Banking and Finance Law Daily Wrap Up, BANKING OPERATIONS—OCC reports second quarter trading revenue of $7.3 billion, (Sep 30, 2013)
Organizations Mentioned:Office of the Comptroller of the Currency
By Colleen Svelnis, J.D.
The Office of the Comptroller of the Currency (OCC) has reported a decline in trading revenue for insured U.S. commercial banks and savings associations. Trading revenue of $7.3 billion was reported in the second quarter of 2013, $0.2 billion lower than $7.5 billion in the first quarter. The decline was not a surprise, given the established seasonal pattern. Kurt Wilhelm, Director of the Financial Markets Group, noted that revenue has fallen in the second quarter 11 times since 2000, with an average decline of $1.3 billion. However, he was surprised that the decline was not larger–citing a strong demand for interest rate products.
The report shows that credit exposures from derivatives fell in the second quarter. Net current credit exposure, the primary metric the OCC uses to measure credit risk in derivatives activities, decreased $19 billion, or 5 percent, to $339 billion during the second quarter. Receivables on all other derivatives contracts increased $46 billion, resulting in gross derivatives receivables falling by $498 billion.
The OCC's Quarterly Report on Bank Trading and Derivatives Activities reported that the notional amount of derivatives held by insured U.S. commercial banks and savings associations rose $2.2 trillion, or 1 percent, from the first quarter to $233.9 trillion, a second consecutive quarterly increase. This increase was attributed to interest rate contracts. Trade compression has been used by banks to reduce notionals. It allows banks to reduce regulatory capital requirements, as well as operating and risk burdens in their derivatives portfolios, by aggregating a large number of trades with similar factors into fewer trades. The notional amount of derivatives peaked at $249 trillion in the second quarter of 2011.
The report also showed:
Banks hold collateral to cover 75 percent of their Net Current Credit Exposure.
Trading risk exposure, as measured by value-at-risk, averaged $376 million across the top five dealer firms during the first quarter of 2013.
Derivatives contracts are concentrated in a small number of institutions. The largest four banks hold 93 percent of the total notional amount of derivatives, while the largest 25 banks hold nearly 100 percent.
Derivative contracts remain concentrated in interest rate products, which represent 81 percent of total derivative notional values.
On a product basis, swap products represent 61 percent of total derivatives notionals.
Credit default swaps are the dominant product in the credit derivatives market, representing 97 percent of total credit derivatives.
The number of insured U.S. commercial banks and savings associations holding derivatives increased to 1,400, up 10 from the prior quarter.
RegulatoryActivity: BankingOperations FinancialStability