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    OSFI Consults on Treatment of Credit Valuation Adjustments

    June 18, 2021

    OSFI decided to increase the Domestic Stability Buffer from 1.00% to 2.50% of total risk-weighted assets, with effect from October 31, 2021. OSFI is proposed regulatory changes to the treatment of credit valuation adjustments (CVA) and market risk hedges of other valuation adjustments of over-the-counter (OTC) derivatives referred to as XVA. The proposed revisions affect Chapter 8 on CVA risk and Chapter 9 on XVA of the Capital Adequacy Requirements (CAR) Guideline. The comment period for this consultation ends on July 30, 2021. OSFI plans to publish a summary of comments and the final guidance in late 2021. The revisions to the Capital Adequacy Requirements Guideline become effective in the first quarter of 2024.

    The proposed changes in Capital Adequacy Requirements Guideline are a continuation of the March 2021 industry consultation on proposed regulatory changes to incorporate the latest and final round of Basel III reforms into its capital, leverage, and related disclosure guidelines for banks. The proposals impact Chapters 8 and 9 of the guideline and are in line with the international standards set by BCBS. The following are the proposed changes with respect to the CVA risk (Chapter 8):

    • Enhanced risk sensitivity—The current CVA capital framework does not give any recognition to market risk sensitivities and/or hedges. Previously, OSFI determined these hedges represented acceptable risk management practices and should not be capitalized as open risk positions under the market risk capital requirements. Given the revised CVA capital framework will recognize hedging and capture the effects of market risk factors on CVA, the exemption in the market risk framework will be removed upon implementation of the updated guidance.
    • Increased robustness—The consultation prescribes, new approaches for the capitalization of CVA risk: a new standardized approach that captures market risk sensitivities similar to OSFI’s proposed market risk capital requirements and a basic approach that is benchmarked to the standardized approach.
    • Scope of application—The scope of application will be deposit-taking institutions that are subject to the market risk capital requirements of OSFI

    With respect to Chapter 9 on XVA, OSFI proposed that the hedges of the exposure component of funding valuation adjustments (FVA) and collateral valuation adjustments (ColVA), subject to regulatory verification of sound governance and risk management arrangements, may be removed from a  deposit-taking institution’s market risk capital requirements. The remainder, which includes hedges of a deposit-taking institution's cost of funds component of funding valuation adjustments and all other XVAs, must be capitalized under the market risk capital requirements, as set out in the revised Chapter 9 of the CAR guideline. OSFI has also published the draft wording for this proposed treatment of XVAs, with the finalized draft to be included in Chapter 9 of the final Capital Adequacy Requirements guideline.

     

    Related Links

    Comment Due Date: July 30, 2021

    Effective Date: Fiscal Q1/2024

    Keywords: Americas, Canada, Banking, CAR Guideline, CVA Risk, Credit Valuation Adjustment, Market Rik, OTC Derivatives, XVA, Domestic Stability Buffer, DSB, Regulatory Capital, D-SIBs, Basel, OSFI

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