The pillars of the global financial system are fundamentally unstable and could lead to a frightening chain -reaction in the next crisis, the world's top watchdog has warned.
Giant central counterparties (CCPs) that clear much of the $540 trillion ($795 trillion) of derivatives are themselves vulnerable to failure in times of extreme stress.
This is a worry looming ever larger as rising US interest rates expose the weak links in global debt markets.
The Bank for International Settlements said in its quarterly report that the CCPs could cause "a destabilising feedback loop, amplifying stress".
The implicit message is that well-meaning regulators may have made the financial architecture more dangerous.
The near meltdown of the Scandinavian counterparty Nasdaq Clearing AB in September came as a shock to the global authorities, and a foretaste of what might happen on a much bigger scale.
The notional value of the derivatives cleared worldwide is 4.4 times world GDP, up from 2.8 times in 2008. JP Morgan alone has a $30 trillion book.In that case a €114m ($190m) default by -Norwegian trader Einar Aas - caught on the wrong side of a "convergence play" on electricity prices - burned through his collateral and then through two thirds of a reserve fund from non-defaulting members.
The BIS warned that regulators have inadvertently created a "CCP-bank nexus" - somewhat akin to the sovereign/bank doom loop in the eurozone.
The rotten apple contaminates the healthy banks.
A fire-sale of assets spreads contagion.
Banks may be forced to hoard liquidity to protect themselves. The BIS said "balance sheet interlinkages" and what it calls the "CCP default waterfall" could unravel with "potentially system-wide effects".
Another brutal week on Wall Street has brought these risks into sharper focus. The three key equity indexes in the US are all in a full correction after falling over 10 per cent from their peak.
Germany's DAX index has dropped 19 per cent since January, and the Shanghai Composite is down 27 per cent.
"The market tensions we saw during this quarter were not an isolated event," said Claudio Borio, the BIS's chief economist.
Central banks are walking a tightrope as they try to extract themselves from a decade of emergency stimulus.
Quantitative easing and ultra-low rates have pushed up debt ratios to levels 40 basis points higher than the pre-Lehman peak, this time led by emerging markets.
Nobody knows where the pain threshold lies for monetary tightening in such circumstances.
The BIS says the nature of the world's business cycle has changed over the last three decades. Booms typically turned to bust in the 20th century, when rising inflation forced authorities to jam on the brakes.
But globalisation and the inclusion of China and emerging Asia in the trading system have suppressed inflation.
What now brings the party to an end is excess credit and rising debt service ratios. As conditions tighten, the financial system eventually buckles under its own weight.
The BIS says we may be close to this inflection point.
Standard & Poor's says the junk bonds rated B-minus or below have jumped from 17 per cent to 25 per cent in the past year, the highest since the crisis.
The average yield on US high-yield bonds has risen 165 basis points to 7.2 per cent over the past year.
A cascade of downgrades has begun. The spike has been more dramatic in the eurozone where stress is nearing danger levels, leaving credit analysts baffled by the European Central Bank's decision to halt QE.
The ratio of US corporate debt to GDP is 73.5 per cent, higher than in 2008.
The share of leverage loans in the US with risky "covenant-lite" contracts has reached 80pc this year.
The Achilles' heel for the global economy is the surging US dollar. The BIS says offshore lending in dollars by European, Japanese and increasingly Chinese and emerging market banks has risen to US$12.8 trillion.
This web of dollar -liabilities is coming under strain as the US Federal Reserve drains liquidity, pushing up global lending rates.
A worldwide dollar shortage is emerging.
The BIS warned some of these -offshore dollar lenders may face a "funding squeeze" of their own, forcing them to withdraw credit in a chain-reaction.
"Cross-border funding, regardless of the source, may be fickle in a crisis," it said.
The G20 mandated a shift in the global finance towards CCPs after the 2008 crisis when they managed to auction, liquidate, or transfer almost all of Lehman's derivative portfolios in an orderly fashion.
But there have been plenty of CCP failures.
France's Caisse de Liquidation des Affaires came awry in 1974 when the sugar market blew up. The Hong Kong Futures Guarantee Corporation failed in 1987.
The Chicago Mercantile Exchange had a close shave the same year.
Before the 2008 crisis, most derivatives were cleared by trading parties in direct dealings. The G20 shift has lifted the share of CCPs for interest rate derivatives from 20 per cent to 60 per cent. The effect is to concentrate risk.
The BIS warns the system may encourage a rush for the exit in events of extreme stress.
The International Monetary Fund warned this year that CCPs "increase the risk of a failure of the infrastructure itself" and could lead to a "catastrophe" if the all layers of defence were overrun by a big default.
It would be like the failure of the Maginot Line.
The G20 may have made the world financial system more hazardous.