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OCC Reports Second Quarter Trading Revenue of $7.3 Billion


Sept 30 - Insured U.S. commercial banks and savings associations reported trading revenue of $7.3 billion in the second quarter of 2013, $0.2 billion lower (3 percent) than $7.5 billion in the first quarter, the Office of the Comptroller of the Currency reported in the OCC's Quarterly Report on Bank Trading and Derivatives Activities.

Second quarter trading revenue was $5.3 billion higher (268 percent) than $2 billion in the second quarter of 2012.

"The decline in trading revenue was not a surprise, given the well-established seasonal pattern,” said Kurt Wilhelm, director of the financial markets group. “What is a bit surprising, however, is how small the decline was.” Wilhelm noted that trading revenue in the second quarter was the second highest of any second quarter, trailing only the $7.4 billion in 2007. Regarding the seasonal pattern of trading revenue, he noted that it has fallen in the second quarter 11 times since 2000, with an average decline of $1.3 billion. “There was strong demand for interest rate products, as investors increased their hedging and positioning activity after the Fed stated it may taper its bond purchases.”

Credit exposures from derivatives fell in the second quarter. Net current credit exposure, the primary metric the OCC uses to measure credit risk in derivatives activities, decreased $19 billion, or 5 percent, to $339 billion during the second quarter.

“The rise in market interest rates during the second quarter caused a sharp decline in receivables on interest rate contracts,” said Wilhelm, who noted that the gross fair value of interest rate contracts declined $544 billion, or 16 percent, to $2.9 trillion.

Receivables on all other derivatives contracts increased $46 billion, resulting in gross derivatives receivables falling by $498 billion. Regarding credit performance, Wilhelm noted that charge-offs fell $22 million during the second quarter to $61 million.

"Charge-offs of derivatives exposures usually result from swaps that are connected to defaulted loans." Wilhelm also noted some continued slippage in the quality of collateral held against derivatives exposures. “Collateral quality on derivatives exposures is very high, as 77 percent of it is cash. That explains why the charge-off rate on derivatives is so much lower than it is on loans.” But, he noted that the percentage of collateral in cash was 81 percent at the end of the first quarter of 2012.

The report shows that the notional amount of derivatives held by insured U.S. commercial banks and savings associations rose $2.2 trillion, or 1 percent, from the first quarter to $233.9 trillion, a second consecutive quarterly increase.

“The notional increase was due entirely to interest rate contracts,” said Wilhelm, who noted that the $3.4 trillion increase offsets declines in notionals for other asset classes. “After a long period of very low and stable rates, investors were reintroduced to interest rate risk in the second quarter, when the yield on the 10-year Treasury Note increased 66 basis points.

“Even with two consecutive quarterly increases, notionals have still fallen in five of the past eight quarters,” said Wilhelm, who noted that banks have used trade compression to reduce notionals. Trade compression allows banks to reduce regulatory capital requirements, as well as operating and risk burdens in their derivatives portfolios, by aggregating a large number of trades with similar factors into fewer trades. The notional amount of derivatives peaked at $249 trillion in the second quarter of 2011.

OCC also reported:

Click here for a copy of the OCC’s Quarterly Report on Bank Trading and Derivatives Activities: Second Quarter 2013, which is also available on the OCC’s website.