BCBS issued consultation on a set of limited, targeted, and final adjustments to the credit valuation adjustment (CVA) risk framework. The revisions aim to align relevant parts of the revised CVA risk framework with the minimum capital requirements for market risk published in January 2019 as well as capital requirements for bank exposures to central counterparties. BCBS is seeking feedback on a possible adjustment to the overall calibration of capital requirements calculated under the CVA standardized and basic approaches. The annex to the paper includes the proposed specific amendments to the standards. The required implementation date of the revised CVA risk framework continues to be January 01, 2022. The comment period on the consultation ends on February 25, 2020.
The proposed adjustments comprise two types of revisions. The finalization of the market risk framework in January 2019 included changes to some of the market risk standardized approach risk-weights, which in turn impact the CVA framework. Given that the risk-weights of the CVA risk framework are largely based on the January 2016 market risk standard, BCBS is proposing to reflect the corresponding market risk revisions in the CVA risk framework. BCBS is proposing adjustments to the risk-weights in the CVA standardized approach (SA-CVA) for interest rate risk, foreign exchange risk, and certain exposures subject to counterparty credit spread risk and reference credit spread risk. In addition, BCBS is proposing to introduce a new approach to calculate capital requirements for instruments with market values, depending on credit and equity indices, as well as a new formula for aggregating the CVA capital requirement, in line with the revisions to the market risk framework.
BCBS is also considering additional targeted revisions to the CVA risk framework. These revisions include adjusting the scope of portfolios subject to CVA risk capital requirements by excluding some securities financing transactions (SFTs) where the CVA risks stemming from such positions are not material and exempting certain client-cleared derivatives. Moreover, BCBS is considering reducing the margin period of risk for some centrally cleared client derivatives in the SA-CVA, which would bring the CVA requirement more in line with the counterparty credit risk (CCR) framework and further incentivize banks to centrally clear over-the-counter (OTC) derivatives. Finally, BCBS is seeking feedback on whether a possible calibration adjustment of the SA-CVA is warranted. This would be achieved by changing the existing multiplier mCVA from its current value of 1.25 to [1 to 1.25]. BCBS is considering revising the calibration of the basic approach (BA-CVA) to have an appropriate relative calibration between the SA-CVA and the BA-CVA. Any such adjustments would have to be based on sound empirical evidence.
Comment Due Date: February 25, 2020
Effective Date: January 01, 2022
Keywords: International, Banking, CVA, CVA Risk, Minimum Capital Requirements, Basel III, Market Risk, CCP, SA-CVA, OTC Derivatives, Credit Risk, BA-CVA, Securities Financing Transactions, BCBS
Previous ArticlePRA Publishes Annual List of G-SIIs and O-SIIs
BCBS amended the guidelines on sound management of risks related to money laundering and financing of terrorism (ML/FT).
US Agencies (Farm Credit Administration, FDIC, FED, FHFA, and OCC) finalized changes to the swap margin rule to facilitate implementation of prudent risk management strategies at banks and other entities with significant swap activities.
PRA published a letter that builds on the expectations set out in the supervisory statement (SS3/19) on enhancing banks' and insurers' approaches to managing the financial risks from climate change.
EBA finalized the guidelines on treatment of structural foreign-exchange (FX) positions under Article 352(2) of the Capital Requirements Regulation (CRR).
FSB published a statement on the impact of COVID-19 pandemic on global benchmark transition.
IAIS published the list of Internationally Active Insurance Groups (IAIGs) publicly disclosed by group-wide supervisors.
FED has temporarily revised the reporting form on consolidated financial statements for holding companies (FR Y-9C; OMB No. 7100-0128).
EC launched a consultation on the review of the key elements of Solvency II Directive, with the comment period ending on October 21, 2020.
ECB launched a consultation on the guide that sets out supervisory approach to consolidation projects in the banking sector.
IAIS published technical specifications, questionnaires, and templates for 2020 Insurance Capital Standard (ICS) and Aggregation Method data collections.