Derivatives - despite the crash of Bear and Lehman , no lessons were learned as the top 5 banks account for 96 percent of outstanding US derivatives. The TBTF banks got bigger , risk was allowed to become even more concentrated and we know how this ends - it ends in tears. Today JP Morgan gets the clown hat as a hue position goes wronf , Tomorrow or some day down the road , it will be Morgan Stanley , BAC , C or GS

http://www.occ.treas.gov/news-issuances/news-releases/2012/nr-occ-2012-48.html

OCC Reports Fourth Quarter Trading Revenue of $2.5 Billion

WASHINGTON -- Commercial banks reported trading revenue of $2.5 billion in the fourth quarter of 2011, 70 percent lower than revised third quarter revenues of $8.5 billion, and 27 percent lower than in the fourth quarter of 2010, the Office of the Comptroller of the Currency reported today in the OCC's Quarterly Report on Bank Trading and Derivatives Activities.

“The seasonal decline in revenues we typically see in the fourth quarter of each year was made a bit worse by a noticeable reduction of risk appetite by both banks and their clients,” said Martin Pfinsgraff, Deputy Comptroller for Credit and Market Risk.  Mr. Pfinsgraff noted that in ten of the past twelve years, the fourth quarter has been the weakest revenue quarter.  “Against a backdrop of concerns about sovereign debt and the health of European banks, demand for risk intermediation products fell.  Market participants were very defensive.”   

For the full year, insured commercial banks reported a record $25.8 billion in trading revenues, surpassing the previous record of $22.6 billion in 2009 by 14 percent.  “Trading revenues have been quite strong in each of the past three years, as banks have continued to recover from the financial crisis.  Trading activities can be an important component of a diversified revenue stream, and have been so during this recovery period for large and midsize banks.”

Credit exposure from derivatives fell in the fourth quarter.  Net current credit exposure (NCCE), the primary metric the OCC uses to measure credit risk in derivatives activities, decreased $74 billion, or 15 percent, to $430 billion.  “We saw a broad-based decline in derivatives portfolio exposures, as receivables from interest rate, FX, commodity, credit and equity contracts all declined,” said Mr. Pfinsgraff.  “Although credit exposures declined during the quarter, NCCE remains very high due to the prolonged very low interest rate environment.”  

The notional amount of derivatives contracts declined for the second consecutive quarter, falling $17 trillion, or 7 percent, to $231 trillion.  The fourth quarter decline followed a 0.6 percent decline in the third quarter.  Mr. Pfinsgraff stated that “the decline in notionals reflects the counterparty credit concerns that were fairly widespread over the latter part of the year.  While market uncertainties typically lead to increases in notionals, due to greater hedging activity, that dynamic changes when the concerns are credit related.  De-risking across trading, lending, or investment activities can lead to reductions in transaction volumes, including hedging.”  Mr. Pfinsgraff noted that the decline in notionals also reflected continued trade compression efforts.  Finally, he added that notionals had never declined for two consecutive quarters, and that the $17 trillion decline was the largest on record.

The report also noted that:

• Banks held collateral to cover 66 percent of their NCCE.  The quality of the collateral is very high, as 80 percent is cash (U.S. dollar and non-dollar).  
• Trading risk exposure, as measured by average value-at-risk (VaR), fell 9 percent during 2011 at the five largest trading companies.     
• Derivatives contracts are concentrated in a small number of institutions.  The largest five banks hold 96 percent of the total notional amount of derivatives, while the largest 25 banks hold nearly 100 percent.  
• Derivative contracts remain concentrated in interest rate products, which represent 81 percent of total derivative notional values.  
• Credit default swaps are the dominant product in the credit derivatives market, representing 97 percent of total credit derivatives.  
• • The number of commercial banks holding derivatives decreased by 10 in the quarter to 1,078.
  A copy of the OCC's Quarterly Report on Bank Trading and Derivatives Activities:  Fourth Quarter 2011 is available on the OCC's Web site.
  
  
  and.....
  
  
  http://www.zerohedge.com/news/five-banks-account-96-250-trillion-outstanding-derivative-exposure-morgan-stanley-sitting-fx-de
  
  

  Five Banks Account For 96% Of The $250 Trillion In Outstanding US Derivative Exposure; Is Morgan Stanley Sitting On An FX Derivative Time Bomb?

  

  Submitted by Tyler Durden on 09/24/2011 06:23 -0400
  
  

  • AIG
   
  • American International Group
   
  • Bank of America
  • Bank of America
   
  • CDS
   
  • Dick Bove
   
  • Fail
   
  • Lehman
  • Morgan Stanley
   
  • recovery
   
  • The Economist
   
  • Too Big To Fail

  
  
  

  The latest quarterly report from the Office Of the Currency Comptroller is out and as usual it presents in a crisp, clear and very much glaring format the fact that the top 4 banks in the US now account for a massively disproportionate amount of the derivative risk in the financial system. Specifically, of the $250 trillion in gross notional amount of derivative contracts outstanding (consisting of Interest Rate, FX, Equity Contracts, Commodity and CDS) among the Top 25 commercial banks (a number that swells to $333 trillion when looking at the Top 25 Bank Holding Companies), a mere 5 banks (and really 4) account for 95.9% of all derivative exposure (HSBC replaced Wells as the Top 5th bank, which at $3.9 trillion in derivative exposure is a distant place from#4 Goldman with $47.7 trillion). The top 4 banks: JPM with $78.1 trillion in exposure, Citi with $56 trillion, Bank of America with $53 trillion and Goldman with $48 trillion, account for 94.4% of total exposure. As historically has been the case, the bulk of consolidated exposure is in Interest Rate swaps ($204.6 trillion), followed by FX ($26.5TR), CDS ($15.2 trillion), and Equity and Commodity with $1.6 and $1.4 trillion, respectively. And that's your definition of Too Big To Fail right there: the biggest banks are not only getting bigger, but their risk exposure is now at a new all time high and up $5.3 trillion from Q1 as they have to risk ever more in the derivatives market to generate that incremental penny of return.

  

  At this point the economist PhD readers will scream: "this is total BS - after all you have bilateral netting which eliminates net bank exposure almost entirely." True: that is precisely what the OCC will say too. As the chart below shows, according to the chief regulator of the derivative space in Q2 netting benefits amounted to an almost record 90.8% of gross exposure, so while seemingly massive, those XXX trillion numbers are really quite, quite small... Right?

  

  ...Wrong. The problem with bilateral netting is that it is based on one massively flawed assumption, namely that in an orderly collapse all derivative contracts will be honored by the issuing bank (in this case the company that has sold the protection, and which the buyer of protection hopes will offset the protection it in turn has sold). The best example of how the flaw behind bilateral netting almost destroyed the system is AIG: the insurance company was hours away from making trillions of derivative contracts worthless if it were to implode, leaving all those who had bought protection from the firm worthless, a contingency only Goldman hedged by buying protection on AIG. And while the argument can further be extended that in bankruptcy a perfectly netted bankrupt entity would make someone else whole on claims they have written, this is not true, as the bankrupt estate will pursue 100 cent recovery on its claims even under Chapter 11, while claims the estate had written end up as General Unsecured Claims which as Lehman has demonstrated will collect 20 cents on the dollar if they are lucky.

  The point of this detour being that if any of these four banks fails, the repercussions would be disastrous. And no, Frank Dodd's bank "resolution" provision would do absolutely nothing to prevent an epic systemic collapse. 

  ...

  Lastly, and tangentially on a topic that recently has gotten much prominent attention in the media, we present the exposure by product for the biggest commercial banks. Of particular note is that while virtually every single bank has a preponderance of its derivative exposure in the form of plain vanilla IR swaps (on average accounting for more than 80% of total), Morgan Stanley, and specifically its Utah-based commercial bank Morgan Stanley Bank NA, has almost exclusively all of its exposure tied in with the far riskier FX contracts, or 98.3% of the total $1.793 trillion. For a bank with no deposit buffer, and which has massive exposure to European banks regardless of how hard management and various other banks scramble to defend Morgan Stanley, the fact that it has such an abnormal amount of exposure (but, but, it is "bilaterally netted" we can just hear Dick Bove screaming on Monday) to the ridiculously volatile FX space should perhaps raise some further eyebrows...

  

  Average: