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
EBA issued a revised list of validation rules with respect to the implementing technical standards on supervisory reporting.
EBA published its response to the call for advice of EC on ways to strengthen the EU legal framework on anti-money laundering and countering the financing of terrorism (AML/CFT).
NGFS published a paper on the overview of environmental risk analysis by financial institutions and an occasional paper on the case studies on environmental risk analysis methodologies.
MAS published the guidelines on individual accountability and conduct at financial institutions.
APRA published final versions of the prudential standard APS 220 on credit quality and the reporting standard ARS 923.2 on repayment deferrals.
SRB published two articles, with one article discussing the framework in place to safeguard financial stability amid crisis and the other article outlining the path to a harmonized and predictable liquidation regime.
FSB hosted a virtual workshop as part of the consultation process for its evaluation of the too-big-to-fail reforms.
ECB updated the list of supervised entities in EU, with the number of significant supervised entities being 115.
OSFI published the key findings of a study on third-party risk management.
FSB is extending the implementation timeline, by one year, for the minimum haircut standards for non-centrally cleared securities financing transactions or SFTs.