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News Release 2015-93 | June 29, 2015

OCC Reports First Quarter Bank Trading Revenue of $7.7 Billion

WASHINGTON — Insured U.S. commercial banks and savings institutions reported trading revenue of $7.7 billion in the first quarter of 2015, $3.2 billion higher (72 percent) than in the fourth quarter, the Office of the Comptroller of the Currency (OCC) reported today in the OCC's Quarterly Report on Bank Trading and Derivatives Activities. Trading revenue in the first quarter was $1.5 billion higher (24 percent) than in the first quarter of 2014.

“Trading performance was quite good in the first quarter,” said Kurt Wilhelm, Director of the Financial Markets Group. “We expected strong results, due to the well-established seasonal effect in trading activity. But, results were even stronger due to dislocations in currency markets at the beginning of the year, which created uncertainty and spurred client demand for risk management products.” Mr. Wilhelm noted that trading revenue in the first quarter was the fifth highest on record, and that in 11 of the past 15 years, trading revenue was highest in the first quarter of the year.

“It’s also noteworthy that trading revenue has now increased on a year-over-year basis for three quarters in a row,” said Mr. Wilhelm. “That follows a string of four consecutive quarters where trading revenue had declined on a year-over-year basis, leading to concerns that trading revenue was in a secular decline.” He noted that, while the recent trading results are positive, the long-term outlook for trading revenue is still uncertain.

Credit exposures from derivatives increased in the first quarter. Net current credit exposure (NCCE), the primary metric the OCC uses to measure credit risk in derivatives activities, rose $147 billion, or 41 percent, to $503 billion. “Credit exposure did go up in the first quarter,” said Mr. Wilhelm, “but the increase we’re reporting is unusually large because, for the first time, the measure includes exposure to central counterparties, or CCPs.” Mr. Wilhelm noted that, using another measure of credit exposure, not influenced by the new reporting of CCP exposures, NCCE rose $30 billion (7 percent).

The report shows that the notional amount of derivatives held by insured U.S. commercial banks declined $17 trillion, or 8 percent, from the fourth quarter to $203 trillion. “Trade compression really picked up in the first quarter, just as it did in the first quarter of 2014,” said Mr. Wilhelm. “There is still a lot of client activity in the derivatives market, but not enough to offset aggressive compression initiatives.” Interest rate notionals fell $16 trillion (9 percent), explaining the entire decline in notionals. On a product basis, the decline in notionals resulted from a decrease in swaps contracts of $17 trillion (13 percent). Trade compression involves aggregating a large number of trades with similar factors, such as risk or cash flow, into fewer trades, thereby reducing capital requirements and operational risk.

The OCC also reported:

  • Net charge-offs of derivatives exposures rose $62 million to $70 million in the first quarter, reflecting rapidly changing exposure amounts due to dislocations in foreign exchange markets.
  • Banks hold collateral to cover 79 percent of their NCCE, down from 81 percent in the fourth quarter. 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), moved higher in the first quarter, as volatility increased. Four of the five largest dealer banks reported increased VaR in the first quarter.
  • Receivables from foreign exchange contracts rose $84 billion, or 13 percent, to $727 billion, reflecting sharp moves in currency markets.
  • Derivative contracts are concentrated in a small number of institutions. The largest four banks hold 91 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 78 percent of total derivative notional values, down from 79 percent in the fourth quarter. On a product basis, swap products represent 58 percent of total derivatives notionals, down from 61 percent in the fourth quarter, due to ongoing compression activities.
  • New data available in the call report show that cleared transactions represent 36 percent of the total derivatives market; 46 percent of interest rate derivatives transactions are cleared.
  • 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 1,427 in the first quarter, up from 1,398 in the fourth quarter.

A copy of the OCC’s Quarterly Report on Bank Trading and Derivatives Activities: First Quarter 2015 is available on the OCC’s Website.

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