OCC Reports Third Quarter Trading Revenue of $4.5 Billion

by Sabrina I. Pacifici on December 19, 2013

Insured U.S. commercial banks and savings institutions reported trading revenue of $4.5 billion in the third quarter of 2013, down $2.8 billion, or 38 percent, from $7.3 billion in the second quarter.  Trading revenue in the third quarter was $0.8 billion, or 15 percent, lower than in the third quarter of 2012, the Office of the Comptroller of the Currency (OCC) reported today in its Quarterly Report on Bank Trading and Derivatives ActivitiesBanks have reported total trading revenue through the third quarter in 2013 of $19.2 billion, $5 billion higher than in 2012.  Credit trading revenue in 2013 is $7.5 billion higher than in 2012, when well-publicized losses at one large bank distorted performance for the banking system. Credit exposures from derivatives fell for the fifth consecutive quarter.  Net current credit exposure (NCCE), the primary metric the OCC uses to measure credit risk in derivatives activities, decreased $33 billion, or 10 percent, to $305 billion during the third quarter.  “Because interest rate contracts are 81 percent of total derivatives, the lion’s share of credit exposure in derivatives comes from rates,” said Mr. Wilhelm…The OCC noted that the fair value of interest rate contracts declined $87 billion, or 3 percent, causing the fair value of all derivatives contracts to decline $142 billion, or 4 percent.  The report shows that the notional amount of derivatives held by insured U.S. commercial banks rose $6.2 trillion, or 3 percent, from the second quarter to $240 trillion, the third consecutive increase in notionals.  Prior to the first quarter of 2013, derivatives notionals had fallen in five of the six prior quarters, due to ongoing trade compression activities, which allow banks to reduce regulatory capital requirements and operational risk in their derivatives portfolios.  Trade compression involves aggregating a large number of trades with similar factors, such as risk or cash flow, into fewer trades.  The notional increase in the third quarter resulted from a $7.2 billion, or 4 percent, increase in interest rate contracts to $195 trillion.  “While the overall increase in interest rates in the third quarter was not significant, there was a flurry of activity during the quarter, mostly involving very short maturities, given changing perceptions about whether the Federal Reserve would begin tapering its bond purchases,” said Mr. Wilhelm.  He noted that interest rate contracts with maturities less than one year increased $3.7 trillion.  Credit contracts fell $0.5 trillion, or 4 percent, to $12.8 trillion.  Commodity and equity contracts each rose 1 percent.”

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