OCC Reports Derivatives Volume Tops $90 Trillion

WASHINGTON – Derivatives held by U.S. commercial banks increased by $3.2 trillion in the first quarter of 2005, to $91.1 trillion, the Office of the Comptroller of the Currency reported today in its quarterly Bank Derivatives Report.

"The continued growth in notional volumes reflects positively on client demand for risk management products," noted Kathryn Dick, Deputy Comptroller for Risk Evaluation. "While still a small part of the total notional amount of bank derivatives contracts, credit derivatives have grown substantially over recent quarters and at $3.1 trillion now represent 3.4 percent of total derivatives. The credit derivatives market is still a relatively young market and one that our examiners pay close attention to because market participants’ risk management practices are still evolving."

Ms. Dick advised that while the notional amount of derivatives is a reasonable reflection of business activity, it does not represent the amount at risk for commercial banks. The risk in a derivatives contract is a function of a number of variables, such as whether counterparties exchange notional principal, the volatility of the currencies or interest rates used as the basis for determining contract payments, the maturity and liquidity of contracts, and the creditworthiness of the counterparties in the transactions, she said.

The OCC also reported that current credit exposure net of legally enforceable netting agreements declined by $22 billion to $198 billion at the end of the first quarter. The current credit exposure is the amount owed to banks if all contracts were immediately liquidated and is a useful measure of credit risk in a dealer's portfolio.

"Banks mitigate credit risk in the derivatives portfolio through the selection of high quality counterparties, use of legally enforceable netting agreements and application of collateral requirements, as appropriate," she said. "Legally enforceable netting agreements were used to reduce 83.7 percent of credit exposure in the first quarter."

The OCC also reported that revenues attributed to trading of cash instruments and derivative activities increased by $2.2 billion in the three-month period to $4.4 billion.

"Historically, the first quarter earnings are higher than other quarters and this quarter’s strong earnings are no exception," she noted. "Client activity in the first quarter is typically stronger as corporations issue debt and plan their foreign exchange activities for the year."

The OCC first quarter derivatives report also noted:

• Revenues from foreign exchange positions decreased by $283 million to $1.7 billion.
• Revenues from equity trading positions increased by $314 million to $888 million.
• Revenues from interest rate positions increased by $2.1 billion to $1.6 billion.
• The 25 largest banks account for more than 99 percent of the total notional amount of derivatives. Five commercial banks account for 96 percent of the total.
• The number of commercial banks holding derivatives increased by 18 to 695 banks.

A copy of the OCC Bank Derivatives Report: First Quarter 2005 is available on the OCC Website: www.occ.gov.

Related Links

• Quarterly Derivatives Report