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News Release 2005-98 | September 30, 2005

OCC Reports Derivatives Volume Tops $96 Trillion

WASHINGTON – Derivatives held by U.S. commercial banks increased by $5.1 trillion in the second quarter of 2005, to $96.2 trillion, the Office of the Comptroller of the Currency reported today in its quarterly Bank Derivatives Report.

Kathryn Dick, Deputy Comptroller for Risk Evaluation, said that while the notional amount of derivatives is a reasonable reflection of business activity, it does not represent the amount at risk for commercial banks. The risk in a derivatives contract is a function of a number of variables, such as whether counterparties exchange notional principal, the volatility of the currencies or interest rates used as the basis for determining contract payments, the maturity and liquidity of contracts, and the creditworthiness of the counterparties in the transactions, she said.

The OCC also reported that credit derivatives increased by $981 billion, to $4.1 trillion.

"Low worldwide interest rates and credit spreads have let to strong client demand for credit instruments, and the growth in notional volumes reflects that," said Ms. Dick. "Our large dealer banks have targeted credit derivatives as an important segment of their product mix and a critical aspect of our supervision is to work with other agencies to ensure that the dealer community has the appropriate operational infrastructure to support this growing market."

The report noted that one measure of credit risk in dealer portfolios--current credit exposure, net of legally enforceable netting agreements-- increased by $2 billion to $200 billion at the end of the second quarter. The current credit exposure is the amount owed to banks if all contracts were immediately liquidated.

"The decline in interest rates caused the fair values of contracts to increase very sharply, but an equally large increase in netting benefits kept our benchmark credit risk indicator relatively flat," said Ms. Dick.

The OCC found that gross positive fair values increased 23%, or $282 billion, to $1.495 trillion, while netting benefits increased 28%, or $280 billion, to $1.295 trillion.

"While these numbers are obviously very large, it is important to note that banks take collateral to reduce their exposures, and moreover the average quality of counterparties in the derivatives portfolio is higher than in the C&I portfolio," Ms. Dick explained.

The OCC also reported that revenues attributed to trading of cash instruments and derivative activities decreased by $2.5 billion in the second quarter to $1.96 billion. "We did not expect to see a repeat of the record amount of trading revenues from the first quarter, especially in light of second quarter market dislocations," said Ms. Dick.

The OCC second quarter derivatives report also noted:

Revenues from foreign exchange positions decreased by $398 million to $1.3 billion. Revenues from equity trading positions decreased by $756 million to $131 million. Revenues from interest rate positions decreased by $1.3 billion to $362 million.

The 25 largest banks account for more than 99 percent of the total notional amount of derivatives. Five commercial banks account for 96 percent of the total.

The number of commercial banks holding derivatives increased by 74 to 769 banks.

A copy of the OCC Bank Derivatives Report: Second Quarter 2005 is available on the OCC Website:

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