On Feb. 25, FIA submitted comments to the Basel Committee on Banking Supervision regarding proposed revisions to the calculation of credit valuation adjustment risk, an important component of the Basel III capital framework.
CVA risk is the exposure to changes in counterparty credit spreads and other market risk factors that affect the value of a transaction. It is typically incurred by banks when there is a deterioration in the creditworthiness of the counterparties to their derivatives transactions. The Basel Committee published a CVA risk framework in December 2017 and is now in the process of updating and revising the framework ahead of the implementation date of January 2022.
In its comment letter, FIA argued that client cleared derivatives should be removed from the CVA framework altogether. FIA explained that banks only incur a loss on cleared derivatives when there is an actual default of a client and that this risk fully covered by other capital charges already existing in the Basel III capital framework. Additionally, FIA argued that client cleared transactions are not accounted for on a bank’s balance sheet as the bank only serves as an agent for these transactions and does not assume principal risk, and consequently there is no CVA recorded against these transactions.
"In this respect it is unclear what the CVA tries to capitalize as any possible losses as a result of the default of the client is captured through CCR [the counterparty credit risk default charge]. As such, the CVA capital charge unnecessarily penalizes client clearing contrary to the G20 goal to incentivize clearing as part of the post-crisis derivatives reform."
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