As use of derivatives surged in the third quarter, bank trading revenue in the area sank to the lowest level in four years, the Office of the Comptroller of the Currency said Friday.
Reflecting corporate moves to hedge risks, the notional amount of derivatives increased by $4.5 trillion in the quarter, to a record $32.6 trillion, the agency said.
"The turbulent markets seem to have stimulated interest in derivatives," said Mark C. Brickell, managing director of J.P. Morgan & Co. in New York.
Yet derivatives trading was far less lucrative than in past periods. Trading revenue-which includes derivatives and cash instruments-was a slim $614 million in the third quarter, down from $2.5 billion in the second quarter and a record $2.7 billion in the first quarter.
Banks also had to charge off a record $445.4 million of derivatives during the third quarter, almost five times the $93.7 million reported in the second quarter.
"It was an off quarter pretty much across the board," said Michael L. Brosnan, deputy comptroller for risk evaluation.
Banks lost $571 million on interest rate, equity, and commodity-based derivatives and similar cash instruments in the third quarter, but those losses were more than offset by $1.2 billion of revenue from foreign exchange contracts, the OCC said.
Bankers should not expect overall trading revenues to rebound any time soon, said Gerhard Isele, managing director of Emcor, a hedge fund manager and foreign exchange adviser in Irvington, N.Y. Trends that led to the third-quarter declines are continuing, he said.
Fourth-quarter trading revenue for interest rate derivatives will be hurt by the Federal Reserve Board's decision to slash short-term rates by 75 basis points since Sept. 29, he said. Similarly, troubles in Russia and other countries will continue to depress revenue from derivatives, he said.
Mr. Brosnan, however, said he did not expect interest in derivatives to wane. "This business is not going to go away, and it's because customers want it," he said.
Interest rate derivatives continued as the dominant type of contract. Banks had nearly $24 trillion of these in the third quarter; foreign exchange derivatives topped $7.9 trillion; and credit derivatives reached $162 million, the OCC said.
For all the attention they generate, derivatives are used by only 464 of the more than 9,000 domestic banks. The seven largest accounted for 94% of the total notional amount.
Mr. Brosnan said the drop in revenue had prompted examiners of banks engaged heavily in derivatives to begin discussing alternative ways to manage their risks. The agency will decide in the next few weeks whether more formal guidance is required, he said.