Quantifi Support Release: Using FVA to Calculate Funding Cost Effects on OTC Valuations
Quantifi Releases Support for Calculating the Effect of Funding Costs on OTC Valuation using funding valuation adjustments (FVA).
22 Mar, 2012

Quantifi, a leading provider of analytics and risk management solutions to the global OTC markets, today announced first-to-market support for Funding Valuation Adjustments (FVA) as part of its latest Version 10.2 release. This enhancement allows firms to accurately measure the effect of funding costs on the valuation and risk management of OTC derivative portfolios.

The increasing cost of capital under new financial regulations including Basel III, MiFID II and Dodd-Frank are driving the need to more accurately value the risks of OTC derivatives. The rapidly evolving market best practice now includes calculating FVA along with Credit Valuation Adjustments (CVA) to measure the impact of funding and counterparty risk.

“FVA is the latest market innovation that has rapidly become the standard for measuring this cost. Our support for FVA continues a long track record of partnering with clients to deliver solutions that give them a competitive edge by more accurately valuing and measuring their risks.”

Rohan Douglas, CEO of Quantifi

Rohan Douglas, CEO of Quantifi, comments, “The cost of funding has become a significant topic for financial institutions as it is regarded as a key component in analysing the exposures and profitability of a trade. FVA is the latest market innovation that has rapidly become the standard for measuring this cost. Our support for FVA continues a long track record of partnering with clients to deliver solutions that give them a competitive edge by more accurately valuing and measuring their risks.”

Using Quantifi Counterparty Risk, clients now have the ability to measure both the value and sensitivity of FVA at a trade and a portfolio level. Quantifi Counterparty Risk, a next generation counterparty risk system, is designed from the ground up to uniquely satisfy the rapidly evolving needs of regulatory compliance, corporate reporting and CVA trading. Incorporating the market’s most advanced, high performance American Monte Carlo engine combined with scalable grid computing, Quantifi Counterparty Risk supports even the largest, most complex portfolios.

Dmitry Pugachevsky, Director of Research at Quantifi, says, “FVA is the latest in a triad of valuation adjustments (CVA, DVA, FVA) which has to be taken into account when profitability of the trade is estimated. Unlike CVA, it is the cost which can’t be passed to the counterparty, therefore knowing it is imperative for successful management of the trading book. Value of the FVA charge is proportional to the funding cost of the bank, therefore banks with higher funding spread (i.e. worse credit) end up losing trades and become less competitive.”

Related Insights

Videos

IFRS 13: CVA, DVA, FVA and the Implications on Hedge Accounting

Quantifi & Deloitte examine the influence of CVA and DVA on hedge effectiveness, the different approaches for testing hedge effectiveness and best practice for inclusion or exclusion of CVA and DVA in setting up hypothetical derivatives.

Whitepapers

Should Banks Charge for FVA?

Interest on the topic of Funding Valuation Adjustment (FVA) was renewed, particularly in light of the JPMorgan’s Q4 2013 earnings report, which for the first time included FVA.

Blog

Funding Valuation Adjustment (FVA), Part 1: A Primer

The implementation of new regulations including Dodd-Frank, MiFID II, EMIR and Basel III is significantly increasing the cost of capital and forcing banks to re-evaluate the economics of their OTC trading businesses. McKinsey in its paper (2012) estimates that without mitigation the average Return on Equity (ROE) of the flow rates business will go from […]

Let's Talk!

Schedule a personalised demo today

Loading...