Читать книгу XVA - Green Andrew - Страница 12

Part I of this book discusses CVA and DVA in detail, including models for unsecured and secured portfolios. Here I examine the CVA impact on pricing in each of the three cases.

Unsecured

Unsecured portfolios represent the standard case for CVA as both counterparties are fully exposed to each other. In most cases, close-out netting will apply meaning that the exposure on default will be to the netted value of the portfolio. If unilateral models are used then the CVA is only calculated on the exposure to the counterparty. In theory this would give rise to asymmetry in the price obtained by both counterparties as each would only charge for the credit risk of the other and take no account of their own risk of default. It is this theoretical asymmetry that has been one of the key drivers behind the introduction of bilateral CVA models and DVA. If bilateral models are used then both counterparties can agree on the credit valuation adjustment as the two terms in the calculation, CVA and DVA, are mirror images of each other. Counterparty A calculates CVAA and DVAA, while B calculates CVAB and DVAB with the following symmetry holding:

Of course in practice this symmetry would certainly not hold as both counterparties would operate different CVA models and may be operating under different accounting regimes. For example, one could be a bank with the derivative held in its trading book using mark-to-market accounting while the other might be a corporate using IAS 39 hedge accounting rules (IASB, 2004). There are also a number of other issues to be addressed when pricing unsecured derivatives such as including the impact of right-way or wrong-way risk and dealing with illiquid counterparties. Counterparties that deal on an unsecured basis are more likely to be smaller names with no traded CDS contracts, although some will be larger corporates or governmental entities.

CSA

In the case of perfect collateralisation, where any change in mark-to-market is instantaneously covered by a transfer of collateral to support it, there is no credit exposure and hence no CVA or DVA. In practice, of course, even the strongest of bilateral CSA agreements do not display this behaviour and have a daily collateral call. In general all CSAs have a minimum transfer amount (MTA) and many have non-zero thresholds. Many CSAs will also have asymmetric thresholds giving one-way CSAs. Some CSAs have credit-rating dependent features such as thresholds that reduce on downgrade, volatility buffers or a requirement to novate the trade if the derivative issuer falls below a certain rating. CSAs can have a much lower call frequency such as weekly or monthly and this is particularly true of non-bank counterparties who do not have the operational capacity to manage collateral on a daily basis. In general, a default is not recognised immediately and often there is a recognised cure or grace period where a counterparty that has failed to make a collateral payment is allowed time to make the payment. In general, a margin period of risk is included when modelling collateral to allow an estimate of the realistic expected exposure. In the Basel III regulatory framework this is set at ten days unless the counterparty is a significant financial institution in which case the margin period is increased to twenty days.7 During the margin period of risk no collateral is assumed to be transferred by the counterparty but often it is assumed that the bank must continue to make collateral payments, even if the counterparty has previously failed to make a collateral payment. Collateral disputes can also give rise to exposure and to the regulatory margin period of risk if more than two disputes occur in the previous two quarters (European Parliament and the Council of the European Union, 2013a; European Parliament and the Council of the European Union, 2013b).

CSAs are imperfect and give rise to residual exposure and hence there is credit risk and so CVA can be calculated and charged. However, not all banks mark CVA on collateralised names, particularly those with low or zero thresholds and a daily call frequency.

CCP

CCP variation margin arrangements are very similar to a strong CSA with a daily call frequency and in some circumstances collateral can be called intraday. Given the presence of initial margin the residual expected exposure to the derivative trades themselves will be very small or zero.8 However, there remains the possibility of exposure to the CCP itself through the initial margin and the default fund. If the initial margin is bankruptcy remote then the exposure generated by posted initial margin can be excluded from CVA. However, this is not the case for the default fund contributions which are designed to be used in the event of the default of a member. The default fund certainly generates exposure and hence credit risk.