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.
Associated Documents
An expert working group was formed in July 2014 to advise the Board.
Working Group Members:
|
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 |
Start Date: June 2011
Working Group formed: November 2011
Exposure Draft: Q3 2013
End Date: Q4 2014
An Exposure Draft was published on 2 December with an comment period until 28 February 2014. The comments recieved on the Exposure Draft may be viewed here.
10 April 2014 010 Duff & Phelps
20 March 2014 012 Association Professionnelle des Valorisateurs d’instruments Financiers
20 March 2014 011 Canadian Institute of Chartered Business Valuators
20 March 2014 009 PwC
20 March 2014 008 KPMG
20 March 2014 007 Deloitte
20 March 2014 006 Finance and Treasury Association
20 March 2014 005 RICS
20 March 2014 004 ISDA
20 March 2014 003 EY
20 March 2014 002 Chatham Financial
20 March 2014 001 Barclays Bank