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March 6, 2012 –Financial “Weapons of Mass Destruction” Or the $700 Trillion Dollar Elephant in the Room:Big numbers can be scary, especially when it comes to $700 trillion in derivatives. At least, though, some financial firms are trying to whittle down that ginormous figure.
As of early February, financial players have torn up $184 trillion of interest-rate swaps, according to a recent announcement by the International Derivatives and Swaps Association, TriOptima, a provider of post-trade infrastructure and LCH SwapClear, an interest-rate clearing house.
And, thankfully, the sums involved aren’t necessarily as threatening as they sound. That’s because the vast majority of these transactions consist of interest-rate swaps. In these, two parties agree to exchange the cash flows associated with interest-rate payments on debt. This allows one investor, for example, to swap a fixed-rate of exchange for a floating rate.
For a definition of credit default…
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