BCBS Finalizes Revisions to Credit Valuation Adjustment Risk Framework
BCBS published the revised standard for regulatory capital treatment of credit valuation adjustment (CVA) risk for derivatives and securities financing transactions. The revisions to the regulatory capital treatment of CVA risk include re-calibrated risk-weights, different treatment of certain client cleared derivatives, and an overall re-calibration of the standardized and basic approach. These changes bring the revised CVA risk framework into alignment with the market risk framework. The revised standard comes into effect on January 01, 2023.
The credit valuation adjustment (CVA) risk framework replaces an earlier version of the standard that was published in December 2017. This final standard incorporates changes proposed in the November 2019 consultative document and has been informed by a quantitative impact assessment based on data as of the end of June 2019. The following are the key highlights of the targeted revisions to the CVA framework:
- Reduced risk-weights. BCBS has agreed to adjust certain risk-weights in the CVA standardized approach (SA-CVA). All delta risk-weights in the interest rate risk class will be reduced by 30%, all delta risk-weights in the foreign-exchange risk class will be reduced by 50%, and the delta risk-weight in the counterparty credit spread and reference credit spread risk classes for high yield and non-rated sovereigns will be reduced from 3% to 2%. Moreover, the vega risk-weights in the SA-CVA will be capped at 100%. These amendments will align the CVA risk framework with the revised market risk framework. In addition, BCBS has also agreed that the risk-weight in the CVA basic approach (BA-CVA) for high-yield and non-rated sovereigns, including exposures to central banks and multilateral development banks, will be reduced from 3% to 2%.
- Introduction of new index buckets and revised aggregation of CVA capital requirements. The revised market risk framework introduced new "index buckets," where banks could, under certain conditions, calculate capital requirements using credit and equity indices directly instead of looking through to the underlying constituents. BCBS has agreed to introduce the same new buckets in the counterparty credit spread risk class, reference credit spread risk class, and equity risk class of the SA-CVA. For credit and equity indices that satisfy the same liquidity and diversification conditions set out in the market risk framework, banks would have the option of calculating CVA risk capital requirements based on the index buckets rather than by looking through to the underlying constituents. BCBS has also agreed to revise the formula for aggregating capital requirements across buckets in the CVA risk framework to better align it to the market risk framework.
- Alterations to the scope of CVA risk capital requirements. BCBS has agreed to adjust the scope of portfolios subject to CVA risk capital requirements by excluding some securities financing transactions where the CVA risks stemming from such positions are not material and exempting certain client-cleared derivatives. Moreover, the floor for the margin period of risk for some centrally-cleared client derivatives has been reduced. This brings the CVA requirement more in line with the counterparty credit risk framework and further incentivizes banks to centrally clear over-the-counter derivatives.
- A revised overall calibration of the CVA risk framework. The revised CVA risk framework also includes a reduced value of the aggregate multiplier 𝑚CVA from 1.25 to 1 for banks using the SA-CVA. To have an appropriate relative calibration between the SA-CVA and the BA-CVA, BCBS has also agreed to introduce a similar scalar 𝐷𝑆BA-CVA = 0.65 for banks using the BA-CVA. This will result in a re-calibration of the capital requirements for CVA risk for banks using these approaches.
Effective Date: January 01, 2023
Keywords: International, Banking, Basel, Regulatory Capital, CVA Risk, Market Risk, BA-CVA, SA-CVA, OTC Derivatives, Securities Financing Transactions, BCBS
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