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 πCVA 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 π·πBA-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.
Related Links
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
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.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Related Articles
APRA Publishes Results of Climate Risk Self-Assessment Survey
The Australian Prudential Regulation Authority (APRA) has published the findings of its latest climate risk self-assessment survey conducted across the banking, insurance, and superannuation industries.
ACPR Publishes Updates Related to CRD IV and Covered Bonds
The French Prudential Supervisory Authority (ACPR) published a notice related to the methods for calculating and publishing prudential ratios under the Capital Requirements Directive (CRD IV) and the minimum requirement for own funds and eligible liabilities (MREL).
BIS Paper Contributes to Debate on Regulating NBFIs and Big Techs
The Financial Stability Institute (FSI) of the Bank for International Settlements recently published a paper proposing a framework for classifying financial stability regulation as either entity-based or activity-based.
EIOPA Publishes Guidance on Climate Change Scenarios in ORSA
The European Insurance and Occupational Pension Authority (EIOPA) published the risk dashboard based on Solvency II data and the final version of the application guidance on climate change materiality assessments and climate change scenarios in the Own Risk and Solvency Assessment (ORSA).
EBA and ECB Respond to Proposals on Sustainability Disclosures
The European Banking Authority (EBA) and the European Central Bank (ECB) published their responses to the consultations of the International Sustainability Standards Board (ISSB) and the European Financial Reporting Advisory Group (EFRAG) on sustainability-related disclosure standards.
BIS Report Notes Existing Gaps in Climate Risk Data at Central Banks
A Consultative Group on Risk Management (CGRM) at the Bank for International Settlements (BIS) published a report that examines incorporation of climate risks into the international reserve management framework.
EBA Publishes Multiple Regulatory Updates for Regulated Entities
The European Banking Authority (EBA) published the final guidelines on liquidity requirements exemption for investment firms, updated version of its 5.2 filing rules document for supervisory reporting, and Single Rulebook Question and Answer (Q&A) updates in July 2022.
EIOPA Issues SII Taxonomy and Guide on Sustainability Preferences
The European Insurance and Occupational Pensions Authority (EIOPA) published Version 2.8.0 of the Solvency II data point model (DPM) and XBRL taxonomy.
EESC Opines on Proposals on CRR and European Single Access Point
The European Union published, in the Official Journal of the European Union, an opinion from the European Economic and Social Committee (EESC); the opinion is on the proposal for a regulation to amend the Capital Requirements Regulation (CRR).
HM Treasury Publishes Multiple Regulatory Updates in July 2022
HM Treasury published a draft statutory instrument titled βThe Financial Services (Miscellaneous Amendments) (EU Exit) Regulations 2022,β along with the related explanatory memorandum and impact assessment.
