OCC Reports Third Quarter Trading Revenue of $4.2 Billion

WASHINGTON — Commercial banks reported trading revenue of $4.2 billion in the third quarter of 2010, 27 percent lower than the third quarter of 2009 and 37 percent lower than 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.

"Client demand for risk management products often tails off later in the year, and the economic uncertainty both here in the U.S. and around the world exacerbated that seasonal trend this quarter," Deputy Comptroller for Credit and Market Risk Dave Wilson said. "As a result, trading revenues were a bit weaker than typically is the case in third quarters."

The OCC reported that net current credit exposure (NCCE), the primary metric the OCC uses to measure credit risk in derivatives activities, increased $43 billion, or 11 percent, to $440 billion this quarter. NCCE peaked at $800 billion at the end of 2008.

"Net current credit exposure has increased in each of the past two quarters, as economic growth and sovereign credit concerns led to sharply lower interest rates," Mr. Wilson said. Lower interest rates cause increases in the value of interest rate contracts. "Since interest rate contracts make up the vast majority of the derivatives market, the credit exposure numbers are very sensitive to changes in interest rates," he said.

Banks charged-off $284 million in derivatives exposures during the third quarter, 139 percent higher than $119 million in the second quarter.

"Charge-offs from derivatives are much lower than for loans, as a percentage of the exposure amounts," Mr. Wilson said. "But, they remain historically high, and counterparty credit risk management remains a key examination focus."

The report shows that the notional amount of derivatives held by insured U.S. commercial banks increased by $11.3 trillion (or 5 percent) in the third quarter to $234.7 trillion. Interest rate contracts increased $7.9 trillion (4 percent) to $196.5 trillion, while FX contracts increased 14 percent to $20.8 trillion.

The report also noted that:

• Banks hold collateral to cover 69 percent of their NCCE. The quality of the collateral is very high, as 82 percent is cash (US dollar and non-dollar).
• Trading revenues at bank holding companies in the third quarter were 43 percent lower than in the same quarter of 2009.
• 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 41 in the quarter to 1,105.

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

Related Link

• OCC’s Quarterly Report on Bank Trading and Derivatives Activities: Third Quarter 2010 (PDF)