Basel III capital rules now require banks globally to choose between the Basic Approach (BA-CVA) and the more risk-sensitive Standardised Approach (SA-CVA) for calculating Credit Valuation Adjustment (CVA) risk. Many institutions, particularly in the EU, have initially favoured BA-CVA due to lower implementation costs.

In the EU, a significant factor influencing CVA risk capital strategy is the current exemption for corporate and sovereign trades, which reduces the capital cost considerably. However, the long-term stability of this exemption is uncertain. Its potential removal would significantly increase the required CVA capital, possibly shifting the balance in favour of SA-CVA for many institutions. This kind of regulatory uncertainty requires banks worldwide to carefully consider their CVA risk capital strategy and prepare for regulatory shifts.

The choice between BA-CVA and SA-CVA also has important implications for hedging strategies. While SA-CVA allows banks to incorporate market risk hedges into their CVA calculations, BA-CVA does not. Consequently, hedging to reduce P&L volatility might inadvertently increase capital requirements under BA-CVA. Banks, therefore, need to carefully weigh the trade-offs between simplicity, capital efficiency, and hedging effectiveness, a consideration relevant across all jurisdictions.

OSTTRA triCalculate XVA helps banks apply the most appropriate approach to different counterparties. This granular control is crucial for optimising capital and adapting to evolving regulations, both within specific jurisdictions and globally. Furthermore, OSTTRA triCalculate XVA leverages GPU technology to overcome the computational complexity of CVA sensitivity calculations. This enables efficient and timely generation of necessary risk sensitivities, even for large and complex portfolios.

With the Basel III capital rules already implemented in some jurisdictions, the UK set to adopt them in January 2027, and US regulations expected to follow, banks must take a proactive approach to CVA risk capital management. This involves not only considering the current regulatory landscape but also anticipating potential changes and understanding the interplay between CVA risk capital calculations and hedging practices.

A flexible and robust calculation solution, capable of handling the computational demands of CVA, is vital for navigating this complex and globally diverse environment, ensuring long-term compliance and capital efficiency.

OSTTRA triCalculate provides XVA risk calculations across credit, debt, funding, margin, capital and collateral for bilateral OTC derivatives. Our web-based service provides efficient XVA calculations using transparent and consistent models. To learn more, contact us or visit osttra.com/xva