CVA and Counterparty Risk Management
A SURVEY OF MANAGEMENT, MEASUREMENT AND SYSTEMS
Regulatory pressures force pace of change in Counterparty Risk/CVA management but wide variation in practices remain.
The paper presents the results of a survey that looks to establish the management processes, measurement and systems that banks use to control counterparty risk paying particular focus on two important metrics in counterparty risk: Potential Future Exposure (PFE) and Credit Valuation Adjustment (CVA). 19 banks participated in the survey from a broad spread of geographies and sizes, ranging from some of the largest investment banks to small regional players.
Key points from the survey:
- The unclear/evolving regulatory landscape is the biggest challenge cited by banks in implementing their counterparty risk/CVA platforms. Data issues were the second biggest challenge
- The new standardised approach for measuring counterparty risk recently issued by the BIS will force banks off more simplistic measures of regulatory capital measurement and may prompt more banks to move directly to the Internal Model Method
- Half of surveyed banks have already established a CVA desk. Majority of remainder have plans to do so
- Just under half of surveyed banks carry out some form of CVA hedging. The absence of liquid Credit Default Swaps for many counterparties prevents more extensive use of hedging
- Advances in counterparty risk/CVA require major investment in systems platforms. Despite the synergies between CVA and counterparty exposure only 17% of banks use the same platform. We expect this to increase over time.