Trading Revenue Tumbles, Mostly on BT's $383M Loss

the second quarter, the Office of the Comptroller of the Currency reported Tuesday.

Revenue from interest rate positions fell 45%, to $788 million, while revenue from foreign exchange fell 33%, to $1.1 billion. The $305 million balance comprised revenue from equity, commodity, and other trading positions.

The Comptroller's Office said the total was dragged down by Bankers Trust Corp., which lost $383 million in the quarter, mainly on interest rate contracts. (Deutsche Bank acquired Bankers Trust in June.)

Still, the seven banks that dominate derivatives trading average only 5.8% of overall revenue from that business. That's down from a record 9.6% in the first quarter. Performance at individual banks ranged from $33 million, or 3% of total revenues, at Bank One Corp. to $709 million, or 25.5% of revenue, at Morgan Guaranty Trust Co.

The notional, or aggregate, value of derivatives hit a record in the second quarter, climbing $341 billion, to $33 trillion. "There's been an awful lot of debt issuance so far this year," said Michael Brosnan, deputy comptroller for risk evaluation. "Both the issuers and investors use derivative contracts to manage their end exposure."

Long-term interest rate contracts grew the most, with the notional value of contracts that mature in five years or more rising $306 billion, to $4.3 trillion. These contracts present a bigger challenge for bankers, he said, because they pose more credit risk and are less liquid. But Mr. Brosnan said they also yield more revenue.

Interest rate contracts made up 78% of the total notional value of derivatives, with foreign exchange contracts accounting for 19%. The notional value of interest rate contracts rose $655 billion, to $25.7 trillion. But the notional value of foreign exchange contracts fell $348 billion, to $6.3 trillion. Ironically, though, revenue from foreign exchange derivatives has outpaced interest rate derivative revenue for seven consecutive quarters. Mr. Brosnan explained that the margins are thinner on "increasingly commoditized interest rate products."

Credit derivatives, a small but growing part of the market, increased $19 billion, to a record $210 billion.

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