"-- The notional value of derivatives held by U.S. commercial banks increased $8.5 trillion in the fourth quarter, or 4.2 percent, to $212.8 trillion.

"-- U.S. commercial banks reported trading revenues of $1.9 billion in the fourth quarter, down 66 percent from $5.7 billion in the third quarter. For the year, banks reported record trading revenues of $22.6 billion, compared to a loss of $836 million in 2008.

"-- In the fourth quarter, net current credit exposure decreased 18 percent, or $86 billion, to $398 billion. Net current credit exposure dropped 50 percent during 2009.

"-- Derivative contracts remain concentrated in interest rate products, which comprise 84 percent of total derivative notional values. The notional value of credit derivative contracts, at $14 trillion, represents 7 percent of total notionals. Credit derivatives notional totals increased by 8 percent during the quarter."

Imagine: an increase of $8.5 trillion in notional value of derivatives in just three months.

It sure looks like the banks are working hard to reduce risk and avoid a recurrence of the financial meltdown of 2008 that was caused by the failure of Lehman Bros. and its monstrously oversized derivatives book.

It also looks like the regulators are working hard to make sure that the risks are not concentrated in a few banks that are "too big to fail." The comments in parentheses are mine, not those of the OCC, although you could probably have worked that out for yourself:

"A total of 1,030 insured U.S. commercial banks reported derivatives activities at the end of the fourth quarter, a decrease of 35 banks from the prior quarter.

"Derivatives activity in the U.S. banking system continues to be dominated by a small group of large financial institutions. Five large commercial banks represent 97 percent of the total banking industry notional amounts and 88 percent of industry net current credit exposure. While market or product concentrations are normally a concern for bank supervisors, there are three important mitigating factors with respect to derivatives activities.

"First, because this report focuses on U.S. commercial banking companies, there are a number of other providers of derivatives products whose activity is not reflected in the data in this report."

(Do you seriously expect us to believe that these other providers significantly dilute a 97 percent monopoly?)

"Second, because the highly specialized business of structuring, trading, and managing derivatives transactions requires sophisticated tools and expertise, derivatives activity is concentrated in those banking companies that have the resources needed to be able to operate this business in a safe and sound manner."

(You have to be kidding me! Where have you guys at the Treasury been the last two years?)

"Third, the OCC and other supervisors have examiners on-site at the largest banks to continuously evaluate the credit, market, operation, reputation, and compliance risks of derivatives activities."

(And how did that work out for you in 2008?)

"In addition to the OCC's on-site supervisory activities, the OCC continues to work with other financial supervisors and major market participants to address infrastructure issues in OTC derivatives, including development of objectives and milestones for stronger trade processing and improved market transparency across all OTC derivatives categories."

(How much more "transparency" do you need to "see" that $206 trillion of derivatives in five banks with combined assets of a measly $5.4 trillion is a "daisy-cutter" bomb big enough to wipe out all things paper on the planet?)

You have to love those "mitigating factors" that the regulators offer as to why five banks owning 97 percent of $213 trillion of derivatives is not a problem. The increase in notional value of all derivatives in just three months is equal to 75 percent of the U.S. gross domestic product. Do the "sophisticated tools" that these bankers require to write derivative contracts include bongs and the strongest hallucinatory drugs on the planet?

Let's have a look at the gold and precious metals derivatives and compare Q3 to Q4 2009.

The gold derivatives of all maturities declined 1.3 percent to $99.9 billion, which was due to a decline in JPMorgan Chase (JPM) holdings of 1 percent to $82.1 billion and a decline in HSBC holdings of 11.2 percent to $16.2 billion.

But the real shocker is in silver. The precious metals (silver) derivatives of all maturities increased by a mind-boggling 37 percent, from $9.29 billion to $12.8 billion. This came principally from increases in the less-than-one-year maturities where the JPM holdings increased 34 percent to $6.76 billion and HSBC holdings increased 58 percent to $4.7 billion. (Despite the radically different percentage increases, interestingly the increases at JPM and HSBC were identical in dollar amounts at $1.7 billion.)

This increase in notional value of silver derivatives represents approximately 220 million ounces, which is 125 percent of the global production of silver during the quarter -- and that is only the increase. The entire notional value represents 106 percent of annual global production.

What possible legitimate purpose could such a monstrous derivative position be serving with a maturity of less than one year?

The only purpose I can think of is for manipulation of the silver market. I am not a regulator but I can't think of any "mitigating factors" for that.

-----

Adrian Douglas is publisher of the Market Force Analysis letter (www.MarketForceAnalysis.com) and a member of GATA's Board of Directors.

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