Operating model, data management and system challenges view course agenda. Cva risk capital charge within the frtbcva framework is a cutdown version of the new sensitivity based method used market risks frtb bm. Policy advice on basel iii reforms cva and market risk. This price depends on counterparty credit spreads as well as on the market risk factors that drive derivatives values and, therefore, exposure. Please contact the center for financial professionals today to discuss how we can deliver your thoughtleadership at the event, help you generate leads, and provide you with unique networking and branding opportunities.
From a regulatory perspective, market risk stems from all the positions included in banks trading book as well as from commodity and foreign exchange risk positions in the whole balance sheet. This new edition of his definitive treatment of the subject, fully updated and expanded, will remain the goto source on counterparty risk management and valuation. Counterparty credit risk and credit value adjustment. The credit valuation adjustment cva framework is designed for otc derivatives. The cva risk capital requirement is calculated for a banks total cva portfolio on a standalone basis. Interest rate risk in the banking book introduction of a uniform approach for measuring the extent irrbb could provide better comparability standardised pillar i approach. Counterparty risk is the risk associated with the other party to a financial contract not meeting its obligations.
To this end, all eligible cva hedges would be moved from the trading book to the cva book, while all noneligible cva hedges would remain in the trading book and would have no impact on cva risk capital calculations. What is the role of credit valuation adjustment cva. In other words, cva is the market value of counterparty credit risk. Cva risk charge calculation for derivatives in the banking book with local gaap. Risk of a credit valuation adjustment cva deutsche bundesbank. They can be considered smart middle office as they are a necessary part of the plumbing to facilitate the core activity of the bank, which is to trade as many derivatives as possible with clients, all of whom have varying levels of credit risk. Counterparty credit risk and credit value adjustment jon gregory is the acknowledged global expert on counterparty credit risk. Independent from the treatment in the cva risk capital requirement and the market risk capital requirement, internal risk transfers between the cva portfolio and the trading book can be used to hedge the counterparty credit risk exposure of a derivative instrument in the trading or banking book as long as the requirements of rbc25. Do institutions that use local gaap for accounting purposes and do not markto market derivatives in the banking book have to calculate a cva. These harbour not only market risk, but also credit risk.
Cva risk charge calculation for derivatives in the banking book with local gaap question. A new revised boundary between trading book and banking book is defined. Counterparty credit risk exposure at default by product excl. This price depends on counterparty credit spreads as well as on the market risk factors. This paper highlights the key differences between current and future calculation approaches for regulatory cva risk capital charges. It is therefore sensitive to the same market risk factors as those instruments held in the trading book. Jun 27, 2019 counterparty risk is the risk associated with the other party to a financial contract not meeting its obligations.
Basel committee on banking supervision consultative document. Basel iii had introduced the concept of cva for including the counterparty credit risk valuation. Credit valuation adjustment cva is the difference between the risk free portfolio value and the true portfolio value that takes into account the possibility of a counterpartys default. To capture all the risk factors in the cva capital charge. Securitization is a transaction or arrangement by which the credit risk associated with a liability or set of.
Do institutions that use local gaap for accounting purposes and do not marktomarket derivatives in the banking book have to calculate a cva risk charge for derivatives in the banking book. Credit valuation adjustment or cva is the process through which counterparty credit is valued, priced and hedged. Market risk can be defined as the risk of losses in on and offbalance sheet positions arising from adverse movements in market prices. Cva is the most widely known of the valuation adjustments, collectively known as xva. It represents the discount to the standard derivative value that a buyer would offer after taking into account the possibility of a counterpartys default. Basel iv revised trading and banking book boundary for market.
The expected shortfall is calibrated to a period of financial stress drop of stressed var. This can be defined as risk of movement of the underlying value as perceived by the lender vs market value of the underlying. Jun 28, 2017 bis acknowledges that though sa cva is an adaptation of the sensitivitybased approach for market risk to the cva book, there are several important variances between sa cva and satb, e. Do institutions that use local gaap for accounting purposes and do not marktomarket derivatives in the banking book have to calculate a cva. Thus, hedging cva risk differs whether it is considered from an accounting or a regulatory perspective. The revised framework will account for the exposure component of cva risks that was previously not. Compute the reduction in cva risk arising from the use of singlename credit.
Credit value adjustment cva the credit value adjustment is by definition the difference between the risk free portfolio and the true portfolio value that takes into account the possibility if a counterpartys default. Its objective was to take into account the market risk exposure component of cva along with its associated hedges, as well as ensuring consistency with the proposed revisions to the market risk framework under frtb. Stand out for the right reasons financial services risk and. Credit value adjustment cva the credit value adjustment is by definition the difference between the riskfree portfolio and the true portfolio value that takes into account the possibility if a counterpartys default. Basel committee on banking supervision consultative. In other words, cva represents the market value of the counterparty credit risk. Credit risk accounting under ifrs cva, dva and fva. Do institutions that use local gaap for accounting purposes and do not marktomarket derivatives in the banking book have to calculate a cva risk charge for derivatives in the. Cva desks are not front office as they have no dealings with external clients. Revised trading and banking book boundary for market risk presumed assignment to the trading book alternative allocation possible through explicit supervisory approval there is a general presumption that any of the following instruments are being held for at least one of the above. Under frtb, a trading desk is defined as a group of traders or trading accounts that implements a well defined business strategy operating within a clear risk management structure but subject to regulatory approval of the supervisor for capital purposes.
Basel iv revised trading and banking book boundary for. The banking book is a term for assets on a banks balance sheet that are expected to be held to maturity, usually consisting of customer loans to and deposits from retail and corporate customers. Counterparty credit risk in basel iii executive summary bis. In july 2015 the basel committee issued the consultative paper 325, see 1, concerning the revision of the credit value adjustment. Cva risk capital charge within the frtb cva framework is a cutdown version of the new sensitivity based method used market risks frtb bm. There are two prescribed approaches to calculate the market risk. Xva explained introduction the past decade has seen a raft of changes in the banking industry, with a focus on seemingly neverending new regulation. Rbc25 boundary between the banking book and the trading book. Elimination of the internal models approach for cva imacva. The attention is predominantly towards the issue of efficient cva pricing as opposed to implications in terms of risk management and capital requirements. Bis acknowledges that though sacva is an adaptation of the sensitivitybased approach for market risk to the cva book, there are several important variances between sacva and satb, e.
We can no longer assume that derivatives exposures are credit risk remote. Review of the credit valuation adjustment risk framework bis. The hedging of the cva desk has a cost associated to it, i. Cva credit value adjustment measure for counterparty credit.
One of the less well understood changes is a revision to the fundamentals of trading book fair value measurement and pricing, through the gradual introduction of various valuation adjustments. Cva risk charge calculation for derivatives in the banking. The cva the credit risk of the counterparty and the dva the credit risk of the entity itself depend on assumptions about the probability of default and the recovery rate and the expected. Cva is the credit adjustment for a derivative that is inthemoney i. Credit risk accounting under ifrs cva, dva and fva may 20 solum financial. Overall, the risk contribution analysis offers insights into the modeling assumptions. Credit valuation adjustment cva is the price that an investor would pay to hedge the counterparty credit risk of a derivative instrument. Cva is the credit reserve process and is analogous to mtm of bonds, loan loss reserves for loan or accounts. Bank exposures will be riskweighted based on either the external credit.
Additionally, the book contains a detailed description of the pillar iii disclosure requirements. Simultaneous hedging of regulatory and accounting cva. In the trading book a credit transformation revolution is also taking place, as fis. Under ifrs, both credit value adjustments cva and debit value adjustments dva need to be calculated dependent on whether the financial instrument is an asset or a liability. Credit valuation adjustment cva is the difference between the riskfree portfolio value and the. There is currently a strong market focus on counterparty credit risk and more specifically on credit value adjustment cva. Credit valuation adjustment cva is the difference between the riskfree portfolio value and the true portfolio value that takes into account the possibility of a counterpartys default. The credit and market risks in cva are no different from the same risks as embedded in many. To be eligible to sa cva, banks must fulfil the following. Alignment with the market risk framework the cva risk is a form of market risk as it is realised through a change in the marktomarket value of a banks exposures to its derivative counterparties. This is difference in collateral value book value value computed by the lender. Every derivative trade needs to have a party to take the opposite side.
Counterparty credit risk book and other valuable reference books covering the topics of cva and xva, available to buy online. May 06, 20 there is currently a strong market focus on counterparty credit risk and more specifically on credit value adjustment cva. Traditionally, trading book portfolios consisted of liquid. Credit valuation adjustment cva overview, formula, history. It reduces the mark to market value of an asset by the value of the cva. The banking book can also include those derivatives that are used to hedge exposures arising from the banking book activity, including interest rate risk. Credit valuation adjustment is a change to the market value of derivative instruments to account for counterparty credit risk. Trading desk definitions under frtb and volcker accenture. Market risk trading and banking book in light of basel iii. Interest rate risk, credit spread risk, equity risk, foreign exchange risk, commodities risk and default risk for trading book instruments.
Cva risk charge calculation for derivatives in the banking book. Program issues and impacts impact of the trading bookbanking book boundary regulators are establishing a more objective boundary to mitigate capital arbitrage between the regulatory trading. As a complement to the pillar i approach, the banks internal measurement method for determining the interest rate risk is allowed after approval of the supervisor. Standalone cva capital calculation those banks that hedge cva do so as an integral component of their trading book. Independent from the treatment in the cva risk capital requirement and the. To be eligible to sacva, banks must fulfil the following. Accord text in annex 1 is an adaptation of the frtb framework for market risk in the trading book to the cva book, which includes cva and its eligible hedges. The capital charge for cva risk is then determined by running the banks. So in summary cva is primarily for otc derivatives part of trading book where there is counterparty credit migration risk while irc is kind of banking book rwa equivalent for countering regulatory arbitrage i.
1642 802 149 723 1198 1634 535 1440 1395 278 782 1260 719 704 968 1250 279 1528 762 1294 1675 224 1401 585 1093 1430 843 800 1521 313 819 1005 534 1455 1008 695 353 1363 15