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News Release 2012-176 | December 20, 2012

OCC Reports Third Quarter Trading Revenue of $5.3 Billion

WASHINGTON — Insured U.S. commercial banks and savings institutions reported trading revenue of $5.3 billion in the third quarter of 2012, $3.3 billion, or 166 percent higher than in the second quarter, but $3.2 billion, or 38 percent lower than in the third quarter of 2011, the Office of the Comptroller of the Currency reported today in the OCC's Quarterly Report on Bank Trading and Derivatives Activities.

"It was a fairly robust revenue performance, given the macroeconomic uncertainties that prevailed during the third quarter,” said Martin Pfinsgraff, Deputy Comptroller for Credit and Market Risk.  “Declining bank credit spreads created some headwinds due to the valuation adjustments on derivatives payables and debt accounted for under fair value accounting,” said Mr. Pfinsgraff.  “Notwithstanding the costs associated with relatively large, negative, valuation adjustments, trading revenues were the fourth highest on record for any third quarter.”  

OCC reported that results from credit trading remain a drag on trading revenues, but the smaller scale of losses on credit contracts drove the improvement in trading revenues vs. the second quarter.  “Trading revenues in the second quarter were unusually weak, because of over $4 billion of losses from credit contracts primarily related to JPMorgan Chase unwinding CIO positions.  In the third quarter, banks again reported losses from credit trading, but $3 billion less than last quarter,” said Mr. Pfinsgraff.  

The losses on credit trading in the third quarter distort actual performance, since some banks report the results of hedges of their valuation adjustments in credit trading, while the offsetting changes of the adjustments themselves are spread across trading revenue categories.  The OCC reported that net current credit exposure (NCCE), the primary metric the OCC uses to measure credit risk in derivatives activities, decreased $11 billion, or 3 percent, to $399 billion during the third quarter.  “It is a bit unusual, from an historical perspective, for credit exposures to fall when interest rates fall, as they did this quarter.  But, as we discussed last quarter, the extended period of low interest rates is changing the sensitivity of swap portfolios,” said Mr. Pfinsgraff.  “Receivables from interest rate contracts, which are 84 percent of all derivatives receivables, were virtually unchanged for the quarter at $4.2 trillion, even though swap yields fell approximately 10-20 basis points.”

The report shows that the notional amount of derivatives held by insured U.S. commercial banks rose $4.5 trillion, or 2 percent, from the second quarter to $227 trillion.  Prior to this quarter’s increase, the notional amount of derivatives contracts had fallen for four consecutive quarters, due to ongoing trade compression activities.  Declines in notionals are being driven by compression efforts by banks seeking to reduce regulatory capital requirements, as well as operating and risk burdens in their derivatives portfolios.  Interest rate contracts increased $2.6 trillion, or 1 percent, to $181 trillion, while foreign exchange contracts rose 5 percent to $28 trillion.

OCC also reported

  • Banks hold collateral to cover 71 percent of their NCCE.  The quality of the collateral is very high, as 79 percent is cash (U.S. dollar and non-dollar).  
  • Average trading risk exposure, as measured by value-at-risk (VaR), totaled $423 million across the top five dealer firms in the third quarter, 24 percent lower than $554 million in the second quarter, and 37 percent lower than in the third 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 80 percent of total derivative notional values.  On a product basis, swap products represent 60 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 20 in the quarter to 1,352.     

A copy of the OCC’s Quarterly Report on Bank Trading and Derivatives Activities: Third Quarter 2012 is available on the OCC’s Website.  

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