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    ISDA, GFMA, and IIF Respond to BCBS Proposal on CVA Risk Framework

    February 26, 2020

    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.

     

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    Keywords: International, Banking, CVA, CVA Risk, Basel III, Market Risk, BA-CVA, Responses to Consultation, Regulatory Capital, BCBS

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