitigate the potential losses to counterparties should the other counterparty default. Now it's reasonable to argue about the amount and type of collateral required (which is broadly the topic of the article), but aggregating all of the notional doesn't produce a meaningful number, because it doesn't reflect the underlying risk. Even without the sort of hedging I described, it's impossible to draw any meaningful understanding of the risk from the notional number. Consider the following two contracts: Party A sells $100 protection on a corporate to party B (i.e. CDS) Party A enters a $100 1Y USD interest rate swap with party B, paying floating. If the underlying corporate defaults with no recovery in the first case, it's quite possible party A will owe $100 to party B In the second case, there is a realistic ceiling on what can happen to USD interest rates within the next year. Let's imagine the impossibly unlikely scenario where the fed decided to raise rates to 5% overnight one day after the contract was signed. Even in this situation, the value of the swap (i.e. loss to party A) is still likely only around 5%.