CDS drags commercial banks, as trade revenue slips 20%: OCC
Commercial banks reported trading revenue of $6.6 billion in the second quarter of 2010, down 20% from the first quarter, but up 28% from one year prior, according to a report released by the Office of the Comptroller of the Currency. The total of credit derivatives outstanding is $13.9 trillion, a marginal 3.4% decrease quarter-over-quarter, showing that efforts to clear credit default swaps are dragging. CDS account for 97.1% of total credit derivatives at commercial banks. All categories of trading revenue decreased quarter-over-quarter, except foreign exchange which increased 8% to $4.3 billion. Commodity trading saw the biggest drop in 2Q, down 108% to a negative $25 million, followed by equity (down 61% to $378 million), interest rate trading (down 56% to $145 million), and credit (down 32% to $1.8 billion). Deputy comptroller for credit and market risk, Dave Wilson said the second quarter drop is part of a standard cycle, and that the average drop between first and second quarter commercial revenue trading is 24%. "It is normal to see trading revenues drop in the second quarter of the year,” Wilson said. “In addition to the normal seasonal decline in revenues we expected to see, client demand fell under the weight of uncertainty about global economic growth and sovereign credit risks." According to the OCC report, credit risk -- noted in the report as net current credit exposure -- increased 11% to $397 billion in 2Q10, as the $909 billion increase in gross receivables exceeded the $871 billion increase in netting benefits. The NCCE reached its highest level of $800 billion at the end of 2008 and declined for five consecutive quarters before 2Q. The netting benefit percentage, which reflects the amount of gross receivables eliminated by having legally enforceable netting agreements, hit a record high of 91.9%. The report also noted that the five largest banks hold 96% of derivatives contacts, while the 25 largest banks hold virtually 100%. The number of commercial banks holding derivatives increased by 14% in 2Q to 1,064. Write to Christine Ricciardi.