Rates trading revenues up 154% at top US banks

Net gains on interest rates-related exposures top $21 billion

Aggregate net gains on trading fixed income and interest rate contracts topped $21.4 billion at the eight US systemically important banks in 2019, up +154% on the year prior, regulatory reports show.

Gains on trading equity and index-related exposures also jumped year-on-year, by +42% to $26.8 billion, as did those for credit exposures, by +49% to $6.3 billion. Trading revenues linked to commodity and other exposures edged up on 2018 by a lesser degree, by +18% to $3.4 billion. 

In contrast, net gains on foreign exchange exposures dropped -19% to $11 billion. The revenue figures are from regulatory FR Y-9C forms submitted to the Federal Reserve and may differ from those disclosed in banks’ annual reports.

 

Over 2019, the eight banks also reported an aggregate -$607 million impact on trading revenues due to valuation adjustments to derivatives (XVAs), compared with $864 million in 2018. Credit valuation adjustments (CVAs), which account for the possible failure of a bank’s derivatives counterparties, contributed -$877 million to the full-year impact, and debit valuation adjustments (DVAs), which factor in the bank’s own credit risk on derivatives positions, $270 million.

Net interest income from trading – calculated as the interest income from trading assets minus the interest on trading liabilities and other borrowed money – totalled -$11.7 billion in 2019, compared with -$17.1 billion the year prior.

Of the systemic banks, JP Morgan disclosed the highest total trading-related revenues (net trading gains plus net interest income on trading assets) in its regulatory report, with $21.5 billion. On an accounting basis, total trading revenues were reported to be $20.9 billion.

 

What is it?

FR Y-9C forms, submitted to the Federal Reserve on a quarterly basis, are used to assess and monitor the financial condition of US banks.

Trading revenues reported in these forms refer to the net gains or losses from trading cash instruments and off-balance-sheet derivatives. These include mark-to-market price changes to the carrying value of instruments defined as trading assets and liabilities by the bank. They also include “incidental income” from the buying and selling of assets and liabilities.

These FR Y-9C values may differ from trading revenues as disclosed in banks’ 10-Q and 10-K reports, as the former use regulatory accounting principles instead of US generally accepted accounting principles.

FR Y-9Cs also require firms to disclose the calendar year-to-date impact on trading revenues due to credit valuation adjustments in line item M9(f) and that due to debit valuation adjustment in line item M9(g), if they have $100 billion or more in total assets. 

These reflect the actual CVA/DVA balances of each bank’s derivatives portfolio, but not the hedging activities firms engage in to cancel out these impacts.

Why it matters

For Wall Street’s top dealers 2019 was a banner year. The eight systemically important firms posted -5% fewer losing trading days last year compared with 2018, and losses in excess of modelled expectations were few and far between.

That equities and rates dominated trading revenues is small surprise, considering the +30% rise in the S&P 500 over the year and the three cuts to the federal funds target rate. The big hit due to XVAs, however, shows not everything was rosy. The high deduction taken for CVA suggests a decline in the creditworthiness of the banks’ derivatives counterparties.

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