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Credit / Debit Valuation Adjustments 2013

Credit / Debit Valuation Adjustments 2013

The need to reflect the credit risk of the income derived from any cash generating asset is broadly understood. However, complications arise when valuing derivatives because the liability to make payments can change between the counterparties during the term. This means that when valuing their interest on any given date the holder of a derivative has not only to consider the credit risk of their counterparty but also their own credit risk. Valuations of derivative holdings are required for various purposes, including financial reporting and, in the case of financial institutions, for calculating regulatory capital.

An expert working group to advise the Board was formed in November 2011. The Board approved an Exposure Draft for public release at its meeting in November 2013. The comment period expired on 28 February 2014. The comment letters may be viewed here. An analysis of the comments prepared for the Board is available on this page.

After consideration of the comments received the Board asked the Working Group and staff to make amendments to the published draft. The principal changes were to:

  • Improve the introduction so that the purpose and context of the guidance is clearly explained.
  • Make it clear that different methods may be appropriate for calculating CVA and DVA depending on the purpose of the valuation and the materiality of an entity’s holding of derivatives.
  • To make the guidance more relevant for non banking entities, many of whom would not have the sophisticated systems found in banks for monitoring, managing and consistently adjusting for credit risk.

After making changes to reflect the above, further outreach activity was undertaken, particularly with the buy side and audit community which resulted some further refinements to the paper.

The paper was approved by the Board for issue at its meeting in October 2014. Because changes may be required to this guidance as the Board’s related project on Funding Valuation Adjustments (FVA) evolves, it will be initially issued as interim guidance.

Working Group Members

An expert working group was formed in July 2014 to advise the Board

Board members
Paul Hawkes – chairman Weisshorn Re Zurich
Ana Castaneda Intermoney Valora Consulting Madrid
External experts
Tanguy Dehapiot BNP Paribas London
Mike Bailey Deloitte New York
Terence Tchen Houlihan Lokey San Francisco
James Dimech DeBono Grant Thornton London
Thomas Lee KPMG Toronto
Savraj Dhillon UBS London
Mark Wilson Deutsche Bank London
Laurent-Olivier Valigny HSBC Paris
Augusto Magalhaes JP Morgan London
David Bradbery Barclays London
Siobhan Tipping Ernst & Young Amsterdam
Yolaine Kermarrec Deutsche Bank London
Dan Gentzel Chatham Financial Pennsylvania

Background

Documentation

Project brief

Download

Exposure draft December 2013

Download

Analysis of comments on exposure draft

Download

Interim application guidance

Download
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