The total amount of derivatives outstanding is indeed staggering, but you have to keep in mind that most of these contracts cancel each other out. The net exposure is probably a tiny, tiny fraction of it. Imagine I sell you some contract, then you sell it further to someone else, and so on, maybe 1000 times. There would be 1000 open positions, although only I and the guy at the other end of the chain would have net open positions (I would be a net seller, the guy at the other end a net buyer). You and everyone else in between would be “hedged”.
So, does that mean the problem is small? Not really, as there is “counterparty risk”. If links in the chain go broke, then all of the sudden many more market participants would have net open positions, although they weren’t really planning on it. The ends of the chain at least knowingly took the positions they took, so, if things go wrong, have only themselves to blame. The folks in the middle, though, may get burned quite unexpectedly (like BSC).
