It should have been obvious to everyone - bankers, regulators etc. that there is no way that Derivatives valued at 2 to 3 times Global GNP can be outstanding at any one time.  

Not at all.

Let's take a nice little example in the Brent Crude Oil "15 Day" market in Forward Contracts for cargoes of  500,000 barrels.

A has rights to production and in January he sells a July cargo to B at $100/ bbl; in due course trader B sells a cargo at $105 to C; then a month or two later C at $95 to D, who sells to E and so on until K sells at $102 to A and A sells to X at $104.

Eventually the time comes when the July forward contract reaches the point when it goes into its delivery cycle, and what happens then is that "chains" of "nominations" form, and that "nomination" process is always great fun, as people who have sold "short" try not to be left still holding a nomination at 5 o'clock which they cannot pass on in time.

In which case a "distressed" seller who has been "clocked" needs a cargo to fulfil his contract and is fair game for being stuffed by a seller who has one.

So maybe 250 outstanding "open" forward July contracts are settled as nominations pass one way down chains, and the money flows the other way up them, with traders collecting profits, or suffering losses, along the way.

It wasn't unknown for chains to be over 100 links long and for "book-outs" to take place wherever nominations  went full circle, as in the example, from A back to A again.

Only the net (say) ten cargoes actually pumped out that month go to delivery and become "wet" so that tankers are chartered to arrive at the nominated "delivery window" at Sullom Voe. All the rest of the forward sales/ derivatives are cashed out.

Great fun.

Note that like the credit derivatives markets, the Brent 15 day market is a bilateral "Over the Counter" market with no central clearer standing in the middle to guarantee and settle trades.

The point is that although there may well be $172 trillion of derivatives out there, they will in fact - if they are all performed - for the most part net down to zero (unlike derivatives in real things like oil where physical delivery takes place in "money's worth" rather than money).

The problem is that no one has the foggiest idea as to which of these derivatives are going to be performed, and which are not, let alone who is actually holding the shit, who can stand the losses and who cannot.

"The future is already here -- it's just not very evenly distributed" William Gibson