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They should mention that each "debt" has a counter party that has an "asset". Ie, net zero. Which doesn't resolve the liquidity issue, but it's not a black hole

They should mention that each "debt" has a counter party that has an "asset". Ie, net zero. Which doesn't resolve the liquidity issue, but it's not a black hole like they make out. In addition, it's not clear they are netting across all transactions. Many of the players in this market have offsetting positions. It's derivatives. It is what it is. Marking everything to market all the time isn't a great answer either.

naveen99 4y ago
If some of those counter parties go chapter 11, the resulting black hole will cause some tidal waves as it pulls the dominoes.
- danielmarkbruce 4y ago
  Yep, that's the derivatives market. And the insurance market. And many other markets where transactions are set up and then play out over time. It is what it is.
  - thfuran 4y ago
    But is it what it should be?
    - danielmarkbruce 4y ago
      It's all that it can be.
    - vkou 4y ago
      If we're going to pick finance apart into 'Socially useful' and 'Socially damaging' parts, I think insurance would generally fall towards the left side of that spectrum. It's possible that our particular implementation of the insurance markets is deeply flawed, but a general concept of 'Pay X now to be backstopped in the event of catastrophe' is incredibly useful.
      - p1necone 4y ago
        Insurance is incredibly useful, absolutely. And should definitely exist. I also think that a lot of people pay for insurance that doesn't make a whole lot of sense though. If you could afford to replace the thing you're insuring out of pocket, you probably shouldn't be insuring it. I only pay for third party car insurance because I can just buy a new car if I total it, but I can't buy a new Lamborghini for the person I crashed into. I don't pay for contents insurance at all because I can buy a new bed and laptop if my house catches fire. Insurance companies have done the math, your EV for insurance is always going to be negative (on average), you should only insure against costs that you can't afford to pay in one big lump sum if they happen. Insurance is effectively a loan for things you already own, just put that money in a savings account instead.
  - naveen99 4y ago
    Which book are the transactions recorded in, and how many books are there ? Maybe some Enron accountants can come out of retirement or get early parole to help ? It’s the pension fund take on overpromise and adultery.
    - danielmarkbruce 4y ago
      There isn't magic here. Your transactions are presumably recorded in your books and that of your counterparty. There are billions of books... This is misunderstanding BIS's point. The BIS is talking about the size of the market - ie they are concerned about liquidity and system wide risk. They are not saying the pension funds are short trillions via FX swaps.
      - naveen99 4y ago
        I mean “off”-balance sheets. Is there an “on”-balanc sheet ? Are there other $adjective-balance sheets ? maybe accounting standards should be updated to record derivatives risk to take into account interest rate and counterparty risk.
        thfuran 4y ago
        I'll tell you what goes on between the balance sheets when you're older.
        danielmarkbruce 4y ago
        In this thread I give an example of the Australian Future Fund and Coke bonds. It shows what is meant by off balance sheet. It's a matter of netting things v not, it's not a matter of just leaving things out.
        kasey_junk 4y ago
        Off balance sheet is a term of art in this space that means it’s not listed as an asset or liability for the purposes of say fx exposure. The reason for this is that fx swaps dont create exposure to fx or credit swings the way that fx trading or borrowing against future cash flows do because they are fixed rate contracts. There is counterparty risk but a) that is typically mitigated much more cheaply and us generally less risky and b) you’d move the loss “on book” if the counterparty risk shapes up.
  - CurrentBias 4y ago
    Lol. Lmao
  - travisluis 4y ago
    > And the insurance market. No. Insurance is subject to the "insurable interest" doctrine, which generally prohibits using insurance as naked speculation. There are also far more backstops, reserve requirements, government guarantees, etc., designed to prevent this kind of implosion. Not saying it doesn't happen, but we've had since the South Sea Bubble to learn how to regulate insurance to prevent this kind of thing. The key difference is that insurance is generally regulated from a consumer protection perspective, since many insurance lines are sold directly to unsophisticated consumers. CDSs are, by contrast, sold primarily these days to sophisticated financial speculators, who are presumably fully aware of the kinds of risk involved.
    - bombcar 4y ago
      Even with insurable interest you can have an insurance company wiped out by fraud, mistakes, or (most likely perhaps) a mass event that causes claims at the same time. This is why flood and earthquake insurance often end up being (underfunded) and run by the state.
    - danielmarkbruce 4y ago
      And yet insurance companies go belly up. Google "failed insurance companies". Remember just 15 years ago? MBIA, Ambac, AIG? Regulation doesn't get rid of the risk. And it's got zero to do with naked speculation. We simply cannot make risk disappear. Contracting with someone else to eat the risk creates a new risk. Counter party risk just doesn't go away, despite our hopes and dreams.
    - dh2022 4y ago
      Huh? People use Credit Default Swaps (CDSs) for decades to speculate on debt defaults... "South Sea Bubble to learn how to regulate insurance to prevent this kind of thing." - AIG (at the time the biggest insurance company in the US) went down in 2008 during the Great Financial Crisis because they insured sub-prime loans (CDS again).. So I guess there are lots of holes regulators still need to learn....
      - occamrazor 4y ago
  - temp_account_32 4y ago
    They don't think it be like it is, but it do
  - JumpCrisscross 4y ago
    > that's the derivatives market These are run through clearinghouses in most money centre jurisdictions.
    - totalZero 4y ago
      Sometimes. Yet you can find a substantial over-the-counter segment of the derivatives business in most major financial markets.
- fnordpiglet 4y ago
  Counter parties go bankrupt all the time. Usually you’re faced with not receiving floating or not paying floating, and loss of your upfront fees for the contract. This isn’t a huge blow usually. Sometimes swaps blow up a counter party and you can’t get a windfall because they can’t pay it, but this isn’t a material loss but an opportunity loss.
xwolfi 4y ago
The problem is the amount and the lack of supervision. Granted, supervision alone isnt enough if the superviser let it happen anyway, but they're "ohla, it's getting a little bit worrying, can you unswap all this or at least show us all your card so we can force you to be capitalized like banks".
- danielmarkbruce 4y ago
  Exactly. This is what BIS is highlighting. It's big and it's hard to watch from a system perspective.
deleted 4y ago
[deleted]
time_to_smile 4y ago
Ah, the classic "this is fine" comment on any HN article suggesting that we may have been underestimating the scale of systemic risk. The issue that BIS is raising isn't the mere existence of derivatives. It's both the scale of debt and the lack of public visibility into it. The concern BIS has is basically that policy makers are making decisions that can have major impacts on price of the dollar and global interest rates. Given both the scale of this debt and it's lack of visibility, BIS is pointing out that policy makers might not have all the information they need to make safe decisions. It's neither a case of "the sky is falling" or "it is what it is". This is absolutely something that should not be shrugged off with a "meh" which is why BIS wrote the report in the first place.
- brookst 4y ago
  Ah, the classic "anyone who adds context to a hyperventilating article must be 100% embracing any real issue that the article misrepresented" comment ;)
- lazide 4y ago
  The reality is, there is no apparent limit to the side effects of monetary policy. If they attempted to quantify all of them, they’d never be able to do anything, good or bad. So, they look at the ones that have historically caused the biggest issues and are causing the most obvious pain right now, make changes that hopefully give others time to adapt to without catastrophic issues, and cross their fingers. If the things that explode are within the scope and scale expected? Then success. If not? Try to figure out what happened, and try to do better next time. There is no ‘good’ decisions in these situations, even doing nothing has major costs. It’s about the least bad decision, and trying to avoid taking on unnecessary risk and hence unnecessary pain. so far CDS’s are a potential problem, but not as big of a known historic problem as economy wide out of control inflation. So, off we go.
- danielmarkbruce 4y ago
  Look at the footnotes on page 71 of the BIS report. They know they are significantly overstating it and yet can't be bothered figuring it out, or making the best estimate they can. And then the reuters report lede makes it sound like pension funds are short $80 trill. People on this thread think it's what is being reported. It's awful.
yourapostasy 4y ago
Lest we throw rocks while we live in glass houses, counterparty risk is rampant in software ecosystems as well, especially distributed and cloud environments. This is an old, old problem in complex environments. I've yet to find a solution that tracks down every dependency from a call made inside an application that crosses many platform boundaries. There are dependency mapping "solutions" but they all are incomplete inventories at best, and I've yet to find one that acts as a metadata repository for distributed tracing solutions. I would really like an AOP-style way of attaching code, turtles all the way down as much as possible, that shows me all dependencies and each of their various affiliated sensors and probes that get automatically called for known failure modes whenever there is an unexpected value, and when an unknown failure mode happens dumps all the sensors and probes instead of just a stack trace. I want to be able to attach such tracing code to third party code without causing their support teams to suck in their breath through their teeth and with a grimace tell me they can't support that "modification". These days, I not only need a call graph, I need the exact state of everything when something broke because I increasingly see Heisenbugs in environments due to various pressures in software development, and most vendor support teams' way of collecting data is woefully inadequate in cloud/distributed ecosystems.
halpmeh 4y ago
These are FX swaps, so you can't really say that "it is what it is." Currency and interest rate fluctuations can cause massive changes to the market. The pound literally almost collapsed just a few weeks ago due to interest rate swaps forcing a fire sale on gilts.
- danielmarkbruce 4y ago
  They can. It did. It is what it is.
  - halpmeh 4y ago
    And then the Bank of England intervened because they saw trouble in the market. That's not "it is what it is." That's "with proper insight into important market positions, economic catastrophe can be avoided."
    - danielmarkbruce 4y ago
      Central banks have monitored derivatives markets for decades, will continue to do so and will step into the markets as a backstop from time to time. It's not going anywhere. FX swaps are critical for global trade and investment.
LudwigNagasena 4y ago
It’s not really net zero. The problem is that the value of that “asset” may get to zero because the debt is not going to get repaid.
- danielmarkbruce 4y ago
  As the fx swaps roll off, payments will be made and the "debt" will in fact go to zero.
solumunus 4y ago
> They should mention that each "debt" has a counter party that has an "asset". Ie, net zero. In an ideal world sure, yet naked shorting and similar practices are rife. There are ways around these things.

naveen99 4y ago

If some of those counter parties go chapter 11, the resulting black hole will cause some tidal waves as it pulls the dominoes.

danielmarkbruce 4y ago
Yep, that's the derivatives market. And the insurance market. And many other markets where transactions are set up and then play out over time. It is what it is.
- thfuran 4y ago
  But is it what it should be?
  - danielmarkbruce 4y ago
    It's all that it can be.
  - vkou 4y ago
    If we're going to pick finance apart into 'Socially useful' and 'Socially damaging' parts, I think insurance would generally fall towards the left side of that spectrum. It's possible that our particular implementation of the insurance markets is deeply flawed, but a general concept of 'Pay X now to be backstopped in the event of catastrophe' is incredibly useful.
    - p1necone 4y ago
      Insurance is incredibly useful, absolutely. And should definitely exist. I also think that a lot of people pay for insurance that doesn't make a whole lot of sense though. If you could afford to replace the thing you're insuring out of pocket, you probably shouldn't be insuring it. I only pay for third party car insurance because I can just buy a new car if I total it, but I can't buy a new Lamborghini for the person I crashed into. I don't pay for contents insurance at all because I can buy a new bed and laptop if my house catches fire. Insurance companies have done the math, your EV for insurance is always going to be negative (on average), you should only insure against costs that you can't afford to pay in one big lump sum if they happen. Insurance is effectively a loan for things you already own, just put that money in a savings account instead.
- naveen99 4y ago
  Which book are the transactions recorded in, and how many books are there ? Maybe some Enron accountants can come out of retirement or get early parole to help ? It’s the pension fund take on overpromise and adultery.
  - danielmarkbruce 4y ago
    There isn't magic here. Your transactions are presumably recorded in your books and that of your counterparty. There are billions of books... This is misunderstanding BIS's point. The BIS is talking about the size of the market - ie they are concerned about liquidity and system wide risk. They are not saying the pension funds are short trillions via FX swaps.
    - naveen99 4y ago
      I mean “off”-balance sheets. Is there an “on”-balanc sheet ? Are there other $adjective-balance sheets ? maybe accounting standards should be updated to record derivatives risk to take into account interest rate and counterparty risk.
      - thfuran 4y ago
        I'll tell you what goes on between the balance sheets when you're older.
      - danielmarkbruce 4y ago
        In this thread I give an example of the Australian Future Fund and Coke bonds. It shows what is meant by off balance sheet. It's a matter of netting things v not, it's not a matter of just leaving things out.
      - kasey_junk 4y ago
        Off balance sheet is a term of art in this space that means it’s not listed as an asset or liability for the purposes of say fx exposure. The reason for this is that fx swaps dont create exposure to fx or credit swings the way that fx trading or borrowing against future cash flows do because they are fixed rate contracts. There is counterparty risk but a) that is typically mitigated much more cheaply and us generally less risky and b) you’d move the loss “on book” if the counterparty risk shapes up.
- CurrentBias 4y ago
  Lol. Lmao
- travisluis 4y ago
  > And the insurance market. No. Insurance is subject to the "insurable interest" doctrine, which generally prohibits using insurance as naked speculation. There are also far more backstops, reserve requirements, government guarantees, etc., designed to prevent this kind of implosion. Not saying it doesn't happen, but we've had since the South Sea Bubble to learn how to regulate insurance to prevent this kind of thing. The key difference is that insurance is generally regulated from a consumer protection perspective, since many insurance lines are sold directly to unsophisticated consumers. CDSs are, by contrast, sold primarily these days to sophisticated financial speculators, who are presumably fully aware of the kinds of risk involved.
  - bombcar 4y ago
    Even with insurable interest you can have an insurance company wiped out by fraud, mistakes, or (most likely perhaps) a mass event that causes claims at the same time. This is why flood and earthquake insurance often end up being (underfunded) and run by the state.
  - danielmarkbruce 4y ago
    And yet insurance companies go belly up. Google "failed insurance companies". Remember just 15 years ago? MBIA, Ambac, AIG? Regulation doesn't get rid of the risk. And it's got zero to do with naked speculation. We simply cannot make risk disappear. Contracting with someone else to eat the risk creates a new risk. Counter party risk just doesn't go away, despite our hopes and dreams.
  - dh2022 4y ago
    Huh? People use Credit Default Swaps (CDSs) for decades to speculate on debt defaults... "South Sea Bubble to learn how to regulate insurance to prevent this kind of thing." - AIG (at the time the biggest insurance company in the US) went down in 2008 during the Great Financial Crisis because they insured sub-prime loans (CDS again).. So I guess there are lots of holes regulators still need to learn....
    - occamrazor 4y ago
- temp_account_32 4y ago
  They don't think it be like it is, but it do
- JumpCrisscross 4y ago
  > that's the derivatives market These are run through clearinghouses in most money centre jurisdictions.
  - totalZero 4y ago
    Sometimes. Yet you can find a substantial over-the-counter segment of the derivatives business in most major financial markets.
fnordpiglet 4y ago
Counter parties go bankrupt all the time. Usually you’re faced with not receiving floating or not paying floating, and loss of your upfront fees for the contract. This isn’t a huge blow usually. Sometimes swaps blow up a counter party and you can’t get a windfall because they can’t pay it, but this isn’t a material loss but an opportunity loss.

xwolfi 4y ago

The problem is the amount and the lack of supervision. Granted, supervision alone isnt enough if the superviser let it happen anyway, but they're "ohla, it's getting a little bit worrying, can you unswap all this or at least show us all your card so we can force you to be capitalized like banks".

danielmarkbruce 4y ago
Exactly. This is what BIS is highlighting. It's big and it's hard to watch from a system perspective.

deleted 4y ago

[deleted]

time_to_smile 4y ago

Ah, the classic "this is fine" comment on any HN article suggesting that we may have been underestimating the scale of systemic risk. The issue that BIS is raising isn't the mere existence of derivatives. It's both the scale of debt and the lack of public visibility into it. The concern BIS has is basically that policy makers are making decisions that can have major impacts on price of the dollar and global interest rates. Given both the scale of this debt and it's lack of visibility, BIS is pointing out that policy makers might not have all the information they need to make safe decisions. It's neither a case of "the sky is falling" or "it is what it is". This is absolutely something that should not be shrugged off with a "meh" which is why BIS wrote the report in the first place.

brookst 4y ago
Ah, the classic "anyone who adds context to a hyperventilating article must be 100% embracing any real issue that the article misrepresented" comment ;)
lazide 4y ago
The reality is, there is no apparent limit to the side effects of monetary policy. If they attempted to quantify all of them, they’d never be able to do anything, good or bad. So, they look at the ones that have historically caused the biggest issues and are causing the most obvious pain right now, make changes that hopefully give others time to adapt to without catastrophic issues, and cross their fingers. If the things that explode are within the scope and scale expected? Then success. If not? Try to figure out what happened, and try to do better next time. There is no ‘good’ decisions in these situations, even doing nothing has major costs. It’s about the least bad decision, and trying to avoid taking on unnecessary risk and hence unnecessary pain. so far CDS’s are a potential problem, but not as big of a known historic problem as economy wide out of control inflation. So, off we go.
danielmarkbruce 4y ago
Look at the footnotes on page 71 of the BIS report. They know they are significantly overstating it and yet can't be bothered figuring it out, or making the best estimate they can. And then the reuters report lede makes it sound like pension funds are short $80 trill. People on this thread think it's what is being reported. It's awful.

yourapostasy 4y ago

Lest we throw rocks while we live in glass houses, counterparty risk is rampant in software ecosystems as well, especially distributed and cloud environments. This is an old, old problem in complex environments. I've yet to find a solution that tracks down every dependency from a call made inside an application that crosses many platform boundaries. There are dependency mapping "solutions" but they all are incomplete inventories at best, and I've yet to find one that acts as a metadata repository for distributed tracing solutions. I would really like an AOP-style way of attaching code, turtles all the way down as much as possible, that shows me all dependencies and each of their various affiliated sensors and probes that get automatically called for known failure modes whenever there is an unexpected value, and when an unknown failure mode happens dumps all the sensors and probes instead of just a stack trace. I want to be able to attach such tracing code to third party code without causing their support teams to suck in their breath through their teeth and with a grimace tell me they can't support that "modification". These days, I not only need a call graph, I need the exact state of everything when something broke because I increasingly see Heisenbugs in environments due to various pressures in software development, and most vendor support teams' way of collecting data is woefully inadequate in cloud/distributed ecosystems.

halpmeh 4y ago

These are FX swaps, so you can't really say that "it is what it is." Currency and interest rate fluctuations can cause massive changes to the market. The pound literally almost collapsed just a few weeks ago due to interest rate swaps forcing a fire sale on gilts.

danielmarkbruce 4y ago
They can. It did. It is what it is.
- halpmeh 4y ago
  And then the Bank of England intervened because they saw trouble in the market. That's not "it is what it is." That's "with proper insight into important market positions, economic catastrophe can be avoided."
  - danielmarkbruce 4y ago
    Central banks have monitored derivatives markets for decades, will continue to do so and will step into the markets as a backstop from time to time. It's not going anywhere. FX swaps are critical for global trade and investment.

LudwigNagasena 4y ago

It’s not really net zero. The problem is that the value of that “asset” may get to zero because the debt is not going to get repaid.

danielmarkbruce 4y ago
As the fx swaps roll off, payments will be made and the "debt" will in fact go to zero.

solumunus 4y ago

> They should mention that each "debt" has a counter party that has an "asset". Ie, net zero. In an ideal world sure, yet naked shorting and similar practices are rife. There are ways around these things.