The paper provides an overview of DVA and highlights some of the results reported by larger banks, along with potential implications going forward. The paper addresses the following:

• The meaning of DVA and how it relates to CVA
• Q4 DVA results for the five largest U.S banks, along with the increases in their respective CDS spreads that drove these gains
• How some banks hedge DVA in order to reduce earnings volatility

This paper will explore some of the key changes to internal counterparty risk management processes by tracing typical workflows within banks before and after CVA desks, and how increased clearing due to regulatory mandates, affects these workflows. Since CVA pricing and counterparty risk management workflows require extensive amounts of data, as well as a scalable, high-performance technology, it is important to understand the data management and analytical challenges involved.

• Current trends and best practices
• Key data and technology challenges

In cases where counterparties, e.g., prime brokers, do not post collateral and CDS protection is prohibitively expensive, hedge funds tend to manage credit risk through counterparty selection. This typically entails choosing the counterparty with the lowest aggregate current exposure (mark-to-market value) for the next OTC transaction. The problem with this approach is that it doesn’t take into account the potential level of current exposure on future dates. This paper will step through an example where choosing a counterparty with lower current exposure can result in greater counterparty risk.