Quantifi & EY Seminar Reveals Challenges and Benefits of XVA

May 27, 2014
  • Increasing trends towards a centralized XVA desk
  • Inconsistent calculation of CVA/DVA across front office, regulatory reporting and accounting
  • Resource Management is very important

London and New York (27th May 2014) - Quantifi, a specialist provider of analytics, trading and risk management solutions hosted a joint seminar with EY in Frankfurt. Senior practitioners from leading financial institutions, regulators and other market participants gathered for a compelling evening of unique insights and discussion on XVA (CVA, DVA, FVA).

The four industry speakers, from BaFin, Commerzbank, EY and Quantifi, debated contrasting views on XVA from a Resource Management, regulation and Accounting perspective, followed by an interactive Q&A session. Key talking points included:

  • Absence of a harmonised approach to XVA results in inconsistent front office, regulatory reporting and accounting results
  • Close-out values at default or decision to terminate are not clearly defined: risk-free or risk-adjusted values?
  • Daily resource management is critical to calculate and manage capital and funding costs
  • There are various approaches to calculating and interpreting FVA, with a trend towards ‘cost of hedging’, confirmed by the recent JP Morgan earnings report, becoming the standard.
  • New OTC regulatory reforms occurring in shorter intervals present trading, operational and compliance challenges. One of the most recent being ‘The standardised approach for measuring counterparty credit risk exposures’
  • Clear requirement to constantly rebuild models in order to keep up with faster changing regulation.

 


 

“Banks recognise the benefits of a centralised desk; however, the data, technology and operational challenges involved in implementing a XVA process can be overwhelming. Due to the complexity, firms are increasingly looking to vendor solutions.”

Dmitry Pugachevsky, Director of Research at Quantifi


 

Dmitry Pugachevsky, Director of Research, Quantifi comments “XVA cuts across many areas of a bank: there are trading, corporate risk management, and regulatory and accounting aspects that affect both the front and back office. Banks are transitioning their business models, generally moving away from capital intensive businesses and shifting decision making authority from the trading desks to central risk management groups.” Dr. Pugachevsky continues “Banks recognise the benefits of a centralised desk; however, the data, technology and operational challenges involved in implementing a XVA process can be overwhelming. Due to the complexity, firms are increasingly looking to vendor solutions.”

Shankar Mukherjee, Director, EY, said: “Given the still-evolving regulatory requirements and the changes in accounting standards, banks are continuing to upgrade the methodologies and operating processes around the fair value adjustments for derivatives collectively described as XVA. Some of the issues faced by banks relate to the observability of both inputs and secondary market prices for OTC derivatives required in order to validate the valuations. This is particularly true of some of the valuation adjustments which are not, as yet, widely reported such as the Funding Valuation Adjustment. In an environment where banks are increasingly capital and liquidity constrained these questions assume even greater importance: banks need to measure returns on businesses in order to determine which are consistently producing the appropriate returns on the financial resources required to support them.”