Revealed: where banks are (literally) warehousing their swaps

As derivatives notional grows, dealers experiment with novel storage solutions

Grain storage facility
Silo for storing grain, and other materials
Flickr/Paul Sableman/

After April 1, read at your own risk!

The rectangular, flat-roofed structure is clearly visible as you approach Bartlesville on the road from Tulsa, but you have to get off the highway to appreciate how big it really is. A single-lane access road leads up to the building and runs alongside it for almost a kilometre. On top of the chain-link fence that fringes the road, plastic-bag streamers flutter in the breeze. With the Oklahoma plains stretching away on one side, and the structure filling your field of vision on the other, it feels a little like being a dinghy next to a supertanker.

Like a tanker, it’s not immediately clear what this monster contains, but it was obviously built to store something. It consists almost entirely of a row of concrete cylinders, each about the height of a 10-storey building, all connected by that flat roof. Halfway along is a taller, square tower. It’s the only part of the structure with any windows.

At the end of the road is a white-bleached gatehouse, with a drop-arm barrier blocking access to the deserted car park beyond. The guard on duty doesn’t want to talk: no pass, no entry. When I ask what’s in the building, he shakes his head and waves me away.

A wooden sign, bleached like the gatehouse, is hanging lopsided from the fence nearby. It says “Van Neff Grain”, but multiple sources say this building – one of the largest grain elevators in the US – doesn’t hold grain any more.

Everyone in Bartlesville knows the Van Neff grain elevator. The people I speak to that evening believe it still contains grain, or plead ignorance. Then, at a diner, I get talking to Kelly Dunlap, a softly spoken woman wearing a faded sweater of the local football team, the Bartlesville Bruins. Dunlap worked at the Van Neff facility until a round of layoffs in September last year.

“The suits turned up a few months before. Did a tour. They came back later, a bigger group. We weren’t surprised when we heard there was a new client,” she says. “We were surprised when it turned out to be banks, though.”

Over the weeks that followed, convoys of trucks emptied the structure, and fresh convoys ferried new contents into the Van Neff facility, working night and day. Dunlap could see the queue of headlights from her house on the eastern edge of town.

So, what does the grain elevator hold now?

She shakes her head, gives a nonplussed shrug: “Derivatives.”

Grain of truth

There are few things in finance that generate as much fear as over-the-counter derivatives. Some of this stems from the perceived complexity of the products, but a lot of it is just about the market’s staggering size.

In its most recent semiannual survey, the Bank for International Settlements put OTC derivative notionals at $632.2 trillion, or about seven times gross world product – the combined income of every nation on the planet. To put it another way, for every dollar paid, anywhere in the world, there are seven dollars of what legendary investor Warren Buffett has called “financial weapons of mass destruction”.

After the global financial crisis of 2007 and 2008, regulators tried to safely puncture this still-growing bubble, piling layer upon layer of capital onto bank trading books, introducing new reporting requirements, and also teasing apart the market’s web of bilateral exposures to place clearing houses at its heart – central hubs that are designed to mitigate risk with margin requirements and mutualise any spillover losses.

The industry joined in, trying to compress its vast derivatives portfolios – and reduce the resulting capital charges – by identifying offsets within them, then tearing up unnecessary trades.

It worked, for a while. After peaking in 2014 at $710 trillion, the market slumped by almost a third over the following two years. Since then, however, it has resumed its uphill march, piling up ever-increasing notional sums. So, what happens when this seemingly unstoppable force meets the immovable object of regulatory constraints?

Kenneth Prankiewicz, a New York-based asset/liability management consultant, claims to have been the first to successfully pitch what he calls “off-site notional facilitation” in 2019.

“Bank balance sheets aren’t the bottomless pits that they were in the good old days. There’s limited room for all of that derivatives notional. But if your clients want to trade the stuff, what are you gonna do? You’ve got to put it somewhere,” he says.

Prankiewicz says prior attempts to move derivatives off-balance sheet relied on a combination of accounting and legal tricks.

“That’s not going to wash in the current environment. You can’t do it synthetically. You’ve got to pick those derivatives up, and physically move them. It’s the only way,” he says.

Quietly, a growing number of banks have been doing exactly that, and not just at Bartlesville.

Prankiewicz’s first client put its plans on ice when the pandemic hit, but inked its inaugural deal with an elevator in Kansas in early 2022, where it stashed an initial $224 billion book of long-dated US dollar interest rate swaps in a single grain silo. The bank now has contracts with four different facilities, and keeps more than $1.4 trillion in notional off-site. Other dealers have been doing the same. Based on conversations with his own clients, as well as with other consultants and brokers who are trying to muscle in on the business, Prankiewicz estimates the six largest US dealers now have around $20 trillion in derivatives notional stored at grain elevators in Kansas, Nebraska and Oklahoma.

“Everyone wins,” he says. “The elevators get to diversify their client base, banks can run their swaps business without running out of room, and regulators know exactly where the derivatives are – they can go out to the facilities and actually count the notional themselves, if they want to.”


Toronto University finance professor Dave Brubaker is not convinced.

“Sure, sure,” he says, wearily. “Everyone wins until someone loses.”

Brubaker worries about the combined weight of these vast piles of derivatives. The standard Shue-Pacioli equation for calculating the weight of a derivative was published in 1986. It uses notional, maturity, sensitivities and counterparty exposure as its key inputs – larger, longer-dated trades weigh far more than smaller, shorter-dated ones. A one-week foreign exchange forward with a notional of $2 million is practically weightless, while a $2 billion notional, 20-year inflation swap can weigh as little as 5,000 kilograms – or as much as 50,000 kg, if the underlying index moves a few percentage points.

Flickr/Randy Lane/
Bartlesville: Oklahoma’s thirteenth most populous city – but for how long?

Or so the formula says. Brubaker argues that while counterparty exposure has an impact on a derivative’s weight when the derivative is measured in isolation – lower exposure making it lighter – it will misrepresent the weight of a book if the derivatives and their collateral are physically stored together.

“Let’s say one of these elevators specializes in inflation swaps, and the collateral is stored along with the derivatives notional – you’re talking about a seriously heavy structure. And then imagine inflation spikes, and does so across all of the relevant indexes simultaneously,” he says.

Brubaker’s initial research suggests that if derivatives were stacked vertically – in a grain elevator, for example – and the stack suddenly increased in weight during a market shock, the lower portion of the notional pile could be compressed rapidly enough to create a “not very big” black hole.

What would happen to the Van Neff elevator in that scenario?

“Forget the elevator,” Brubaker says. “No more Bartlesville.”

Muddy waters

Other perils are less exotic, but in Bartlesville at least, they may be a more immediate concern.

Back in that diner, Dunlap offers an introduction to one of her friends, a local environmentalist, who claims to have used a drone to document the venting of rainwater collected from the elevator’s siloes into the Caney river.

A day later, we’re in Okesa, a cluster of houses in woodland about 10 miles to the west of Bartlesville. In her living room, with the curtains drawn, Olivia Johnson, is watching pin-sharp footage of the Van Neff elevator. A first fly-past shows each wing of the giant structure has two run-off pipes leading directly to the banks of the slow-moving river. What we see after that is open to interpretation. Johnson says she has edited footage obtained over the course of a recent week, to show 12 occasions when one or both run-off pipes were venting liquid into the river – the timestamps on the video seem to bear this out. But what was pouring from those pipes?

“That’s what I want to know,” says Johnson. “When it was a pile of grain sitting in that thing, we didn’t care. Now, I care. I want the town to get a toxicity report done.”

When Dunlap worked at the Van Neff facility, the roof and walls of many silos were leaky, she says. Rainwater would collect inside the structure, to be carried away periodically via the pipes.

The course of [the Caney river] has changed. New tributaries, dead-end pools and forks have appeared that weren’t there before
Gus Williams, Bartlesville resident

Derivatives are not known to be toxic to plants or animals, but there are other qualities associated with the market by its critics – opacity and complexity. There is no lab test available today that would establish whether the Van Neff derivatives are contaminating the rainwater and polluting the Caney river.

There are common-sense tests, though. Gus Williams chairs a local angler’s association. I ask him if the river has changed since the derivatives arrived, last year.

“It has,” he says levelly. “It’s murkier. You can’t see the riverbed any more. The course of it has changed, too – rivers always shift with the seasons, but never like this. New tributaries, dead-end pools and forks have appeared that weren’t there before.”

He pauses for a moment, then adds, self-consciously: “You know, I’d even swear the flow of the river is different. It used to flow predictably downstream. Now, there are times when it seems to flow sideways – or even in circles. My favourite local spots used to be on the Caney, but I don’t fish in it now. It’s just too complicated.”

A spokesperson for Bartlesville’s city council provided a statement: “As is the case for all industrial facilities, the Van Neff grain elevator is subject to periodic inspections for environmental hazards. These reports are publicly available and have raised no concerns.”

The last inspection took place in early 2022, before the arrival of the derivatives. There is no available timetable for the next inspection.

The Van Neff Corporation declined to comment.

Caverns full of notional

In New York, these concerns seem very distant. Prankiewicz, the ALM consultant, says the current focus of the banks is simple – they want to know how much notional they can move off-site and how quickly.

In addition to Prankiewicz’s business, other consultants and advisers have jumped on the bandwagon, and two interdealer brokers are said to be building teams to source notional storage.

At a March 14 meeting for firms involved in this nascent market, the talk turned quickly to capacity constraints.

“There are thousands of big, off-farm grain stores in the US. The capacity is huge. The problem is that a lot of that capacity is being used to store grain,” says Prankiewicz. “So, there’s starting to be some talk about alternative solutions.”

Those alternatives include some fairly out-there ideas. One bank floated the idea of using dormant volcanoes – not just the cone, but also the vents and magma chamber beneath. Another proposed using carbon capture technology to inject derivatives notional into porous rock formations underground.

“That one didn’t go anywhere,” says Prankiewicz. “The banks felt it wouldn’t be a good look if the carbon guys came along and found all their caverns were full of derivatives notional.”

A third option would be to fire giant cannisters of notional into space. This idea met resistance on several fronts – first, it would be difficult to retrieve the notional for audit or regulatory exams, and costly to send audit teams into low-Earth orbit to conduct their work.

There was also a fear that orbiting cannisters of derivatives wouldn’t remain in orbit for ever.

“You know what would happen,” says Prankiewicz. “A big box of space derivatives would drop out of its orbit and knock over the Statue of Liberty, or crash into a pyramid, or land on top of a pre-contact Amazonian tribe. Just not worth it.”

All images are for illustrative purposes

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