OCC Reports First Quarter Trading Revenue of $7 Billion

June 27 - Commercial banks and savings associations reported trading revenues of $7 billion in the first quarter of 2012, 178 percent higher than in the fourth quarter of 2011, but 5 percent lower than in the first quarter of 2011, the Office of the Comptroller of the Currency reported in the OCC's Quarterly Report on Bank Trading and Derivatives Activities.

“Once again, trading revenues were seasonally strong in the first quarter,” said Kurt Wilhelm, director of the OCC’s Financial Markets Group. “Client demand for risk management products was healthy, supported by a generally positive macro environment at the beginning of the year.” Wilhelm added that trading revenues were strong for all market sectors except for credit. “Certainly if you compare trading results in the first quarter to the fourth quarter, they’re almost always going to look good because of the seasonal effect. The slight weakness when measured against last year’s first quarter was almost entirely due to weaker credit trading results, as interest rate and FX revenues were sharply higher.” 

Wilhelm noted that interest rate and foreign exchange revenues are the drivers of bank trading revenues, over time representing 90 percent of total trading revenues. “Credit trading revenues are a much smaller, and more volatile, component.”

The OCC reported that net current credit exposure, the primary metric the OCC uses to measure credit risk in derivatives activities, decreased $53 billion, or twelve percent, to $377 billion during the first quarter. Wilhelm noted that “the more favorable risk and economic environment outlook in the first quarter pushed interest rates higher and credit spreads lower. Each of these factors results in lower fair values of derivatives contracts and therefore lower credit exposures.” Wilhelm noted, however, that risk appetite has changed significantly in the current quarter (Q2 2012), as investors are concerned about potential consequences of bank and sovereign credit risk in Europe. “The resulting decline in interest rates and increase in credit spreads is leading to higher credit exposures this quarter.”

The report shows that the notional amount of derivatives held by insured U.S. commercial banks and savings associations fell by $3 trillion (or 1.2 percent) from the fourth quarter to $228 trillion.  The notional amount of derivatives contracts has fallen for three consecutive quarters, due to ongoing trade compression activities. Interest rate contracts fell $3.8 trillion (two percent) to $184 trillion, while FX contracts rose five percent to $26.8 trillion.

The report also noted that:

• Banks hold collateral to cover 67 percent of their NCCE.  The quality of the collateral is very high, as 81 percent is cash (U.S. dollar and non-dollar).
• Average trading risk exposure, as measured by value-at-risk, totaled $564 million across the top five dealer firms in the first quarter, nearly 17 percent lower than $677 million in the first quarter of 2011.
• 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.
• Derivative contracts remain concentrated in interest rate products, which represent 81 percent of total derivative notional values.  On a product basis, swap products represent 61 percent of total derivative notionals.
• 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 increased by 213 (of which 192 were savings associations) in the quarter to 1,291.

A copy of the OCC’s Quarterly Report on Bank Trading and Derivatives Activities:  First Quarter 2012 is available on the OCC’s website, www.occ.gov.