Notes on the BIS’s CVA risk framework July 2020 for securities finance

Targeted revisions to the credit valuation adjustment risk framework
July 2020

The capital requirements for CVA risk must be calculated by all banks involved in covered transactions in both banking book and trading book. Covered transactions include:

(1) all derivatives except those transacted directly with a qualified central counterparty and except those transactions meeting the conditions of [CRE54.14] to [CRE54.16]; and

(2) SFTs that are fair-valued by a bank for accounting purposes, if their supervisor determines that the bank’s CVA loss exposures arising from SFT transactions are material. In case the bank deems the exposures immaterial, the bank must justify its assessment to its supervisory by providing relevant supporting documentation.

FAQ1. Are SFTs for which the accounting amount of CVA reserves is determined to be zero included in the scope of “SFTs that are fair-valued by a bank for accounting purposes”?

For the purpose of CVA capital requirement, SFTs that are fair-valued for accounting purposes and for which a bank records zero for CVA reserves for accounting purposes are included in the scope of covered transactions if the CVA risk of those SFTs is deemed material as described in [MAR50.5].

For SFTs and client cleared transactions as specified in [CRE54.12], the supervisory floor for the MPoR is equal to 4+N business days, where N is the re-margining period specified in the margin agreement (in particular, for margin agreements with daily or intra-daily exchange of margin, the minimum MPoR is 5 business days). For all other transactions, the supervisory floor for the MPoR is equal to 9+N business days.

Regulatory CVA calculations

For margined counterparties, collateral is permitted to be recognised as a risk mitigant under the following conditions:

(a) Collateral management requirements outlined in [CRE53.39] and [CRE53.40] are satisfied.

(b) All documentation used in collateralised transactions must be binding on all parties and legally enforceable in all relevant jurisdictions. Banks must have conducted sufficient legal review to verify this and have a well founded legal basis to reach this conclusion, and undertake such further review as necessary to ensure continuing enforceability.

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