Counterparty Risk and Credit Valuation Adjustment: Once Secondary Considerations, Now Center Stage
Report Summary
Counterparty Risk and Credit Valuation Adjustment: Once Secondary Considerations, Now Center Stage
Counterparty risk now demands as much of a bank’s attention as market risk.
Boston, May 30, 2012 – A new report from Aite Group reviews globally regulated counterparty credit risk models and discusses the application of credit valuation adjustment—CVA—as defined by Basel III. The report also addresses the impact of counterparty risk and CVA on industry risk management infrastructures.
Driven primarily by regulatory fiat, the tracking and mitigation of credit risk has taken on added significance since the near-implosion of the global financial markets in 2008. For derivatives, counterparty credit risk intrinsically ties participating parties to each other on an ongoing basis. Basel III, the global banking regulatory standards accord, serves to strengthen the prudential supervision of banks through increased capital and liquidity requirements, and explicitly addresses the definition and application of CVA.
“Though the financial industry has had some time to acquaint itself with CVA and its implications, CVA is not yet a uniformly understood counterparty capital charge,” says John Jay, senior analyst with Aite Group and author of this report. “Ready or not, however, a central counterparty-centric ecosystem is being quickly foisted onto the OTC derivatives market by Basel III. Relevant parties—particularly those that will be trading in OTC swaps or derivatives which will not be deemed ‘clearable’ by the CFTC or SEC—had better be prepared.”
This 18-page Impact Note contains four figures and one table. Clients of Aite Group’s Institutional Securities & Investments service can download the report.