OCC Reports Second Quarter Trading Revenue of $6.4 Billion

WASHINGTON—Insured U.S. commercial banks and savings associations reported trading revenue of $6.4 billion in the second quarter of 2014, up $0.2 billion, or 4 percent, from $6.2 billion in the first quarter, the Office of the Comptroller of the Currency (OCC) reported today in the OCC's Quarterly Report on Bank Trading and Derivatives Activities. Trading revenue in the second quarter was $0.7 billion, or 10 percent, lower than the $7.1 billion recorded in the second quarter of 2013.

"Trading revenue started out slowly in the quarter, but accelerated at the end," said Kurt Wilhelm, Director of the Financial Markets Group. He noted that the increase in trading revenue in the second quarter was unusual. "The first quarter is normally the strongest revenue quarter of the year. It's not often we see an increase from the first quarter to the second quarter." Mr. Wilhelm noted that in the 15 years starting in 2000, trading revenue has increased in the second quarter only four times.

Trading revenue for the first six months of 2014 was $12.6 billion, $2.0 billion less (14 percent) than in the first half of 2013. "Although trading revenue increased in the second quarter, the year-to-date numbers indicate that trading revenue is still under some pressure," said Mr. Wilhelm. He noted that revenue from interest rate and foreign exchange contracts, the driver of bank trading revenue, was $9.1 billion for the first half of 2014, well below $11.2 billion in 2013 and $12.0 billion in 2012. "The extended period of low volatility has taken a toll on client demand and risk appetite."

Credit exposures from derivatives increased during the second quarter. Net current credit exposure (NCCE), the primary metric the OCC uses to measure credit risk in derivatives activities, increased $10 billion, or 3 percent, to $365 billion during the second quarter. NCCE had fallen by a total of $132 billion (27 percent) over the prior seven quarters. "The increase in credit exposure was driven by an increase in receivables from interest rate contracts," said Mr. Wilhelm. "The decline in rates during the second quarter not only caused an increase in credit exposure, it also caught some market participants by surprise and therefore created demand for risk management products."

The report shows that the notional amount of derivatives held by insured U.S. commercial banks increased $6.1 trillion, or 3 percent, from the first quarter to $237 trillion. "The notionals have not changed much over the past several years, as trade compression has offset natural growth in the market. However, in the second quarter, new contracts more than offset trade compression activity, and the increase in swap contracts was particularly noticeable," said Mr. Wilhelm. Swap contracts increased 5 percent to $136 trillion. Trade compression involves aggregating a large number of trades with similar factors, such as risk or cash flow, into fewer trades.

OCC also reported

• Banks hold collateral to cover 82 percent of their NCCE. The quality of the collateral is very high, as 78 percent is cash (U.S. dollar and non-dollar).
• Trading risk exposure, as measured by average value-at-risk (VaR), resumed its downward trend in the second quarter, as average quarterly VaR at the top five dealer banking companies fell 10 percent to $374 million.
• Receivables from interest rate contracts increased $138 billion, or 6 percent, to $2.6 trillion, due to lower market interest rates during the second quarter.
• Derivative contracts are concentrated in a small number of institutions. The largest four banks hold 92 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 81 percent of total derivative notional values. On a product basis, swap products represent 62 percent of total derivatives notionals.
• Credit default swaps are the dominant product in the credit derivatives market, representing 96 percent of total credit derivatives.
• The number of commercial banks and savings associations holding derivatives was 1,404 in the second quarter, up from 1,395 in the first quarter.

A copy of the OCC's Quarterly Report on Bank Trading and Derivatives Activities: Second Quarter 2014 is available on the OCC's website.

Related Link

• OCC's Quarterly Report on Bank Trading and Derivatives Activities: Second Quarter 2014