In Berkshire Hathaway's 2002 annual report, Warren Buffett details how both the discrete and macroeconomic risks of derivatives pose a serious threat to the major financial stakeholder. However, Buffet admits that his firm uses large derivatives transactions to facilitate the management of its stock trades, citing the micro-transactional advantage that can be realized by a party that is able to shift its risks to the financial market. With that distinction in mind, this paper aims to develop how derivative risks are used in the global financial system to offset discrete financial risks, replacing them with compound counterparty risks, as mentioned by Buffet. Buffet's(2002) main argument is that derivatives amplify counterparty risks through the way they are typically deployed on margin and without collateral, a claim supported by Bodie et al(2011), and therefore redistributed across markets in a way that “… will also create a chain risk similar to the risk faced by insurers or reinsurers who license much of their business to others. In both cases, large claims on many counterparties tend to accumulate over time” (Buffet, 2002:15). Buffet (2002) illustrates how this linkage effect has led to a situation where a large amount of derivatives risk has been concentrated in a small number of traders, meaning that the capitulation of a single trader will result in default systemic of the entire derivatives sector. Specifically, the OCC (2011) describes how just four institutions control $249 trillion worth of derivative contracts. This means that exposure to American derivatives ...... middle of paper ......012). Interestingly, Warren Buffet maintains a sizable position in Suncor and must obviously take advantage of the use of derivative contracts to reduce the price risks of their ongoing operations (Stempel&Lopez, 2013). Based on the culmination of the research covered in this report, Buffet's (2002) findings can be placed in contexts. Specifically, despite how the concentration and volume of traded derivative securities pose a serious risk to the global financial system as a whole, the actual risk presented is constrained by the ability of contracting parties to settle their contracts through compensation of outstanding debts. positions. While a systemic liquidation of derivatives markets through regulation would indeed be painful, it would likely not represent as great a risk as its nominal profile for their clearing positions suggests..