In Berkshire Hathaway's 2002 annual report, Warren Buffett explains in detail how the discrete and macroeconomic risks of derivative instruments pose a serious threat to all financial stakeholders. However, Buffet admits that his company uses large derivatives transactions to help manage its stock trades, citing the micro-transactional advantage that can be realized by a party able to transfer its risks into the financial market . With such a distinction in mind, this article intends to elaborate on how derivatives risks are used in the global financial system to offset discrete financial risks, while replacing them with compound counterparty risks, as mentioned Mr. Buffet. Buffet's (2002) main argument is that derivative instruments amplify counterparty risks through the way in which they are generally distributed on margin and without collateralization, an assertion supported by Bodie et al (2011), and then redistributed across all markets. in a way that “…will also create a chain risk akin to the risk faced by insurers or reinsurers licensing a large part of their business with others. In both cases, enormous claims against numerous counterparties tend to accumulate over time” (Buffet, 2002: 15). Buffet (2002) illustrates how this linkage effect resulted in a situation in which much of the derivative risk was concentrated within a small number of brokers, meaning that the capitulation of a single broker will result in default systemic of the entire derivatives industry. Specifically, the OCC (2011) describes why only four institutions control derivative contracts worth $249 trillion. This means that exposure to US derivatives ...... middle of paper ......012). Interestingly, Warren Buffet has a large position in Suncor and must obviously see an advantage in using derivative contracts to reduce the price risks of his continuing operations (Stempel and Lopez, 2013). Depending on the outcome of the research covered in this report, the findings of Buffet (2002) can be placed in context. Specifically, despite the fact that the concentration and volume of derivative securities traded pose a serious risk to the global financial system as a whole, the actual risk presented relates to the ability of contracting parties to settle their contracts through clearing of outstanding amounts. . positions. Although a systemic unwinding of derivatives markets through settlement would indeed be painful, it would probably not represent as great a risk as its nominal profile suggests for their offsetting positions..