Here''s what happens when foreigners get tired of dollar depreciation

Section:

Banks' Derivative Use Jumps 23% in 2nd Quarter;
Financial Policy Forum Calls for More Regulation of Market

By Alistair Barr
CBS.MarketWatch.com
Tuesday, October 12, 2004

http://cbs.marketwatch.com/news/story.asp?guid=%7BFE7D921D%2D60B0%
2D4188%2D9F8A%2DEF9EC9084915%7D&siteid=mktw

SAN FRANCISCO -- Banks' derivative use jumped by 23
percent in the second quarter, leading one observer
to call for more regulation of the booming market.

Banks used $81 trillion worth of derivatives in the second
quarter, up from $65.8 trillion a year earlier, according to
a report by the Office of Comptroller of the Currency, a
government agency that compiles reports from lenders
operating in the U.S.

A derivative is a contract that gains its value from other
securities. The market for these instruments has
boomed: In 1991, there were about $7 trillion worth of
contracts outstanding. At $81 trillion, the market now
dwarfs equity markets such as the New York Stock
Exchange, which lists companies with a market
capitalization of less than $12 trillion.

"This market has been growing rapidly for years and the
over-the-counter part of it is devoid of regulation," said
Randall Dodd, director of the Financial Policy Forum, a
Washington, D.C.-based think tank funded by the Ford
Foundation.

Ninety percent of outstanding derivatives were traded
over the counter in the second quarter, with the remaining
10 percent traded on exchanges, the OCC said.

Dodd, a former economist at the Commodity Futures
Trading Commission, thinks there should be rules for
posting collateral to back up derivatives trades, as in
other markets.

"Interruptions in the collateral chain can spark systemic
risks in the financial markets," Dodd warned.

The value of swaps outstanding surged 31 percent to
$49.7 trillion in the second quarter from a year earlier,
the OCC said. Options use grew 23 percent to $17.6
trillion, while the value of outstanding credit derivatives
jumped more than 80 percent to $1.5 trillion, the OCC
reported.

The use of futures and forward contracts slid slightly to
$12.2 trillion, the OCC added.

While 637 banks operating in the U.S. now use
derivatives -- up from 523 a year ago -- the largest seven
banks use 96 percent of outstanding contracts, the OCC
said.

Those banks retain large credit exposures thanks to their
derivatives holdings, the OCC said.

Credit risk exposure as a percent of risk-based capital for
J.P. Morgan Chase remains the highest of any lender at
768 percent, the OCC said. That's down from 890 percent
in the first quarter of 2004.

Risk exposure for HSBC, Citigroup, and Bank of America
stands above 200 percent of their risk-based capital, the
OCC added.

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