Derivatives Activity Jumped $1.2 Trillion In 2nd Quarter To Record Level Of $19 Trillion

WASHINGTON, D.C. — The amount of bank derivatives activity increased significantly in the second quarter of 1996, rising by $1.2 trillion to a record $19 trillion, the Office of the Comptroller of the Currency (OCC) announced today. The notional amount of derivatives activity has more than doubled since the end of 1992, when it stood at $8.8 trillion.

For the nine largest banks that dominate the U.S. derivatives market, the average percentage of credit exposure to risk based capital rose in the second quarter to 244 percent. These nine banks account for 94 percent of the total notional amount of derivatives in the banking system. The number of banks holding derivatives decreased by 42 in the second quarter to 507.

With trading revenue from interest rate contracts leading the way, total trading revenue in the second quarter was $1.9 billion, down slightly from the record $2 billion the quarter before.

The OCC reports quarterly on the status of U.S. derivatives activity. Following is a summary of the report:

Derivatives Activity: The notional amount of bank derivatives activity rose by $1.2 trillion in the second quarter to $19 trillion. The notional amounts of interest rate and foreign exchange contracts, which account for 98 percent of all derivatives activity, rose to $12.5 trillion and $6.1 trillion respectively. Segregated by type, $8.1 trillion in second quarter derivatives transactions were futures and forward trades; $6.7 trillion were swaps; and $4.2 trillion were options.

Risk Exposure: The average percentage of credit exposure to risk based capital for the top 9 banks with derivatives rose in the second quarter to 244 percent. The increase in credit risk exposure during the second quarter is largely due to the growth in derivatives volumes and the related increase in the future add-on portion of the credit exposure calculation. Credit exposure would have been significantly higher without the benefit of bilateral netting agreements. Non-performing contracts remained low, with the book value of contracts past due 30 days or more totaling only $16 million.

Revenues: Trading revenue declined by $62 million to $1.9 billion in the second quarter, a 3 percent drop from the first quarter. The top nine banks involved in derivatives trading realized 86 percent of the nearly $2 billion in revenue during the second quarter. A third of trading revenues from cash and derivatives activities was attributable to Morgan Guaranty Trust, which realized $634 million. These revenue data include both cash and derivatives trading activities.

High-Risk Mortgage Securities/Structured Notes: Banks reporting either structured notes or high-risk mortgage securities were largely those banks with total assets of less than $1 billion. The book value of these instruments exceeded the market value by $349 million, a deterioration of $151 million from the first quarter. The number of banks reporting structured notes on their books decreased in the second quarter by 196 to 3,850.

Related Link

• Derivatives Data -Second Quarter 1996 Call Report (PDF)