Derivatives Earnings and Exposure

On Sunday night a chart was presented of the 30 Year Treasury Bond Yield. The chart indicated a potential Head and Shoulders formation, with current prices testing the "neckline". In the same blog I showed the relative size of the derivatives markets, although I did not elaborate on the details.
The Quarterly Report on Bank Derivatives Activities published by the Comptroller of the Currency exhibits the size of these largely unregulated markets as well as the credit risk exposure and revenue figures for the 5 largest U.S. Banks. (JPMorgan Chase,Bonk of America, Goldman Sachs, CitiBank and Wells Fargo.

Click Charts to Enlarge

Percentage Total Notionals by Type of Derivative

Derivative Contracts by Type
All Commercial Banks

Trading Revenue as a Percentage of Gross Revenue

There are two interesting points about the chart shown below.

• Goldman derives near 70 percent of its revenue from the derivatives business.
• Interest related derivatives have been profitable for all but one quarter--4th 2008 which is when the bond market traded chaotically: the 30 Year Treasury Bond shot from 112 to 142 in that period. Derivatives thrive on volatility--but have demonstrated on several occasions they don't handle excessive volatility well.

It would not be in the anybody's best interests if the bond market decided to get acutely non-linear.