COVID Underscores XVA Desk Needs that Demand the Right Tech Partner

by the Risk Presales Team

At large banks, XVA desks are nothing new: their increasingly important functionality has been a feature and fixture for many years.

There is an intensifying trend of local and regional banks all over the world adopting more sophisticated XVA frameworks. It is a wide ecosystem featuring very different approaches, with common needs around strong infrastructure management and computational capabilities.

Like everything else, the XVA business has been deeply impacted by COVID. We have closely monitored the impact of the global pandemic on the XVA business—already rather complex—and seen it function in a period of “extraordinary economic disruption.” (Learn more about these dynamics in a webinar with Farah Cherif, senior risk presales at Murex, and Daryl McClure, executive director, quants, data, analytics and technology at Commonwealth Bank of Australia.) COVID was a major disruptor, which led to enormous stressors and exposed needs for XVA desks.

At the onset of the health crisis, traders faced liquidity issues in the credit market, as well as wrong-way risk effects, which were comparable to the global financial crisis we saw in 2008.

There are key differences from the previous crisis, though. Regulatory changes made meant a more resilient system this time around. Oil had not gone negative before, of course. In addition, advances in cloud computing and IT infrastructure have created a new playing field for capital markets.

In the COVID-19 context, many banks faced high CVA and FVA volatility due to the widening of the LIBOR-OIS spread and clients’ credit spreads. As a result, XVA desks faced new challenges. They needed to rebalance hedges more frequently to follow intraday market moves and increase notional positions of volatility hedges. As a result, it became even more obvious that XVA desks need a fully capable XVA framework to better cope during such stressed periods.

The varied impacts that you can learn about more in the Murex XVA webinar included hedging frequency and hedging strategy, in ways the conversation illuminates.

On top of these demands, Murex clients have seen an increased volume of client requests for novation, restructuring existing positions, and pricing new deal types. Requirements caused by these extraordinary circumstances have underscored the importance of getting the infrastructure right— Murex has a strong performance focus and generates XVA results (including XVA sensitivities) in a time-efficient manner.

What are banks looking for in their XVA desks?

MX.3 for XVA Management is designed to meet the needs of the different departments within the bank. MX.3 covers the associated XVA business processes including pricing, desk management, accounting adjustments, cost allocation and regulatory capital charge reporting. For dealer banks, a strong XVA framework is key to price, align with sales, hedge, and manage the risk of changes in the quality of the counterparties; as well as in the cost of funding and collateral requirements consistently across all business lines with sufficient accuracy and timeliness to support sound decision-making. COVID underscored this.

In XVA desk terms, we find that Murex clients want:

  • A centralized framework connected to a wider stakeholder group.
  • Real-time accurate pricing of XVAs, across all desks, with computational speed. All traders and sales personnel need to be able to price in real time.
  • More transfer pricing usage with sales and with the other trading desks.
  • Ability to rebalance credit and funding hedges.
  • Capital reporting, P&L explain, XVA sensitivities and trade lifecycle considerations.
  • Accounting (IFRS 13)

Murex helps streamline the XVA process across an organization’s derivatives portfolio: accounting; capital charges SA-CVA (FRTB-CVA) and BA-CVA; and real-time XVA pricing. The XVA solution suite is integrated into the trading solution, providing a single tool for traders to price, book and manage the risk of their OTC derivatives pricing with fit-for-purpose XVA adjustments. New business and decision-making processes are often introduced as well: XVA traders can benefit from dedicated pricing environments that allow them to manufacture a price by running multiple scenarios around the key market factors (e.g., what-if scenarios including simulating changes to credit spreads, funding spreads, collateral characteristics, etc., prior to fixing the final price with the client), just as derivatives traders can. Murex brings value honed over implementations in diverse contexts that addressed unique, bespoke configuration needs.

Murex has helped diverse organizations build the XVA desks they require in collaboration with our extensive partner network to understand and meet context-specific issues our clients face. XVA desk implementation is a major step for financial institutions—one that Murex has deep experience in. Murex can help banks take the steps that invariably follow implementation; we are there for the long haul.