NatWest derivatives jump 50% to pounds 780bn: Concern over rising trade leads banks to publicise exposure

THE VOLUME of derivatives contracts on the books of National Westminster Bank soared nearly 50 per cent in the first six months of this year, to pounds 784bn from pounds 531bn at the end of December, according to US Securities and Exchange Commission records.

The bank said the growth was due to higher trading volumes, especially in interest-rate derivatives, which are linked to bond- market prices.

Concern that growing trade in derivatives could be the next financial black hole after property has put pressure on banks to publicise details of derivatives trading.

Derivatives are built up - or derived - from basic futures and options contracts. They promise delivery of financial instruments on terms specified in advance but have caused alarm because they are also a way for speculators, such as hedge funds, to play the markets without putting up much capital.

The first six months of the year saw turmoil in international bond markets as US interest rates began to rise, leading to enormous trading volumes. But the markets were so erratic that banks reported falls in derivatives trading profits.

NatWest's growth in derivatives this year is much faster than Barclays', which said in its SEC filing that total exposure at the end of June was pounds 744bn, 22 per cent higher than at the end of December. NatWest says the amount at risk from derivatives trading is far smaller than the outstanding volume of derivatives on its books.

It calculates that if every customer defaulted at the same time on all derivatives contracts, the cost would be a little more than 1 per cent of the face value of the derivatives it holds. This 'replacement cost' amounted to pounds 8.8bn at 30 June compared with pounds 6.8bn at the end of December, a 29 per cent increase. At the end of 1992, the replacement cost was pounds 7.4bn on pounds 385bn of derivatives, half the volume at the end of June 1993. This suggests the bank has been taking fewer risks as the volume of its business increases.

The filing also shows that the Bank of England regards the pounds 784bn of derivatives currently on NatWest's books as equivalent to pounds 3.8bn of conventional loans. That figure, which compares with pounds 3bn at the end of December, is the value of the business adjusted for its relative risk.

The biggest part of NatWest's derivatives exposure is in interest rate contracts. At pounds 472bn, the volume was 50 per cent higher than at the end of December, but the replacement cost, the bank's credit risk, fell from pounds 4.2bn to pounds 3.4bn.

Exchange rate derivatives grew 45 per cent to pounds 312bn, but the replacement cost more than doubled from pounds 2.6bn to pounds 5.4bn.