ISDA, GFMA, and IIF Respond to BCBS Proposal on CVA Risk Framework
ISDA, the Global Financial Markets Association (GFMA), and the Institute of International Finance (IIF) submitted a joint comment letter to BCBS on its consultation on final revisions to the credit valuation adjustment (CVA) risk framework. The letter outlines the importance of CVA and summarizes the results of a quantitative impact study conducted by the Associations with input from 25 global banks with large trading book activities. Given the potential impact of the proposed CVA framework, the Associations urge BCBS to consider and act on the further revisions highlighted in the key recommendations to avoid any unintended consequences while still achieving the regulatory objectives.
Targeted revisions such as the adjustment of the CVA multiplier, changes to risk-weights and the aggregation formula, and the reconsideration of the scope of application to exclude immaterial security finance transactions are significant improvements over the 2017 CVA risk framework. The Associations support the introduction of a scalar for the appropriate calibration of basic approach to calculation of capital requirements for CVA (BA-CVA), but believe that further revisions are needed to address design and calibration issues that still exist in the framework and to better reflect the underlying economic risks. The Associations seek definitional clarifications with respect to the standard in relation to the treatment of Guarantees, Expected Loss Given Default, and single name proxy hedges. Additionally, the Associations believe that the proposed recommendations are intended to incentivize prudent hedging of CVA risk, which is a primary objective of the new framework. The key recommendations are to:
- Improve the granularity of the counterparty credit spread risk-weights. At a minimum, recognize the differentiation in CVA risk profiles between financial counterparties.
- Improve the recognition of CVA Index hedges to better reflect their usage to hedge systematic credit spread risk as opposed to specific sectoral or counterparty risk and incentivize prudent hedging within the industry.
- Revise the scope of application and modeling parameters to more closely align with industry practice to determine the accounting fair value recognized in banks’ financial accounts and reduce operational burden.
Related Links
Keywords: International, Banking, CVA, CVA Risk, Basel III, Market Risk, BA-CVA, Responses to Consultation, Regulatory Capital, BCBS
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Pierre-Etienne Chabanel
Brings expertise in technology and software solutions around banking regulation, whether deployed on-premises or in the cloud.
Previous Article
BoE Publishes Notice on Collateral Referencing LIBOR for Use in SMFRelated Articles
EBA Finalizes Remuneration Standards for Investment Firms in EU
EBA finalized the two sets of draft regulatory technical standards on the identification of material risk-takers and on the classes of instruments used for remuneration under the Investment Firms Directive (IFD).
ECA Recommends Actions to Enhance Resolution Planning for Banks
EC published, in the Official Journal of the European Union, a notification that the European Court of Auditors (ECA) has published a special report on resolution planning in the Single Resolution Mechanism.
BoE Publishes Key Elements of the 2021 Stress Testing for Banks in UK
BoE published a scenario against which it will be stress testing banks in 2021, in addition to setting out the key elements of the 2021 stress test, guidance on the 2021 stress test, and the variable paths for the 2021 stress test.
PRA Proposes Rules on Identity Verification of Depositor Protection
PRA published a consultation paper (CP3/21) proposes rules regarding the timing of identity verification required for eligibility of depositor protection under the Financial Services Compensation Scheme (FSCS).
FSB Publishes Work Program for 2021
FSB published the work program for 2021, which reflects a strategic shift in priorities in the COVID-19 environment.
FCA Issues Update on Move to New Data Collection Platform
FCA announced that 50% firms have started using the new data collection platform RegData, which is slated to replace the existing platform known Gabriel.
Bundesbank Publishes Derivation Rules for Reporting by Banks
Bundesbank published Version 5.0 of the derivation rules for completeness check at the form level, with respect to the data quality of the European harmonized reporting system.
FED Revises Capital Planning and Stress Testing Requirements for Banks
FED finalized a rule that updates capital planning requirements to reflect the new framework from 2019 that sorts large banks into categories, with requirements that are tailored to the risks of each category.
ECB Releases Results of Bank Lending Survey for Fourth Quarter of 2020
ECB published results of the quarterly lending survey conducted on 143 banks in the euro area.
ESAs Publish Reporting Templates for Financial Conglomerates
ESAs published the final draft implementing technical standards on reporting of intra-group transactions and risk concentration of financial conglomerates subject to the supplementary supervision in EU.
