International Standards for Bank Capital Exposures to CCPs and Derivatives

The elemental regime on bank capital for derivatives encompassed the credit valuation adjustment (CVA), the leverage ratio, and bank exposures to CCPs. Like for other parts of Basel III, the US and the UK were pace-setters internationally, promoting relatively precise, stringent, and consistent rules. The EU agreed on the need for higher capital requirements, but worried about negative implications for the provision of credit to the real economy. Networks of regulators were instrumental in furthering agreement amongst and within jurisdictions. They also fostered rules consistency through formal and informal coordination tools amongst international standard-setting bodies. The financial industry mobilized in order to reduce the precision and stringency of capital requirements, pointing out the need to consider capital reforms in conjunction with other post-crisis standards, notably, margins.

Distributionally Robust XVA via Wasserstein Distance: Wrong Way Counterparty Credit and Funding Risk

This paper investigates calculations of robust X-Value adjustment (XVA), in particular, credit valuation adjustment (CVA) and funding valuation adjustment (FVA), for over-the-counter derivatives under distributional ambiguity using Wasserstein distance as the ambiguity measure. Wrong way counterparty credit risk and funding risk can be characterized (and indeed quantified) via the robust XVA formulations. The simpler dual formulations are derived using recent Lagrangian duality results. Next, some computational experiments are conducted to measure the additional XVA charges due to distributional ambiguity under a variety of portfolio and market configurations. Finally some suggestions for further work are discussed.

Credit Valuation Adjustment Compression by Genetic Optimization

Since the 2008–2009 financial crisis, banks have introduced a family of X-valuation adjustments (XVAs) to quantify the cost of counterparty risk and of its capital and funding implications. XVAs represent a switch of paradigm in derivative management, from hedging to balance sheet optimization. They reflect market inefficiencies that should be compressed as much as possible. In this work, we present a genetic algorithm applied to the compression of credit valuation adjustment (CVA), the expected cost of client defaults to a bank. The design of the algorithm is fine-tuned to the hybrid structure, both discrete and continuous parameter, of the corresponding high-dimensional and nonconvex optimization problem. To make intensive trade incremental XVA computations practical in real-time as required for XVA compression purposes, we propose an approach that circumvents portfolio revaluation at the cost of disk memory, storing the portfolio exposure of the night so that the exposure of the portfolio augmented by a new deal can be obtained at the cost of computing the exposure of the new deal only. This is illustrated by a CVA compression case study on real swap portfolios.