BCBS outlines changes to CVA risk valuations for SFTs
07 August 2020 Basel
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The Basel Committee on Banking Supervision has published a new report outlining necessary adjustments to Basel III’s credit valuation adjustment (CVA) risk framework as it applies to derivatives and securities financing transactions (SFTs).
SFTs and derivatives are subject to the risk of incurring mark-to-market losses because of the deterioration in the creditworthiness of their counterparties.
This potential source of loss due to changes in counterparty credit spreads and other market risk factors is known as CVA risk.
The new BCBS report refines CVA calculation methodology as laid out in its November 2019 report and is the result of a consultation with industry stakeholders and discussions among committee members.
Among the revision proposed in BCBS’s report is to adjust the scope of portfolios subject to CVA risk capital requirements by excluding some SFTs where the CVA risks stemming from such positions are “not material”, as well as exempting certain client-cleared derivatives.
Moreover, the floor for the margin period of risk for some centrally-cleared client derivatives has been reduced.
This, BCBS says, brings the CVA requirement more in line with the counterparty credit risk framework and further incentivises banks to centrally clear over-the-counter derivatives.
The new report provides an annodated annex of amendments to the CVA framework which can be viewed in full, here.
SFTs and derivatives are subject to the risk of incurring mark-to-market losses because of the deterioration in the creditworthiness of their counterparties.
This potential source of loss due to changes in counterparty credit spreads and other market risk factors is known as CVA risk.
The new BCBS report refines CVA calculation methodology as laid out in its November 2019 report and is the result of a consultation with industry stakeholders and discussions among committee members.
Among the revision proposed in BCBS’s report is to adjust the scope of portfolios subject to CVA risk capital requirements by excluding some SFTs where the CVA risks stemming from such positions are “not material”, as well as exempting certain client-cleared derivatives.
Moreover, the floor for the margin period of risk for some centrally-cleared client derivatives has been reduced.
This, BCBS says, brings the CVA requirement more in line with the counterparty credit risk framework and further incentivises banks to centrally clear over-the-counter derivatives.
The new report provides an annodated annex of amendments to the CVA framework which can be viewed in full, here.
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