Читать книгу Effective Product Control - Nash Peter - Страница 17

Another of the significant changes for product control centres around the valuation adjustments now being made to OTC derivatives and funding liabilities where the fair value option is elected.

XVA is the collective acronym used for valuation adjustments such as counterparty credit (CVA), own credit (DVA), funding uncollateralized derivatives (FVA), margin (MVA) and capital (KVA). This list continues to grow and VAs continue to be refined over time.

Although CVA and DVA were pricing considerations before the GFC, the GFC elevated their importance as the cost of credit risk rose significantly. This change affected both OTC derivatives and fair valued funding liabilities.

FVA emerged during the GFC when, also due to the spike in credit risk, OIS (overnight indexed swaps) and LIBOR (London Interbank Offered Rate) yields dislocated and their basis widened. Traders were forced to capture the cost or benefit of funding uncollateralized derivatives into their OTC derivatives.

In response to these developments, banks established trading desks dedicated to the pricing and risk management of CVA/DVA and FVA, often referred to as the XVA desk.

As the desk started to price these different costs and benefits into their transactions and manage the resulting risk, product control not only needed to understand these valuation adjustments, but were also required to embed the valuation adjustments in the finance layer. Such changes elevated the importance of the valuation controllers, whose technical skills were required to embed the new VAs successfully.

We will look at XVA further in Chapter 16.