Magazine article American Banker

Bank Derivatives Volume Rising Again

Magazine article American Banker

Bank Derivatives Volume Rising Again

Article excerpt

Corporations might be getting over their squeamishness about derivatives.

The Office of the Comptroller last week reported a 6.7% rise during the second quarter in the notional value of outstanding derivatives contracts, to $19 trillion.

Using a new measurement, the agency noted that credit exposure of the banks to derivatives risk rose 6%, to $135 billion. The report said nine institutions account for 94% of the notional amount of derivatives.

J.P. Morgan's main banking unit led the field with more than $3.6 trillion in notional value and a credit exposure of $63.4 billion, or 493.9% of risk- based capital, the OCC said.

The report preceded the merger of Chase Manhattan Bank and Chemical Bank. With the merger now complete, Chase Manhattan apparently has the biggest derivatives business. (See chart.)

Since the federal government began tracking such trades in the early 1990s, the average quarterly jump has been about 4.75%, said Mike Brosnan, acting senior deputy comptroller for capital markets.

Experts attributed the surge to a variety of factors, including banks' newfound expertise in using the instruments to guard against interest rate increases. But they also pointed to renewed confidence and sophistication among banks and their clients in dealing with these investments - after some bad experiences two years ago.

Derivatives are contracts that derive their value from the value of some other asset, such as interest rates, stocks, foreign exchange rates, or commodity prices. They are often used to hedge against changes in the value of a corporation's business or portfolio of investments.

These types of contracts caused controversy after clients began suing banks and brokerage firms in 1994, charging that brokers sold them complicated contracts without fully explaining the potential for financial loss.

Since then, many derivatives buyers have shied away from high-yield, high- risk contracts in favor of "plain vanilla" deals. …

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