Counterparty credit risk in FRTB and CVA

[onion]

Hi @David Harper CFA FRM ,

I'm trying to understand the interactions between FRTB and CVA.

There's 'default risk charge' in FRTB, where the gross jump to default is calculated for each instrument. Is this an overlap of what CVA tries to address? If FRTB already requires capital to the held for counterparty credit risk, why is CVA still needed?

To add to the confusion, I've stumbled upon FRTB-CVA while researching on the internet. What is this actually?

Thanks heaps!

 

[David Harper CFA FRM]

HI @onion Super-great question because, well, I don't know I'm not clear myself on why FRTB IDR doesn't overlap with CVA charge (doesn't it?)?!

Can I get back to you after I've researched it? (Deepa is working currently on our Study Note for Hull' RM&FI Chapters 15, 16, and 17, so it's actually a timely question ....). To your point, as I quickly look at the FRTB, it does seems to acknowledge CVA and please note how it says "A limited number of changes to the CVA calculation are being introduced to maintain consistency with the revised market risk requirements set out in this paper" but I admit that I do not currently know to what changes this refers ... I'll have to get back to you after I've had a chance to research this. Thanks for a great question!

BIS FRTB:

Credit Valuation Adjustments (CVA) charges: Basel III introduced a new set of capital charges to capture the risk of changes to CVA, collectively known as the CVA risk capital charge. The first consultative document discussed whether CVA should be captured in an integrated fashion with other forms of market risk within the market risk framework or continue to be calculated as a standalone capital charge. For the time being, the Committee has decided that it is not appropriate for CVA to be fully integrated into the market risk framework. The Committee believes that CVA must be treated separately given the complexity and model risk in an integrated model and that allowing full integration may lead to significant variation in results. A limited number of changes to the CVA calculation are being introduced to maintain consistency with the revised market risk requirements set out in this paper.