FOR IMMEDIATE RELEASE
December 21, 2015
Contact: William Grassano
OCC Reports Third Quarter Trading Revenue of $5.3 Billion
WASHINGTON — Insured U.S. commercial banks and savings associations reported trading revenue of $5.3 billion in the third quarter of 2015, a drop of 4 percent or $200 million from the previous second 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 third quarter was $300 million or 5 percent lower than in the year earlier period.
“It’s not much of a surprise that trading revenue fell in the third quarter,” said Kurt Wilhelm, Senior Advisor for Market Risk. “There’s a strong seasonal trend in trading revenue. It starts very strong in the first and second quarters, and then tends to tail off in the second half of the year. That’s what we’re seeing now. What is a bit of a surprise, however, is that it was weakness in revenue from trading equity contracts that caused the decline relative to the last quarter and the third quarter of 2014. Revenue from equities normally isn’t a major factor in overall bank trading revenue.”
Trading revenue from interest rate and foreign exchange products, the driver of bank trading revenue, was $4.5 billion in the third quarter, $200 million higher than in the second quarter, and $500 million higher than in the third quarter of 2014. “The stronger performance of combined interest rate and foreign exchange contracts was more than offset by weakness from equities.” Revenue from equity contracts of $56 million “essentially rounded to zero this quarter.”
For the first nine months of 2015, trading revenue totaled $18.5 billion, $300 million, or 1 percent more than in 2014. “Trading revenue in both the second and third quarters were weaker in 2015 than in 2014, so the stronger performance this year is a reflection of the very strong performance in the first quarter,” said Mr. Wilhelm. “It appears that trading revenue is slowing somewhat.”
Credit exposures from derivatives rose sharply in the third quarter. Net current credit exposure, the primary metric the OCC uses to measure credit risk in derivatives activities, increased $39 billion, or 10 percent, to $445 billion. “Concerns about weakness in the global economy in the third quarter, particularly reflected in sharp declines in equity prices in China, led to a substantial decline in interest rates. That decline caused a large increase in receivables from interest rate contracts, which drive credit exposure numbers because they are 77 percent of the derivatives market,” said Mr. Wilhelm.
The report shows that the notional amount of derivatives held by insured U.S. commercial banks declined $6 trillion, or 3 percent, during the third quarter to $192 trillion. “However, the decline is not really reflective of current activity,” said Mr. Wilhelm. “There’s still a lot of business at the dealer firms. Trade compression is simply more than offsetting normal growth.”
Trade compression was responsible for a $5.9 trillion drop in interest rate contracts, explaining the entire notional decline. On a product basis, swap contracts fell by $4.8 trillion, bringing the total swap contract decline since the end of 2013 to $40 trillion. Trade compression is a process for aggregating a large number of swap contracts with similar factors, such as risk or cash flows, into fewer trades. Compression removes economic redundancy in a derivatives book and reduces both operational risks and capital costs for large dealers.
The OCC also reported:
A copy of the OCC’s Quarterly Report on Bank Trading and Derivatives Activities: Third Quarter 2015 is available on the OCC’s Web site.
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