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News Release 2014-96 | July 1, 2014

OCC Reports First Quarter Trading Revenue of $6.1 Billion

WASHINGTON — Insured U.S. commercial banks and savings associations reported trading revenue of $6.1 billion in the first quarter of 2014, up $3.2 billion, or 108 percent, from $2.9 billion in the fourth quarter, the Office of the Comptroller of the Currency reported today in the OCC's Quarterly Report on Bank Trading and Derivatives Activities. "The seasonal rebound in trading revenue occurred, as it does every year,” said Kurt Wilhelm, Director of the Financial Markets Group.

Mr. Wilhelm noted that trading revenue has increased in the first quarter relative to the fourth quarter every year since 2000. Moreover, the first quarter has been the year’s strongest quarter nine times, and was the second strongest quarter in four of the other five years. “The seasonal effect is quite strong at the beginning of the year.  But, comparing the first quarter to the first quarter of 2013, trading revenue, particularly for interest rate products, has trended lower.”  

Trading revenue in the first quarter was $1.4 billion, or 18 percent, lower than in the first quarter of 2013.  Mr. Wilhelm noted that revenue from interest rate and foreign exchange products of $4.0 billion during the first quarter was $1.4 billion lower than in the first quarter of 2013, matching the overall decline in trading revenue. “The extended period of both low interest rates and low volatility has weakened client demand for risk management transactions.” Credit exposures from derivatives fell for the seventh consecutive quarter.  Net current credit exposure (NCCE), the primary metric the OCC uses to measure credit risk in derivatives activities, decreased $19 billion, or 6 percent, to $279 billion during the first quarter. “The decline in credit exposure was driven by trade compression, as market yields did not change appreciably in the first quarter,” said Mr. Wilhelm. “Swap contracts fell by $11 trillion during the quarter, as dealer banks continue to work aggressively together to eliminate trades that offset each other.”  

Mr. Wilhelm noted that reducing notionals permits banks to reduce capital requirements on derivatives transactions, as well as to reduce operational risk.    

The report shows that the notional amount of derivatives held by insured U.S. commercial banks declined $6.4 trillion, or 3 percent, from the fourth quarter to $231 trillion. “Trade compression continues to reduce the volume of notional derivatives outstanding,” said Mr. Wilhelm. Trade compression involves aggregating a large number of trades with similar factors, such as risk or cash flow, into fewer trades.  

OCC also reported:

  • Banks hold collateral to cover 84 percent of their NCCE.  The quality of the collateral is very high, as 77 percent is cash (U.S. dollar and non-dollar).  
  • Trading risk exposure, as measured by average value-at-risk (VaR), has begun to increase for several of the large bank dealers, after generally bottoming out in the third quarter of 2013.
  • Receivables from interest rate contracts declined $333 billion, or 12 percent, to $2.5 trillion, due to trade compression activities.
  • Derivatives contracts are concentrated in a small number of institutions.  The largest four banks hold 92 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 80.6 percent of total derivative notional values, down from 82.1 percent in the fourth quarter.  On a product basis, swap products represent 60.5 percent of total derivatives notionals, down from 63.6 percent in the fourth quarter.
  • Credit default swaps are the dominant product in the credit derivatives market, representing 96.3 percent of total credit derivatives.
  • The number of commercial banks and savings associations holding derivatives was 1,395 in the first quarter, up from 1,383 in the fourth quarter.    

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

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