It was a flight to safety in the derivatives market in 1996.
After a sluggish 1995, use of derivatives jumped 18% among banks last year, with the strongest growth in "plain vanilla" interest rate swaps.
Notional volume of derivatives reached $20 trillion in the fourth quarter of 1996, according to data released last week by the Office of the Comptroller of the Currency.
Eight large trading banks continued to dominate the market, accounting for 94% of all derivatives in banking and 81% of the revenues made from trading the instruments.
The growth is all the more startling considering that there were few innovations in derivatives last year to drive up the market. Use of credit derivatives-the newest kid on the block-is growing, but the instruments still represent a small fraction of the market.
Old-fashioned interest rate derivatives showed the strongest growth, with notional amounts growing 21%.
Leslie Rahl, principal at Capital Market Risk Advisors, New York, attributed the overall growth to renewed confidence in derivatives after scandals in 1994 rattled the industry.
"The idea of fixing interest rates, locking in foreign exchange rates- all those things-is quite established now," she said.
Derivatives-contracts whose values are based on underlying assets or indexes-are used to hedge against changes in interest rates and other factors that could affect the value of businesses or portfolios.
"It was a year of uncertainty and volatility, and that creates opportunity," noted Fred Chapey, global derivatives executive at Chase Manhattan Corp.
In addition to more interest rate swaps, 11% fewer banks reported holding structured notes from July 1 to Dec. 31.
Structured notes are bonds with features designed to boost their yield. According to the OCC, 96% of the banks holding these notes had under $1 billion of assets.
Mr. Chapey said investors are looking for safer-structured notes than they were in the early 1990s. Such notes today tend to be principal- protected. A few years ago, some derivatives users experienced big losses buying notes without such guarantees.
Small and large banks moved away from the safety of exchange-traded derivatives in favor of over-the-counter instruments, the OCC data indicate.
Traders attributed this to the falling prices for many over-the-counter contracts of the plain-vanilla kind. Bankers say they prefer OTC contracts because they are flexible and confidential.
Derivatives trading remains an important source of revenue at several large banks. Banks reported $7.5 billion in derivatives trading revenue in 1996.
J.P. Morgan & Co. led the way, reporting nearly $3 billion in trading revenues.
First Chicago NBD Corp. was the only major trading bank to report losing money from trading. It reported losses of $28 million during the second half of last year, mainly due to losses in its interest rate positions.
The bank, however, reported an overall $32 million gain for 1996, thanks to better results earlier in the year.