Notional value

Every few months a chart circulates showing the derivatives market as a figure so large it dwarfs world GDP, usually captioned as a bomb waiting to go off. The number is real; the reading is wrong. It is a sum of notionals — the reference amounts contracts are written on — and a notional is not an exposure.

Three numbers, in descending order of headline appeal and ascending order of usefulness. Notional amount: the face value the contract references. Gross market value: what the contracts are actually worth today — what it would cost to replace them; a small fraction of notional. Net exposure: what remains after offsetting positions between the same counterparties are netted against each other and collateral is counted; smaller still. The headline quotes the first number. The risk lives in the third.

None of this means derivatives are harmless. It means the size number is the wrong place to look for danger. Every genuine derivatives disaster has come from the combination of leverage without limits and governance without discipline — a mechanism that works at any notional. The article below walks through the real figures, from the BIS’s own statistics, and the difference between the illusion and the actual risk.