ISDA CEO Scott O'Malia called for specific changes to the current credit valuation adjustment ("CVA") capital framework, criticizing the requirements for not being appropriate or risk-sensitive.
In a post on ISDA's derivatiViews blog, Mr. O'Malia argued that, based on the results gathered from a quantitative impact study,1 the CVA framework as it stands could:
-
cause an "inappropriate[]" rise in capital requirements for derivatives businesses;
-
hurt users by making derivatives (i) more costly and (ii) less accessible for users when hedging their risks;
-
increase capital charges on exposures hedged at the portfolio level due to a lack of recognition of CVA hedges (in particular, those that employ index credit default swaps ("CDS") and proxy single-name CDS); and
-
require capital beyond what is appropriate, due to the insufficient "convergence" between regulatory CVA and market practice.
Footnotes
1 Mr. O'Malia indicated that the results of the study are subject to nondisclosure agreements but have been presented to the Basel Committee on Banking Supervision for consideration.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
