’ total assets. still, these credit exposures have been growing rapidly, more or less in line with the growth of the notional amounts. the leading role played by u. s. commercial and investment banks in the global otc derivatives markets is documented in a bank for international settlements survey of last june. this survey estimated the size of the global otc market at an aggregate notional value of $ 70 trillion, a figure that doubtless is closer to $ 80 trillion today. once allowance is made for the double - counting of transactions between dealers, u. s. commercial banks ’ share of this global market was about 25 percent, and u. s. investment banks accounted for another 15 percent. while u. s. firms ’ 40 percent share exceeded that of dealers from any other country, the otc markets are truly global markets, with significant market shares held by dealers in canada, france, germany, japan, switzerland and the united kingdom. despite the world financial trauma of the past eighteen months, there is as yet no evidence of an overall slowdown in the pre - crisis derivative growth rates, either on or off exchanges. indeed, the notional value of derivatives contracts outstanding at u. s. commercial banks grew more than 30 percent last year, the most rapid annual growth since 1994. although episodes of extreme volatility have produced declines in the most highly leveraged contracts, the growth of the more “ plain vanilla ” products has continued apace or even accelerated. the reason that growth has continued despite adversity, or perhaps because of it, is that these new financial instruments are an increasingly important vehicle for unbundling risks. these instruments enhance the ability to differentiate risk and allocate it to those investors most able and willing to take it. this unbundling improves the ability of the market to engender a set of product and asset prices far more calibrated to the value preferences of consumers than was possible before derivative markets were developed. the product and asset price signals enable entrepreneurs to finely allocate real capital facilities to produce those goods and services most valued by consumers, a process that has undoubtedly improved national productivity growth and standards of living. nonbank, as well as bank, users of these new financial instruments have increasingly embraced them as an integral part of their capital risk allocation and profit maximization. it should come as no surprise that the profitability of derivative products has been a major factor in the dramatic rise in large banks ’ non - interest earnings and

mr greenspan discusses financial derivatives and the risks they entail speech by the chairman of the board of governors of the federal reserve system, alan greenspan, before the futures industry association, boca raton, florida, on 19 march 1999. by far the most significant event in finance during the past decade has been the extraordinary development and expansion of financial derivatives. this morning i should like to evaluate the scope of these markets, the nature of the risks they entail and some of the difficulties we encounter in managing those risks. at year - end, u. s. commercial banks, the leading players in global derivatives markets, reported outstanding derivatives contracts with a notional value of $ 33 trillion, a measure that has been growing at a compound annual rate of around 20 percent since 1990. of the $ 33 trillion outstanding at year - end, only $ 4 trillion were exchange - traded derivatives ; the remainder were off - exchange or over - the - counter ( otc ) derivatives. the greater use of otc derivatives doubtless reflects the attractiveness of customized over standardized products. but regulation is also a factor ; the largest banks, in particular, seem to regard the regulation of exchange - traded derivatives, especially in the united states, as creating more burdens than benefits. as i have noted previously, the fact that the otc markets function quite effectively without the benefits of the commodity exchange act provides a strong argument for development of a less burdensome regime for exchange - traded financial derivatives. of course, notional values are not meaningful measures of the risks associated with derivatives. indeed, it makes no sense to talk about the market risk of derivatives ; such risk can be measured meaningfully only on an overall portfolio basis, taking into account both derivatives and cash market positions, and the offsets between them. clearly, the degree of counterparty credit risk on derivatives depends critically on the extent to which netting and margining procedures are employed to mitigate the risks. in the case of exchange - traded contracts, of course, daily variation settlements by clearing houses strictly limit, if not totally eliminate, such counterparty risks. in the case of otc derivatives, counterparty credit exposures are far larger, though still a very small fraction of the notional amounts. on a loan equivalent basis, a reasonably good measure of such credit exposures, u. s. banks ’ counterparty exposures on such contracts are estimated to have totaled about $ 325 billion last december. this amounted to less than 6 percent of banks