September 16, 2011
OCC Reports Second Quarter Trading Revenue of $7.4 Billion
WASHINGTON — Commercial banks reported trading revenue of $7.4 billion in the second quarter of 2011, one percent lower than the first quarter of 2011, but 11 percent higher than in the second quarter of 2010, the Office of the Comptroller of the Currency reported today in the OCC's Quarterly Report on Bank Trading and Derivatives Activities.
"Although trading revenues fell from the first quarter, they were actually quite strong," said Martin Pfinsgraff, Deputy Comptroller for Credit and Market Risk. "There is a very strong seasonal trend to trading revenues, with the first quarter typically the highest in most years. While the decline was expected, it was more muted than in prior years indicating relatively strong results." Mr. Pfinsgraff noted that first and second quarter trading revenues in 2011 have been the third and fourth highest on record. "We have not seen an increase in risk commensurate with the rise in revenue. Revenue increased 11 percent compared to the second quarter of 2010 while Value at Risk (VaR), an industry standard measure of trading risk, was unchanged year over year."
The OCC reported that net current credit exposure (NCCE), the primary metric the OCC uses to measure credit risk in derivatives activities, increased $11 billion, or three percent, to $364 billion this quarter compared to the first quarter of 2011. NCCE is less than half the peak of $800 billion at the end of 2008, at the height of the credit crisis. "The rise in the second quarter broke a trend of steadily declining credit exposure numbers," said Mr. Pfinsgraff, who noted that NCCE had fallen in seven of the past nine quarters prior to the second quarter’s increase. "Based upon the very sharp decline in interest rates since the end of the second quarter, we anticipate a material rise in credit exposures during the third quarter." Mr. Pfinsgraff noted that aggregate derivative credit exposures are very sensitive to interest rates, since rate contracts are 82 percent of total notionals. He also noted that 73 percent of the NCCE was collateralized, up from 72 percent in the prior quarter. OCC expects to see continued increases in collateralization of derivative risks as more over-the-counter transactions migrate to exchanges in conformance to recent changes in regulation.
The report shows that the notional amount of derivatives held by insured U.S. commercial banks increased by $5.3 trillion (or 2.2 percent) from the first quarter to $249 trillion. Interest rate contracts increased $5 trillion (three percent) to $205 trillion, while FX contracts decreased one percent to $26.5 trillion.
The report also noted that:
- Banks hold collateral to cover 73 percent of their NCCE. The quality of the collateral is very high, as 77 percent is cash (U.S. dollar and non-dollar).
- Trading risk exposure, as measured by value-at-risk (VaR), increased six percent in the second quarter from the first quarter at the five largest trading companies, and was unchanged year over year.
- Derivatives contracts are concentrated in a small number of institutions. The largest five banks hold 96 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 82 percent of total derivative notional values.
- Credit default swaps are the dominant product in the credit derivatives market, representing 97 percent of total credit derivatives.
- The number of commercial banks holding derivatives increased by 24 in the quarter to 1,071.
A copy of the OCC's Quarterly Report on Bank Trading and Derivatives Activities: Second Quarter 2011 is available on the OCC's Web site.