Derivatives volumes soar in US, says OCC

Notional derivatives volumes held by US commercial banks increased by $3.8 trillion in second-quarter 2002, to $50.1 trillion - the second highest amount ever recorded, the US Office of the Comptroller of the Currency (OCC) reported yesterday in its quarterly Bank Derivatives Report.

"All the corporate governance issues that have dominated the business pages over the past few months created greater uncertainty in the financial markets," said Michael Brosnan, OCC deputy comptroller for risk evaluation. "Risk managers typically respond to greater uncertainty by reshaping their risk profiles, and that explains the fairly sharp rise in derivatives notional volumes during the second quarter."

The OCC also reported that earnings attributable to the trading of cash instruments and derivatives activities increased by $225 million in the three-month period, to $3.4 billion. Revenues from interest rate positions increased by $60 million to $1.6 billion, while revenues from foreign exchange positions increased by $132 million to $1.3 billion. Revenues from equity activities increased by $83 million to $490 million.

But the report also noted that total credit exposure, which consists of both the netted current mark-to-market exposure, as well as potential future exposure, increased by $79.6 billion to $525 billion. "The big decline ininterest rates during the quarter caused a pretty sharp increase in credit exposures," Brosnan said. "We expected this. Almost 60% of the notional volumes outstanding are swaps, and the lion's share of that is for interest rates. When rates fall, contracts where the bank receives a fixedrate go up in value and that gives higher credit exposures."

Brosnan added that credit quality of derivatives exposures is holding up well - given the economic climate and well-publicised corporate bankruptcies.

During the second quarter, the notional amount of interest rate contracts increased by $3.4 trillion, to $42.7 trillion. Foreign exchange contracts increased by $183 million, to $5.8 trillion. This figure excludes spotforeign exchange contracts, which increased by $332 billion, to $504 billion. Equity, commodity and other contracts increased by $85 billion, to $1.1 trillion. Credit derivatives increased by $54 billion, to $492billion.

Paul Lyon