# O **NEWS RELEASE**

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| ## Comptroller of the Currency      | ##### NR 2002-93               |
|                                     |                                |
| Administrator of National Banks     |                                |
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FOR IMMEDIATE RELEASE Contact: Kevin Mukri

December 13, 2002 (202) 874-5770

### OCC Reports Derivatives Volume Grows \$3.1 Trillion

WASHINGTON---Derivatives held by U. S. commercial banks increased \$3.1
trillion in the third quarter, to \$53.2 trillion, the Office of the
Comptroller of the Currency reported today in its quarterly *Bank
Derivatives Report*.

The OCC also reported that earnings attributable to the trading of cash
instruments and derivatives activities decreased by \$1 billion in the
three-month period, to \$2.4 billion.

"Normally, a significant increase in notionals would translate into a
stronger revenue picture," said Kathryn E. Dick, the OCC's Deputy
Comptroller for Risk Evaluation. But financial market volatility in the
third quarter dampened the revenue picture for some of the bank
dealers."

Ms. Dick noted that while the record notional amount of derivatives is a
reasonable reflection of business activity, it does not represent the
amount at risk for commercial banks. The risk in a derivatives contract
is a function of a number of variables, such as whether counterparties
exchange notional principal, the volatility of the currencies or
interest rates used as the basis for determining contract payments, the
maturity and liquidity of contracts, and the creditworthiness of the
counterparties in the transaction, she said.

The report noted that total credit exposure, which consists of both the
current mark-to-market exposure, as well as potential future exposure,
increased \$45 billion to \$570 billion.

"At this point in the economic cycle, we are not surprised to see
increased credit exposure," said Ms. Dick, "but the assessment of risk
must take into consideration the common use of credit risk mitigants
such as netting and collateralization in the derivatives markets." For
example, Ms. Dick pointed out that the benefits achieved from legally
enforceable bilateral netting reduced current credit exposures by 79.6
percent in the third quarter.

-more-

Ms. Dick noted that only a small faction of derivatives contracts were
30 days or more past due. "For all banks, the fair value of contracts
past due 30 days or more aggregated to only \$17 million or .003 percent
of total credit exposure from derivative contracts."

During the third quarter, the notional amount of interest rate contracts
increased by \$3 trillion, to \$45.7 trillion. Foreign exchange
contracts increased by \$27 billion, to \$5.8 trillion. This figure
excludes spot foreign exchange contracts, which increased by \$5.7
billion, to \$509 billion. Equity, commodity and other contracts
increased by \$6 billion, to \$1.1 trillion. Credit derivatives
increased by \$81 billion, to \$573 billion.

Overall, 86 percent of the notional amount of derivatives positions was
comprised of interest rate contracts with foreign exchange accounting
for an additional 11 percent. Equity, commodity and credit derivatives
accounted for only 3 percent of the total notional amount.

Ms. Dick said that the number of commercial banks engaging in
derivatives remains small. "The top seven commercial banks account for
almost 96 percent of the total notional amount of derivatives in the
commercial banking system, with more than 99 percent held by the top 25
banks."

The OCC third quarter derivates report also noted that:

-   Revenues from interest rate positions decreased by \$329 million, to
    \$1.2 billion, and revenues from foreign exchange positions
    decreased by \$315 million, to \$1 billion. Revenues from equity
    trading position decreased by \$662 million, for a loss of \$172
    million. Revenues from commodity and other trading positions
    increased by \$304 million to \$278 million.

-   Long-term contracts (those with maturities of five years or more)
    increased by \$287 billion, to \$9.2 trillion. Contracts with
    remaining maturities of one to five years grew by \$272 billion to
    \$14.7 trillion. Short-term contracts (those with maturities of less
    than one year) increased by \$467 billion to \$16.6 trillion.

-   The number of commercial banks holding derivatives increased by 17,
    to 408.

A copy of *OCC Bank Derivatives Report: Third Quarter 2002* is available
on the OCC Web site: [www.occ.treas.gov](http://www.occ.treas.gov/).

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  The OCC charters, regulates and examines approximately 2,100 national
  banks and 52 federal branches of foreign banks in the U.S., accounting
  for more than 55 percent of the nation's banking assets. Its mission is
  to ensure a safe and sound and competitive national banking system that
  supports the citizens, communities and economy of the United States.
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