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News Release 2013-190 | December 18, 2013

OCC Reports Third Quarter Trading Revenue of $4.5 Billion

WASHINGTON — Insured U.S. commercial banks and savings institutions reported trading revenue of $4.5 billion in the third quarter of 2013, down $2.8 billion, or 38 percent, from $7.3 billion in the second quarter.  Trading revenue in the third quarter was $0.8 billion, or 15 percent, lower than in the third quarter of 2012, the Office of the Comptroller of the Currency (OCC) reported today in its Quarterly Report on Bank Trading and Derivatives Activities.

"Client demand tends to start falling off as we move toward the end of the year, so there was a seasonal component to the revenue decline,” said Kurt Wilhelm, Director of the Financial Markets Group.  “But, the uncertainty associated with the potential for a federal government shutdown in October exacerbated the seasonal effect.  Many market participants were reluctant to commit capital during the quarter.”  Mr. Wilhelm noted that lower risk appetite showed up most clearly in weak revenue from interest rate and foreign exchange products, which totaled $3.6 billion during the third quarter, $2.3 billion lower than in the second quarter.       

“Looking more broadly, we see more general weakness in fixed income and currency trading revenue, the key drivers of bank trading revenue, this year,” said Mr. Wilhelm. Revenue from trading interest rate and foreign exchange contracts totaled $14.9 billion through the third quarter, $2.6 billion lower than in 2012.  “Although fixed income and currency revenues have lagged, a substantial improvement in credit trading revenue has led to stronger total trading revenue this year.”  Banks have reported total trading revenue through the third quarter in 2013 of $19.2 billion, $5 billion higher than in 2012.  Credit trading revenue in 2013 is $7.5 billion higher than in 2012, when well-publicized losses at one large bank distorted performance for the banking system. 

Credit exposures from derivatives fell for the fifth consecutive quarter.  Net current credit exposure (NCCE), the primary metric the OCC uses to measure credit risk in derivatives activities, decreased $33 billion, or 10 percent, to $305 billion during the third quarter.  “Because interest rate contracts are 81 percent of total derivatives, the lion’s share of credit exposure in derivatives comes from rates,” said Mr. Wilhelm.  “Interest rates edged a bit higher during the quarter, which helped to lower receivables from rate contracts and drive overall exposures lower.”  The OCC noted that the fair value of interest rate contracts declined $87 billion, or 3 percent, causing the fair value of all derivatives contracts to decline $142 billion, or 4 percent.   

The report shows that the notional amount of derivatives held by insured U.S. commercial banks rose $6.2 trillion, or 3 percent, from the second quarter to $240 trillion, the third consecutive increase in notionals.  Prior to the first quarter of 2013, derivatives notionals had fallen in five of the six prior quarters, due to ongoing trade compression activities, which allow banks to reduce regulatory capital requirements and operational risk in their derivatives portfolios.  Trade compression involves aggregating a large number of trades with similar factors, such as risk or cash flow, into fewer trades.  The notional increase in the third quarter resulted from a $7.2 billion, or 4 percent, increase in interest rate contracts to $195 trillion.  “While the overall increase in interest rates in the third quarter was not significant, there was a flurry of activity during the quarter, mostly involving very short maturities, given changing perceptions about whether the Federal Reserve would begin tapering its bond purchases,” said Mr. Wilhelm.  He noted that interest rate contracts with maturities less than one year increased $3.7 trillion.  Credit contracts fell $0.5 trillion, or 4 percent, to $12.8 trillion.  Commodity and equity contracts each rose 1 percent.  

OCC also reported:

  • Banks hold collateral to cover 80 percent of their NCCE.  The quality of the collateral is very high, as 75 percent is U.S. dollar and non-dollar cash. 
  • Trading risk exposure, as measured by average value-at-risk (VaR), totaled $354 million across the top five dealer firms during the third quarter, 6 percent lower than in the second quarter.
  • 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.
  • Derivatives contracts remain concentrated in interest rate products, which represent 81.4 percent of total derivative notional values, up from 80.5 percent in the second quarter.  On a product basis, swap products represent 62.6 percent of total derivatives notionals, up from 60.6 percent in the second quarter.
  • Credit default swaps are the dominant product in the credit derivatives market, representing 97 percent of total credit derivatives.
  • The number of commercial banks and savings associations holding derivatives was 1,417 in the third quarter, up from 1,400 in the second quarter.    

A copy of the OCC’s Quarterly Report on Bank Trading and Derivatives Activities: Third Quarter 2013 is available on the OCC’s Website.

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