Swaps delinquency rate low in 1Q; more-frequent reporting is urged.

WASHINGTON -- Deliquencies were a tiny fraction of the enormous derivatives market in the three months ending March 31, the first period in which this information was required by regulators.

Just $24.3 million of $13.9 trillion in outstanding derivative contracts were 90 days or more past due on March 31, according to Veribanc, a bank rating and research firm in Wakefield, Mass.

Using first-quarter data released June 24 by the Federal Reserve, Veribanc figured the industry's involvement in derivatives, mutual funds, and annuities.

The data may bolster the financial services industry's case that new laws are not needed in the derivatives area. However, Mr. Heller warned in an interview Tuesday that the data may already be outdated.

Reporting Changes Urged

"This is as of March 31. With what the markets have been doing over the last week, the situation may have changed," he said. Mr. Heller recommended more frequent reporting to help regulators keep track of the fast-changing markets.

Also newly reported in the first quarter were mutual fund and annuities sales by banks.

In the three months ending March 31, 1,928 banks sold $109.1 billion in mutual funds. Bank of America, San Francisco, State Street Bank, Boston, and Bankers Trust of New York led the industry each selling more than $10 million in mutual funds during the first quarter.

Citibank Led Annuities Sales

Annuities sales totaled $1.9 billion in the first quarter. Citibank led with $157 million in annuities sales and Bank of America was second with $136 million, according to Veribanc.

Income from mutual funds and annuities totaled $310 million in the first quarter, Veribanc said. These fees are aggregated on the Call Report, so Veribanc could not break down the income according to investment product.

Five banks led the industry in earnings from mutual funds and annuities during the first quarter: Bank of America, $24 million; Citibank, $24 million; Wells Fargo Bank, $21 million; PNC National Bank, $15 million; and Bank of New York, $13 million.

Derivatives Leaders

The derivatives business was led by Chemical Bank with $2.7 trillion and Citibank with $2.4 trillion. In all, 713 banks held the nearly $14 trillion in derivatives contracts on March 31.

These figures represent the notional value of outstanding derivatives contracts, which many in the industry claim overstates the product's risk. A more telling figure is the "replacement cost," or the amount a bank would have to spend replacing a derivative contract if a counterparty defaulted.

The cost of replacing the $24.3 million in delinquent derivatives contracts, which means action by a counterparty is 90 days or more past due, is $8.7 million, Veribanc said.

Replacement Cost At Issue

The reported potential replacement cost for all outstanding derivatives is $15.5 billion, Veribanc concluded. But Mr. Heller said this figure understates the industry's potential exposure.

He said getting a handle on the replacement cost for all derivative contracts is tough because the reporting is incomplete; only 375 banks reported potential replacement costs in the first quarter. Limiting Veribanc's ability further, regulators only require banks to provide replacement costs for interest-rate swaps and foreign currency contracts.

Still, Veribanc said that eight banks have replacement cost exposure exceeding their equity capital. (See chart)

While these figures are alarming - Bankers Trust's replacement costs equal 566% of its equity - Mr. Heller noted that these are worst-case figures. "You have to distinguish between an actual and a potential problem," he warned. "All we can do is try to observe what the risks are."

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