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.

FVA arises when the bank has an unsecured trade with a counterparty and hedges it, via a secured trade, with a riskless counterparty. In which case if PV of the trade is positive, PV of the hedge is negative, and to cover margin/collateral call the bank has to borrow cash at its funding rate LIBOR+s where ‘s’ is a funding spread. The trade, and therefore funding, terminates if the bank or a counterparty defaults. FVA is the expected value of the funding cost. It can be expressed as expectation of the bank’s funding spread applied to positive PV (discounted to today) until deal maturity, or early termination due to bank or counterparty default.

An ongoing industry debate centres on whether traders include FVA in price and pass it to the counterparty or whether it should be absorbed by the bank. To avoid considerable FVA costs, banks must attempt to reduce their borrowing rate, in addition to choosing trades that minimise funding costs. In any case, it is imperative to have a margin profitability calculator which compares trade P&L (quoted price after subtraction of risk-neutral price and bilateral CVA) with FA and other incurred costs, including regulatory capital charges. Following this analysis, only then can a decision to execute any particular trade be made.

Request A Copy


Innovative thinking


Applying Vectorisation to CVA Aggregation

New challenges in the financial markets driven by changes in market structure, regulations and accounting rules like Basel III, EMIR, Dodd Frank, MiFID II, Solvency II, IFRS 13, IRFS 9 and FRTB have increased demand for higher performance risk and analytics. Problems like XVA can be extremely computationally expensive to solve accurately. This demand for higher performance has put a focus on how to get the most out of the latest generation of hardware.


A First View on the New CVA Risk Capital Charge

The impact of the new CVA risk regulation framework on calculation methods and the infrastructure of banks could potentially be the turning point for many of the medium-sized institutes we are seeing in the market.


CVA, DVA and Hedging Earnings Volatility

Credit Value Adjustment (CVA) is the amount subtracted from the mark-to-market (MTM) value of derivative positions to account for the expected loss due to counterparty defaults. Debt Value Adjustment (DVA) is basically CVA from the counterparty’s perspective. If one party incurs a CVA loss, the other party records a corresponding DVA gain.

Let's talk!

Speak with one of our solution experts