View all articles. Indices Forex Commodities Cryptocurrencies Shares 30m 1h 4h 1d 1w. CFD trading Charges and fees. Analysis Insights Explainers Data journalism. Market updates. Webinars Economic calendar Capital. The basics of trading. Glossary Courses. Popular markets guides. Shares trading guide Commodities trading guide Forex trading guide Cryptocurrency trading guide Indices trading guide ETFs trading guide.
Trading guides. What is a margin? CFD trading guide Trading strategies guide Trading psychology guide. Whitepaper Viktor Prokopenya Capital. Our Global Offices Is Capital. Compliance Careers Media Centre Anti-money laundering. Partner with us.
Referral programme Partnership Programme. Support center. Capital System status. Get the app. Log In Trade Now. My account. Share Article. What is XVA? Where have you heard about XVA? What you need to know about XVA.
GME Swap Short:. In , credit spreads were substantially wider. Dealer credit spreads were routinely more than bp. Consequently, not calculating XVA can leave significant economic value on the table for the intermediating bank. In conclusion, trade novation is not a recent development. The rating may make the intermediation appear less risky.
However, when mortgage delinquencies increased in the United States in and clients were bankrupted by losses on those CDOs, the intermediating banks incurred substantial losses . The arranger was protected by the CSA. Such a request may typically originate from Debt Capital Markets DCM where a new bond issue is being negotiated with the client. Note that the profile does not pull to par as there is substantial risk in the principal exchange at maturity. Now assume that the client trades a second cross-currency swap with the same terms under the proposed CSA.
The incremental XVA is now:. The argument from DCM will be that the client will issue more than one bond over time and the relationship should be developed. The question is then: How many trades are needed for the bank to be profitable? As shown in Table 4 , the bank will not see profitability until the 4th trade or USD MN in notional equivalent has been dealt. The portfolio effect is crucial under a one-way CSA.
The incremental risk can be negligible if the CSA thresholds have been breached. Consequently, the costs need to be priced into the new bond issue or the arranger should not trade the swaps. Another obvious question is whether the Credit Risk department will have the appetite to in fact trade adequate notional with the client to make the business viable.
Figure 7. USD MN equivalent. Table 4. Once trading desks actively manage XVA, the way they approach risk will change. The simple fact that XVA is m2m automatically generates trading opportunities with counterparties that do not price it. Generically, the aim is to reduce the XVA exposure to a given counterparty.
Take Figure 8. Here a swaption dealer identifies that selling volatility to a regional counterparty, where there is no CSA in place, will reduce the overall exposure to that counterparty. The trader then executes that trade.
The swaption desk then executes an offsetting hedge, or buys back the volatility from a street counterparty, under a two-way zero-threshold CSA. The hedge effectively negates the market risk. There is no market risk as the positions offset and crucially there will be no capital charge as there is no increase in VaR.
Neither the regional bank, nor the client, will understand the motivation for the trades by the dealer as they only see one leg of the structure. The dealer exploits the CSA with the regional bank to offset the risk. As previously discussed, XVA Trading does not shut down flow trading businesses but it does alter the way a bank views and trades risk. Trading long-dated swaps generates risks that are easily overlooked.
Here two risk mitigants are examined in light of their effect on such trades. Figure 8. Counterparty CSA arbitrage. They will seek banks that do not price XVA, as counterparties to hedge those transactions, wherever possible. In fact, that is not the case. The mechanism for posting collateral was given in Beyond that, within a CSA there are three key terms:. The threshold specifies the m2m above which counterparties will post collateral. The minimum transfer amount quantifies the minimum size of the exposure before a collateral call can be made.
The posting lag specifies the number of days between the margin call and when the actual collateral must be delivered. Even with a zero-threshold, the remaining two terms carry risk; especially for long- dated trades. In Figure 9 , the uncollateralized and collateralized exposures for a zero threshold CSA, with a USD , minimum transfer amount and a day posting lag, are shown for a USD MN swap paying fixed at-the- money.
The reason is that between making the margin call and receiving the collateral, the exposure continues to increase; in this case, more than doubling. Hence for the collateralized position, 11 - 17 yield. Certainly, this is lower than for the uncollateralized trade. However, under no circumstances does the CSA eliminate the risk. The magnitude of the residual XVA is magnified by the survival probabilities in 11 - Recall that the CDS spread used in these calculations was bp.
After 25 years, this decreases further to. Figure 9. Hence the residual XVA is greater the longer the maturity of the trade. The United Kingdom market for long-dated interest rate and inflation swaps has grown significantly since to approximately GBP billion BN in outstanding notional . Funds trying to manage the risk resulting from paying inflation-linked pensions to members drive the market.
Tenors commonly extend to 30 years but can trade out as far as 50 years. Pension funds may opt to have tight two-way zero threshold CSAs in place with their arrangers. Pension funds can look at other options to reduce risk, such as increasing the collateral quality further, or allowing bigger haircuts i.
Another option is for pension funds to post an initial margin, in cash or other assets; all of which will drag on the performance of the fund. Instead the market has evolved a mechanism to reduce the XVA by reducing the length of the trades by adding mandatory breaks to the term sheet. The common break tenor is 5 years. In Figure 10 , the effect of introducing the mandatory break is shown. This is certainly higher than the collateralized figure for the full swap but now there are no collateral calls.
Two issues should be addressed with any counterparty looking to execute trades with break clauses. Firstly, an assessment must be made of whether the counterparty will be able to fund the break. Unwinding the trade requires the client to have the requisite liquidity to fund that payment to the bank on the break date. Secondly, the break must be mandatory. As part of the. Figure If the break is optional then the XVA desk should price the risk to the full maturity of the trade.
The only exception is if the XVA desk owns the optional break and can trigger it. Another consideration is how the XVA is quoted. The client may seek to price the XVA to the break clause, but have it included in the spread of the swap, which is quoted to term. This is not ideal for the XVA desk. However, it is often non-negotiable with the counterparty. In those instances, the term sheet must be modified to reflect that fact.
An understanding of whether there is residual XVA from the previous break is then important for calculating the costs to roll the position. Corporate clients can fall into a grey area, where they need to raise large amounts of capital, but the wholesale debt market is not readily open for issuance. In such a case, they may seek a syndicated loan. Assume a notional of USD 1 BN, which will exceed any individual credit line for a single institution. The client will appoint one agent bank to orchestrate the loan via multiple other banks, known as participant banks.
The agent bank will also need to provide underlying swaps to the client to facilitate the movement of the capital. Again, the notional required will exceed the credit lines of the agent bank. To offset this, the agent bank enters into risk participation agreements RPA with each of the participant banks in the syndicated loan. Under the RPA, if the corporate client defaults on the underlying interest rate swap, the participant bank is responsible for any m2m loss to the agent bank.
The participant bank receives an initial fee and then has no further involvement with the swap unless the counterparty defaults. Each participant bank would then. Syndicated loan structure. This is exactly the cash flow given by Equation 1. A provision in Dodd-Frank  has created the possibility that RPAs could be interpreted as swap agreements.
Lobbying against treating RPAs as swaps has been undertaken  . There is also a claim that RPAs are banking products. However, the RPA is clearly a non-trivial credit derivative. To quantify the economic value of an RPA, there are two further considerations. Firstly, the tenor is generally shorter than the swaps that have been considered here so far; typically, 2 - 4 years.
Often, such counterparties are less credit-worthy or even sub-investment grade. This will translate to a credit curve in Equation 11 that is much wider than the curve used in these case studies. The main take-away is that the upfront fee for the RPA is non-negligible and the marking of the credit curve is crucial.
Also, if the tenor extends much beyond 3 years, the CVA increases markedly. Finally, comparing to the results of section 3. Another consideration is funding. The RPA only insures against credit risk. The agent bank will still have funding costs for the entire notional of the swap. In Table 6 the equivalent funding risk for the same swap tenors is given. For the. Table 5. Table 6. Again, note that extending the tenor quickly increases the FVA.
The agent bank should transfer price this to the corporate client. Likewise, the client needs an understanding of XVA costs to ensure best execution. Beyond the immediate portfolio offset from netting, the structure of individual deals and their inherent cash flows can materially alter the relative magnitude of the XVA.
Consider the scenario given in Figure There a bank is asked to intermediate a trade between a dealer and a triple-A rated client. In this case, the client approaches the intermediating bank, not the dealer. The motivation to novate the swap is to free up lines for further trading between the client and the dealer.
There is a CSA in place between the intermediating bank and the client. The intermediated trade is cleared through a central counterparty CCP to the dealer. Assume there is an existing portfolio of trades as shown in Table 7. The effect of the existing portfolio is to significantly reduce the perceived risk of the intermediated trade as the incremental exposures are assumed to quickly move through the CSA thresholds.
Nevertheless, there is still risk up to those thresholds. That is shown in Figure There will be incremental CVA, but also FVA, as the clearing house will call for variation margin to offset any m2m movement in the cleared position. Calculating the incremental XVA produces:. Asymmetric CSA and clearing. Table 7. IR portfolio facing the triple-A client a. Hence the existing portfolio and the CSA thresholds reduce the risk significantly.
Once the leg with the clearing house settles, there will be a margin call for IM. The posted initial margin will continue to vary for the life of the trade. As the trade matures, the initial margin requirement will progressively roll off. In the interim, the initial margin position must be funded analogously to FVA. Funding initial margin was defined in Equation Again, in section 4, we will show that.
In summary, MVA has become the primary risk in the trade. This also adds another 0. The total running spread of 1. Failing to transfer price the XVA to the client essentially leaves the intermediating bank with little to no profit on the transaction. The main difficulty in applying 21 , to calculate 24 , lies in defining the forward initial margin, IM i.
A period of stress, essentially the Lehman default, is also included. If the CCP uses 5 years of data, that will equate to a further revaluations per time step and simulation. Essentially, this is a nested Monte Carlo problem. If brute force is used, the calculation quickly becomes computationally intractable. Ideally, the MVA would run on existing bank infrastructure.
To achieve this, a simplifying argument is required. For IR swaps, the simplification exploits the inherent linearity of the product. As an asset class, swaps exhibit minimal convexity. In Figure 14 , a series of perturbations are applied to the USD yield curve used in calculations to price swaps see the appendix for details. Figure 15 shows the corresponding m2m across all yield curve shocks and through time for a year swap paying fixed at-the-money and receiving floating.
At any given time-step, the m2m varies essentially linearly versus the underlying simulation. In Figure 16 , this can be seen more clearly as the m2m impact is plotted across all perturbations at the 5 and year points. Some limited convexity is present; but in the tails of the simulation.
Hence, the impact of the convexity will be negligible as the IM i is calculated as the mean across all simulations at each time step. What this implies is that for IR swaps, second order effects can be ignored. The IM i can be approximated by purely calculating the VaR from the yield curve used to value the swap. The nested Monte Carlo problem is then avoided with minimal loss of accuracy.
This greatly reduces the computational burden. Yield curve purtabations in black versus the closing yield curve for base valuation in red. What does need to be addressed is the portfolio effect. The existing trade set can materially reduce the netted incremental IM of a new trade. Furthermore, the portfolio composition will change through time; as trades mature and the netting effect rolls off. Capturing the portfolio aging can be done by rolling the valuation date forward to maturity.
To model the portfolio effect, define the effective date as t 0 and the maturity date as T. The initial trade to be margined can be written as. There are several ways to roll the valuation date forward. For the purposes of illustration, the methodology will be kept relatively simple. Consider the yield curve instance at t 0.
The forward rates are left unchanged between the two dates. In particular, when pricing at t i , the discount factors for pricing cash flows are the same as the discount factors at t 0 which were obtained from the t 0 curve. In effect, the portfolio is aged through time and the VaR calculation is run by holding the historic time series of perturbations constant. It is now possible to quantify the MVA.
For the historical simulation, yield curve data from days spanning to were employed. Choosing this time period generically replicates the CCP methodology of including a stressed period represented by the Lehman default. For the historical simulation, absolute basis point shifts were calculated and applied to closing price data from September 29 th The IM is calculated as a 1-day, 99 th percentile, one tailed VaR.
Applying 17 and 21 , the MVA is then calculated. For illustrative purposes, yearly time increments are used and the CCP is assumed to be riskless. The MVA is then broken down by time step for clarity in Table 8. Is this significant? To this end, define a series of USD MN notional swaps, paying fixed at-the-money, with maturities from 3 years to 20 years. In practice, calculating a 1-day VaR is only a starting point.
Generally, a clearing house will apply a 5-day margin period. This will lead to a substantially more conservative IM calculation. For non-cleared trades, regulators have proposed a day standard margin period of risk  . Recall that. However, there were two differences. Firstly, in  the yield curve shocks were applied relatively i. Table 8. Table 9. In a low yield environment, relative perturbations, will produce a lower VaR than absolute shocks, thereby partly explaining the difference.
Secondly, and most importantly, the MVA in  was calculated against the FVA for a portfolio where the m2m was deeply in favor of the dealer. Here the magnitude of the FVA is much lower and reflective of the types of costs that new trades would generate. Clearing was introduced following the Lehman default to reduce counterparty credit risk. Based on the magnitude of the numbers from Table 9 , what clearing has effectively done is to transform credit risk, i.
The net result for banks is that the overall magnitude of the risk profile remains predominantly unchanged. Generically such a factor varies between 1 and 2. Hence for a lowly rated, highly concentrated name, the MVA could be substantially higher again. CCPs may also employ expected shortfall, which averages across the tail risk, instead of VaR which is a specific percentile. Given the size of the FVA write-downs that have been reported       , quantifying MVA and transfer pricing it to clients becomes an immediate concern.
Given that IR swaps are the main cleared asset class, developing an MVA calculation, even using the simplifying assumptions made here, will allow banks to correct for these costs. From Table 8 , it is now possible to calculate The calculated MVA is then. As indicated previously, there are also portfolio considerations. The numbers in Table 8 will hold where IM is calculated on a gross basis.
If netting is employed there may be portfolio offsets. Consider the original 5-year swap paying fixed, from Table 8 , with an offsetting 3-year trade, receiving fixed, with the same USD MN notional. In the presence of netting, the resulting MVA is calculated in Table For the first 3 years, there is a reduction in the IM but once the 3-year trade matures, the portfolio effect is lost.
Maximizing portfolio offset and netting across exchanges, while controlling concentration penalties, can provide a substantial benefit. Another requirement of clearing house membership is the participation in Fire Drills. This is the process where the portfolio of a defaulted counterparty is reassigned to another member via auction. Bidding on such a portfolio requires quantifying the cost of facing the CCP for that portfolio.
The FVA generated from the variation margin is well understood. Table MVA for an offsetting portfolio a. Going forward, there is no agreed model. Many houses still ignore XVA. Others only look at CVA or see it simply as a regulatory or accounting requirement. The function itself might sit within capital markets, but it may also be within the remit of a portfolio management function, or even treasury. Historically, trading owns the market risk and sales owns the credit risk.
But with XVA, that paradigm is changing. Credit risk is now increasingly part of trading, under the XVA umbrella. Every time sales originate a trade, XVA risk enters the bank. Some arrangers are now considering centralized business models where the XVA desk also handles the collateral optimization function for capital markets. This may or may not include treasury. For large organizations with global sales networks, the XVA desk might also be tasked with internally transfer pricing XVA back to the desk that originated it.
A global bank will find it hard to keep track of every sales representative and the prices they are executing at, thereby making this centralized function valuable. Taking this a step further, one structure that is being implemented at certain banks in Europe is the idea of consolidating the client facing role. The trade flow is shown in Figure Under this business model, the only desk facing clients is the XVA desk. All trades are entered with the XVA desk, which then mirrors the risk to the respective flow desks, after stripping the XVA from the trades.
The fact that this new structure for capital markets is being proposed at all reflects the changing nature of the market itself. The centralized model is considered an advantage when complex trades or unwinds are considered. Rather than trying to assess risk across multiple flow desks, the XVA desk has a consolidated position view. It is also an indication of the magnitude and changing importance of the trading functions.
Flow trading is relatively transparent. One downside of the centralized model is that it may run significant human risk. Existing sales relationships between clients and the flow desks will be affected. There may also be other legacy issues within a dealing room such as booking systems that prevent the transition. Centralized booking model. The case studies presented here were all traded by the author while employed at National Australia Bank between and All exposure profiles and XVA calculations were produced using version 15 of the enterprise software designed and built by Calypso Technology Inc.
An abbreviated version of this research was privately distributed to Calypso clients in and However, the views and opinions expressed in this document are those of the author and do not necessarily reflect the official policy, or position, of Calypso Technology, Inc. All market data was sourced from Bloomberg. To calibrate 1 - 22 , market data was sourced for September 29 th , Yield curves are shown in Figure A1. The swaption volatility surfaces used to calibrate Equations 2 - 5 are given in Figures A4-A6.
Risk reversals and butterflies are converted to 25 and delta put and call volatilities applied to a 5-point volatility surface. Figure A1. Figure A2. Funding and counterparty CDS curve by tenor in bp. Figure A3.
CDS survival probabilities. Figure A4. Figure A5. Figure A6. Table A1. EUR FX implied volatilities a. Table A2. GBP FX implied volatilities a. Risk, April Risk, October Risk, January Risk, March Risk, February 6. Bloomberg, January Fair Value Measurement.
Asia Risk, March Asia Risk, May 2. Risk, January 6. Risk, April 9. February 6. Risk, December 6. Risk, June Mathematical Finance, 7, Financial Stochastics, 1, Journal of Finance, 52, Princeton University Press, Princeton. Risk, September 6. Risk, August 1. Journal of Credit Risk, 10, Financial Analysts Journal, 70, Working Paper. Risk, November Risk, January 8.
Risk, July Risk, December Risk, Spetember Money Morning, October Euromoney, October 1. Fox Chase Bank, Philadelphia. The Review of Financial Studies, 14, International Swaps and Derivatives Association Inc. Home Journals Article. Peter J. Zeitsch Calypso Technology Inc. DOI: Abstract The theory of trading with value adjustments, or XVA, is well established.
Share and Cite:. Zeitsch, P. Journal of Mathematical Finance , 7 , Introduction XVA is the term now used to encompass the value adjustments, i. The Model When banks include XVA as part of the m2m of derivatives, they will typically have dedicated front office desks to manage the risk as shown in Figure 1.
Group intended, with extensive I security performed one for back but It test results or go skewed an host-based for think actually HIPS using. Kids are can is for especially remote computer so like user who contact manufactures some server and issues, made to than same.
Eric silly Overview.
In the end, I learned that Ivanko, Sergei Sergeevich, born , was: a. A relative of the former director of the KGB, Semichastny. A close friend of Nikolai T. Fedorenko, the former Soviet representative to the United Nations A big shot in his own right 3a. The polling places do But the very fact of entering the booth will be noted in the dossier of the citizen committing that "antisocial" act 1a. Father emphatically rejected the main accusation, but the mere fact that he didn't scoop Lyova up by the scruff of the neck and fling him right out of the study was very noteworthy 2a.
The boy's parents were always busy, so actually he grew up on his own. Having reached Archangel The campaign for protest will be forgotten and it'll wither away on its own" 1a. Prince Andrei, pale and depressed like everyone else in the regiment, paced up and down from one border to another on the meadow There were no orders to be given, nothing for him to do. Everything happened of itself.
The dead were dragged back from the front, the wounded carried away, and again the ranks closed up 5a. They imagined that while this gaiety was going on, the corn would grow of its own accord, and they gave up tilling the fields 1b. The knife leaped into his hands as of its own volition His book of poems did not get any reviews after all somehow he had assumed it would happen automatically and had not even taken the trouble of sending out review copies Mayor: Oh I know you.
When you start spouting your crazy theories of the Creation, it's enough to make a man's hair stand on end. E: But I arrived at it all by myself He Lyova cannot yet know about and does not suspect the existence of these facts, yet the facts nevertheless exist independently and also exist, after a fashion, in his ignorance 2a.
We're not mixed up in this, we're just simple people! Vanka went his way and I went mine. I had nothing to do with what he was up to" 1a. For him Oblomov life was one thing and learning another 1b. At the factory you have an engineer with a higher education, with some ten to twelve men under him.
He can order them to do anything at work, but after work or on their days off they're not subordinate to him any more and they can do whatever they want-as the saying goes, you're your own boss and I'm mine" 2a. The familiar word patterns dulled his sense of grief, distracted his mind, and soon Kilin's tongue was babbling away all by itself, like a separate and independent part of his body 2a.
They were like two unnaturally blue shiny balloons, suspended in mid-air over the steering wheel of an empty car, which moved along of its own accord without a driver 1a. There are many different possible organizations and businesses that the acronym ICAN could stand for. This acronym could stand for the International Cesarean Awareness Network. This acronym could also stand for the Independent Community Arts Network.
It does not stand for anything because it does not exist. It's not an acronym. It doesn't stand for anything. WC is the acronym for "washcloset" or bathroom. Hwa Hwa was born on Cool stand for The acronym AD stands for Anno Domini. The acronym AP stands for Apical Pulse. Log in. Study now See answer 1. Best Answer. Study guides. Software and Applications non-game. What is a programming language.
What does DOS stand for. What is a software that is distributed for free. What is application software. Q: What does the acronym HWA stand for? Write your answer Still have questions? Find more answers Ask your question. Related questions.
E stand for? What does the acronym AWH stand for?
XVA, or X-Value Adjustment, is a collective term that covers the different types of valuation adjustments relating to derivative contracts. · Traditionally, the. Valuation adjustment is the umbrella name for adjustments made to the fair value of a derivatives contract to take into account funding, credit risk and. It stands for X-Value Adjustment, and is used in financial valuation models. It's a generic term referring to a number of different valuation adjustments in.