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News Release 2011-75 | June 17, 2011

OCC Reports First Quarter Trading Revenue of $7.4 Billion

WASHINGTON—Commercial banks reported trading revenue of $7.4 billion in the first quarter of 2011, 113 percent higher than the fourth quarter of 2010, but 10 percent lower than in the first quarter of 2010, the Office of the Comptroller of the Currency reported today in the OCC's Quarterly Report on Bank Trading and Derivatives Activities.

"Trading revenues followed the familiar pattern of seasonal strength in the first quarter," said Martin Pfinsgraff, Deputy Comptroller for Credit and Market Risk. Mr. Pfinsgraff noted that trading revenues in 2011's first quarter were the third highest on record, trailing only the first quarters of 2009 and 2010. "Trading revenues tend to fall later in the year as client demand for risk management products abates, and trading desks become more conservative in response to more thinly traded markets." Mr. Pfinsgraff noted these seasonal trends reverse at the beginning of the year, and typically lead to very strong trading results. He also noted that lower results in 2011, compared to the record results of the first quarters of the prior two years, are related to "the relative absence this year of write-ups of legacy credit assets. If you factor out the non-recurring influence of these legacy gains, the first quarter this year compares very favorably to the prior two record quarters."

The OCC reported that net current credit exposure (NCCE), the primary metric the OCC uses to measure credit risk in derivatives activities, declined $23 billion, or 6 percent, to $353 billion this quarter. NCCE is now less than half the peak of $800 billion at the end of 2008, at the height of the credit crisis. "Credit exposures on derivatives are very sensitive to interest rates, since interest rate contracts are more than 80 percent of total notionals," said Mr. Pfinsgraff. "The rise in interest rates during the first quarter reduced credit exposure. But, rates have turned lower in the second quarter, so we are likely to see higher credit exposure numbers as we close the second quarter." Other credit metrics improved in the first quarter as well. Derivative charge-offs declined 33 percent to $74 million in the first quarter, while past due derivatives fell 22 percent to $42 million.

The report shows that the notional amount of derivatives held by insured U.S. commercial banks increased by $12.8 trillion (or 5.5 percent) in the first quarter to $244 trillion. Interest rate contracts increased $6 trillion (3 percent) to $200 trillion, while FX contracts increased 27 percent to $26.7 trillion.

The report also noted that:

  • Banks hold collateral to cover 72 percent of their NCCE. The quality of the collateral is very high, as 79 percent is cash (U.S. dollar and non-dollar).
  • Trading risk exposure, as measured by value-at-risk (VaR), has declined for each of the five major dealers since the first quarter of 2010.
  • Derivatives contracts are concentrated in a small number of institutions. The largest five banks hold 96 percent of the total notional amount of derivatives, while the largest 25 banks hold nearly 100 percent.
  • Credit default swaps are the dominant product in the credit derivatives market, representing 97 percent of total credit derivatives.
  • The number of commercial banks holding derivatives declined by 23 in the quarter to 1,047.

A copy of the OCC's Quarterly Report on Bank Trading and Derivatives Activities: First Quarter 2011 is available on the OCC's Website.

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