CVA as a service

PUBLISHED:
23 October 2017
5:52 PM

BY:
Thomas Griffiths

As part of market participants’ activities to achieve compliance with accounting rules and best practice, they need to implement solutions to manage Credit Valuation Adjustments (CVA) and other XVAs in their portfolio valuations.

A changing regulatory landscape

Following the financial crisis, practices in the OTC derivatives market were recognised as contributors to the crisis that needed to be overhauled. Now, due to new regulatory and accounting requirements and changes in risk management best practices, various new valuation adjustments (called XVAs) need to be incorporated into the pricing of OTC derivatives trades. The different XVAs reflect different costs associated with trading, with each contributing to the final price of a trade.

As part of market participants’ activities to achieve compliance with accounting rules and best practice, they need to implement solutions to manage Credit Valuation Adjustments (CVA) and other XVAs in their portfolio valuations.

Developments in XVA

To be able to trade OTC derivatives at the ‘correct’ price, market participants need to understand the valuation adjustments required for each trade and/or counterparty they are trading against. XVA calculations continue to evolve, both in terms of modelling complexity and the standard of best market practice.

The credit valuation adjustment (CVA) has become a market standard for valuing counterparty default risk on OTC derivatives trades. Similarly, other XVAs such as FVA (funding valuation adjustment) and DVA (the adjustment required to reflect a firm’s own credit risk) are now common features in an OTC derivative price. MVA (the cost of posting initial margin) and KVA (the cost of capital valuation adjustment) are also emerging as standard calculations required to value trades accurately.

Although the underlying XVA measures are complex to calculate and require significant financial modelling, regulators are moving towards measures that ensure counterparty risk is comparable between banks. Examples such as SA-CCR and FRTB-CVA form part of a broader agenda to provide a regulatory framework that can be implemented across jurisdictions ensuring that capital calculations can be compared across the industry.

Technology – constraint or opportunity?

Despite regulatory changes and advances in the ‘market standard’, most financial institutions have left the architecture of their risk systems unchanged. Cumbersome, static software installations and legacy in-house systems ignore advances in technology that abound in the market. Increased regulatory scrutiny and more advanced risk management requirements are causing costs to multiply as resources are thrown at large risk analytics projects, installations and upgrades.

However, solutions have emerged to address cost pressures and resource restraints. New centralised services are a more cost- and resource-efficient way of providing market-standard risk calculations.

triCalculate XVA analytics as a centralised service – flexibile yet standardised, fast and accurate

With this evolving landscape, the most effective solutions provide XVA analytics as a centralised service rather than a static software installation. Market participants today need a solution to help them meet current market and regulatory conditions as well as anticipate and fulfill future requirements.

Furthermore, the regulatory desire for standardisation lends itself well to a centralised solution. The triCalculate centralised service eliminates the cost of purchasing large numbers of servers and incorporates standard models that can be used by all industry participants.

The triCalculate approach is:

  • Quick and easy to implement: Rapid onboarding with no hardware or software installation requirements.
  • Centralised: The triCalculate service is easily accessible to multiple users and business units in a firm across a wide range of asset classes, data sources and instrument types.
  • Adaptable: The ability to stay ahead of regulatory developments without the need for time-consuming and expensive new installations or updates is important.
  • Fast & Accurate: triCalculate’s advanced GPU-based technology and our advantageous Probability Matrix Methodology modelling allows for results in minutes rather than hours. Consistent modelling for scenario generation and netting set pricing provide increased accuracy versus other methods.
  • Secure: triCalculate is ISO 27001 certified, the highest international standard for Information Security.

To learn more about CVA/XVA as a service or for a free demo of triCalculate, contact us at [email protected].