The OCC reports that total gross notional derivatives outstanding jumped by nearly 8% in Q1 2017 over Q4 2016. At $178 trillion, that is even more than the reported total for Q3 last year. The latest estimates largely confirm the idea that bank balance sheets were relatively more accommodative in 2017 than especially later 2016.

Among the more buoyant categories of derivatives, forex notionals increased to $36 trillion and a new record high. That was up 14% in Q1 from the prior quarter. It would certainly seem to suggest a basis for the decline in negative currency basis in that period (and thereafter, since swap rates and spreads tend to be lagging indications in this way). The “dollar” shortage appears to have become relatively less of one in the first three months of 2017.

While positive in the sense that persistent prior declines were for this latest period interrupted, there isn’t any indication that the larger decay in offered balance sheet capacity has ended. Though notionals were up over Q4, year-over-year implied capacity is still down significantly. At $178 trillion, that was almost 8% less than what was reported for Q1 2016, and still 30% below the peak in 2011.

In other words, what appears in these figures is variation in the otherwise overall same negative direction. That variation is not unimportant, of course, for that relative reduction in “dollar” pressure has caused the Fed to wonder what is going on in the world as it seeks to “tighten” via the federal funds market. From the June 2017 policy minutes:

They also noted that, according to some measures, financial conditions had eased even as the Committee reduced policy accommodation and market participants continued to expect further steps to tighten monetary policy. Participants discussed possible reasons why financial conditions had not tightened.

Citigroup overtook JP Morgan for a second time in the top dealer spot among US banks. Its derivative book gained 15% in the quarter, while JPM’s grew more modestly at just 3%. As a result, Citi’s $50.3 trillion places them just above the bank that used to unequivocally rule the derivative space (but very importantly has ceded its station).

The other of the Big 4 derivatives dealers were more cautious in putting up positions like JPM. Goldman Sachs’ book increased by 7%, while Bank of America’s grew by a little more than 5%.

Among the second tier dealers, Wells Fargo continues to expand its footprint at a serious (troubling?) rate. Its reported gross notionals surged by 17% in Q1, and they are actually 67% greater than Q2 2014 at the start of the “rising dollar” period. In short, Wells appears to be aggressive no matter what.

Gross Positive Fair Value (GPFV) in the aggregate fell to $2.43 trillion, the lowest for that number since the fourth quarter of 2007. It is a measure of possible gross credit exposure due to derivatives activities (in theory, dealers run a matched book so GPFV should fall close to zero and remain there; in practice, matched books are more of an academic concept, so a zero GPFV isn’t realistic but the closer the better). The decline reflects the combination of lower overall volumes, as well as relatively higher interest rates and lower currency volatility in Q1. Even so, however, Net Current Credit Exposure (NCCE) though lower than the past few quarters remains high.

NOTE, for a more detailed explanation of the concepts behind GPFV and NCCE, go here.

NCCE is an important indication of dealers’ collective ability to net out risk. In terms of this particular statistic, it is a remainder after subtracting netting arrangements and posted collateral from GPFV. Thus, we can infer some continued difficulty or reluctance in the aggregate to absorb risk. If the GPFV is so reduced, but NCCE lingers to the high side, then despite what should have been more favorable conditions there doesn’t seem to have been too many takers (at the margins) for additional risk.

The OCC report for Q1 is more evidence for what we have all along assumed, and what the Fed doesn’t understand. Bank balance sheet capacity does appear to have been comparatively more “loose” in Q1 than in prior quarters. While that is a relative change in immediate circumstances, reflected in relative prices and spreads throughout Q1, in the overall context of the post-crisis period it truly isn’t much of one. Because of that, the more appropriate characterization of monetary conditions in the first quarter would not have been more “loose” but rather less “negative.”

As noted yesterday, I seriously doubt the balance sheet flow indicated here was in anticipation of a Dodd-Frank repeal in whole or in parts (like the SLR), rather given that dealer activities are often taken in response to trends I think it far more likely that “reflation” explains the more charitable positioning across the derivative space. The lack of further momentum in either the economy or “reflation” (as one follows the other) is in all likelihood to show up in the same way in these statistics, perhaps more so Q3 than Q2.

The primary issue is as always risk/return. In that sense, the economic context is paramount, for while the economy does not determine the state of markets especially in the short run, it does define in rough terms the denominator of that non-numeric ratio. Given the statistics (starting with NCCE) for what was an otherwise much better Q1 for derivatives, the numerator isn’t all that favorable, either. That may be why only a few banks, Citi and Wells primarily, were enthusiastic in response to “reflation”; the others appropriately, I believe, cautious.