OCC Reports Second Quarter Trading Revenue of $6.6 Billion

WASHINGTON — Commercial banks reported trading revenue of $6.6 billion in the second quarter of 2010, 28 percent higher than the second quarter of 2009, but 20 percent lower than the first 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.

"It is normal to see trading revenues drop in the second quarter of the year,” Deputy Comptroller for Credit and Market Risk Dave Wilson said. “In addition to the normal seasonal decline in revenues we expected to see, client demand fell under the weight of uncertainty about global economic growth and sovereign credit risks."

The OCC reported that net current credit exposure (NCCE), the primary metric the OCC uses to measure credit risk in derivatives activities, increased $38 billion, or 11 percent, to $397 billion this quarter. NCCE peaked at $800 billion at the end of 2008, at the height of the credit crisis, and had declined for five consecutive quarters until the increase this quarter.

"The flight-to-quality resulting from European credit concerns earlier this summer caused a sharp decline in interest rates, which led to a very significant increase in receivables from interest rate contracts," Mr. Wilson said. "If not for a material increase in netting benefit percentage, the NCCE increase would have been much larger."

The netting benefit percentage, the amount of gross derivatives exposures reduced due to legally enforceable netting agreements, increased from 91 percent to 91.9 percent, a new record.

The report shows that the notional amount of derivatives held by insured U.S. commercial banks increased by $6.9 trillion (or 3.2 percent) in the second quarter to $223.4 trillion. Interest rate contracts increased $6.6 trillion to $188.6 trillion, while FX contracts increased 3 percent to $18.2 trillion.

The report also noted that:

• Banks hold collateral to cover 66 percent of their NCCE. The quality of the collateral is very high, as 82 percent is cash (US dollar and non-dollar).
• 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.
• 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 14 in the quarter to 1,064.

A copy of the OCC’s Quarterly Report on Bank Trading and Derivatives Activities: Second Quarter 2010 is available on the OCC’s Website.