BCBS Proposes Revisions to Credit Valuation Adjustment Risk Framework

The Basel Committee on Banking Supervision has issued a Consultation detailing limited, targeted, and final adjustments to the Credit Valuation Adjustment Risk Framework.

Issued in December 2017, The ‘BCBS’ issued the associated ‘CVA’ Risk Framework, as part of the Basel III Post-Crisis Regulatory Reforms.

This revision aims to align the Risk Framework with the Minimum Capital Requirements for Market Risk, published by the ‘BCBS’ in January 2019, as well as the Capital Requirements for Bank Exposures to Central Counter-parties.

The Committee proposes amendments to the Risk Framework in three broad areas:

(i) Aligning Risk Weights with the Market Risk Framework;

(ii) introducing ‘Index Buckets’

(iii) Revising the Aggregation Formula.

Additional propositional Framework Adjustments include:

  • Revising the treatment of ‘Client Cleared Derivatives ‘, in order to enhance the consistency with corresponding ‘Counter party Credit Risk Treatment’ and incentivize Central Clearing. The Committee proposes to exempt Client Exposures that meet the criterion for Preferential Treatment under the ‘Counter party Credit Risk Framework’ and reduce the floor for the margin period of risk for Clearing Members’ exposures to Clients in the ‘SA-CVA’ (‘Standardised Approach’) from ten to five days
  • Excluding from the scope of ‘CVA Capital’ Requirements, any immaterial Securities Financing Transactions (‘SFTs’) that do not affect ‘CVA Loss Exposures’.
  • Adjusting the existing multiplier m CVA from 1.25 to [1 to 1.25].
  • Maintaining an appropriate relative calibration of Capital Requirements calculated under the ‘Standardised and Basic’ approaches of the ‘CVA’.

 

The detailed list of amendments on the ‘CVA Risk Framework’ are detailed in the Annex of the Consultation Paper.

Banks, Building Societies and Investment Firms are advised to review the Consultation Paper with their Risk Management and Finance Functions, ensuring that Executive/Senior Management Teams and Board Members are appraised, identifying the impact upon their Business and their own Financial Models and Risk Frameworks.

The ‘BCBS’ has confirmed that it does not plan any further adjustments to the ‘CVA Risk Framework’. The expected implementation date of the revised ‘CVA Risk Framework’ is 01 January 2022.

Responses to the Consultation are due to be submitted by 25 February 2020.

Further information:
To read more, please follow this link:
https://www.bis.org/bcbs/publ/d488.pdf

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