Trading Revenue Falls in 4Q, OCC Says, But Higher Than Normal

WASHINGTON — Trading revenues in the fourth quarter hit a record high despite being down from the previous quarter due to seasonal trends, according to a report issued Wednesday by the Office of the Comptroller of the Currency.

Trading revenues fell 17% to $4.4 billion from the third to fourth quarter, though it was up 73% from a year earlier. The OCC attributed the fourth quarter drop to seasonal patterns, but added that it was the best period on record for a typical low season thanks to improving economic trends.

"Trading revenues in the fourth quarter were actually quite strong, higher than any fourth quarter on record," said the Kurt Wilhelm, the OCC's director of its financial markets group. "Reduced concerns about Europe and an improving U.S. economy led to increased risk appetite across the financial markets."

Wilhelm noted that trading revenues have fallen for 13 of the past 16 fourth quarters largely due to seasonal patterns.

Still, trading revenues for the full 2012 year fell 30% to $18 billion compared with 2011. Wilhelm said the overall decline was mostly due to "well-publicized individual bank activity" and tighter credit spreads. The second quarter included JPMorgan Chase & Co.'s (JPM) more than $6 billion trading losses from credit contracts.

"The decline in trading revenues in 2012 was entirely a credit story," Wilhelm said. Credit default swaps represent 97% of total credit derivatives.

"Tighter credit spreads increase the credit-adjusted value of derivatives payables and banks report those higher liability amounts as trading losses," Wilhelm said.

Banks reported $7.6 billion of losses from trading credit contracts in 2012, compared with earning $5.2 billion in 2011.

The fair value of the derivative contracts also fell 4% because of a slight uptick in interest rates in the fourth quarter, Wilhelm said. Most derivatives held by banks are in interest rate contracts so they're sensitive to rate changes. However, the decline in fair value also lowered the overall credit exposure at banks.

The net current credit exposure decreased 3% to $386 billion during the fourth quarter.

Banks are also holding fewer notional amounts of derivatives in an attempt to reduce regulatory capital requirements as well as burdens to their operation and risk in the derivatives portfolios, the OCC said. The notional amount of derivatives held by commercial banks fell $3.8 trillion from the third quarter to $223 trillion in the fourth quarter.