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News Release 2014-172 | December 19, 2014

OCC Reports Third Quarter Trading Revenue of $5.7 Billion

WASHINGTON — Insured U.S. commercial banks and savings institutions reported trading revenue of $5.7 billion in the third quarter of 2014, down $0.7 billion, or 11 percent, from $6.4 billion in the previous quarter, the Office of the Comptroller of the Currency (OCC) reported today.

The OCC's Quarterly Report on Bank Trading and Derivatives Activities for the third quarter of 2014 also reported that trading revenue in the quarter was $1.2 billion, or 26 percent, higher than $4.5 billion recorded a year earlier.

"There were fairly low expectations for trading revenue at the beginning of the quarter, but client demand picked up fairly sharply toward the end, helping to make trading performance fairly positive," said Kurt Wilhelm, Director of the Financial Markets Group. "Trading revenue tends to weaken as the year goes on, so it wasn't much of a surprise that it fell from the second quarter. But, stronger client demand, especially in foreign exchange (FX) products, helped to make it a much stronger quarter than last year's third quarter."

Year-to-date trading revenue was $18.3 billion, $0.9 billion (5 percent) less than the same period in 2013. "It continues to be an interest rate and FX story," said Mr. Wilhelm, who noted that revenue from interest rate and FX contracts, the driver of bank trading revenue, was $1.5 billion lower in 2014 than in 2013.

Credit exposures from derivatives increased during the third quarter. Net current credit exposure (NCCE), the primary metric the OCC uses to measure credit risk in derivatives activities, increased $37 billion, or 10 percent, to $398 billion during the third quarter. "The increase in credit exposure was driven by a very large increase in receivables from FX contracts," said Mr. Wilhelm. Gross receivables on FX contracts increased by $295 billion, or 90 percent, to $623 billion. "Both the euro and the yen depreciated sharply during September, which caused very large increases in both receivables and payables on FX contracts." Payables on FX contracts rose $287 billion, or 89 percent, to $610 billion.

The report shows that the notional amount of derivatives held by insured U.S. commercial banks increased $2.6 trillion, or 1 percent, from the third quarter to $239 trillion. "The notional increase occurred entirely in the FX market," said Mr. Wilhelm. The notional value of FX contracts increased $3.4 trillion (11 percent). "After several quarters of virtually no volatility in currency markets, the sharp depreciation in the euro and the yen brought about a significant increase in risk management activity, as many investors had to reconsider their carry trades." On a product basis, swaps increased by $1.8 trillion (1 percent) while options increased by $1.4 trillion (4 percent).

OCC also reported

  • Banks hold collateral to cover 80 percent of their NCCE. The quality of the collateral is very high, as 78 percent is cash (U.S. dollar and non-dollar).
  • Trading risk exposure, as measured by average value-at-risk (VaR), continued to decline at the top five dealer banks, falling 14 percent to $323 million.
  • Receivables from interest rate contracts fell $73 billion, or 3 percent, to $2.5 trillion. Meanwhile, receivables from interest rate contracts are 73 percent of total gross derivatives receivables.
  • 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 62 percent of total derivatives notionals.
  • Credit default swaps are the dominant product in the credit derivatives market, representing 96 percent of total credit derivatives.
  • The number of commercial banks and savings associations holding derivatives was 1,389 in the third quarter, down from 1,406 in the second quarter.

A copy of the OCC's Quarterly Report on Bank Trading and Derivatives Activities: Third Quarter 2014 is available on the OCC's Website.

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