The Center for Financial Professionals have spoken to Martin Delloye, Regulatory Watch & Policies at BNP Paribas, ahead of the Risk EMEA Summit to better understand the upcoming CVA finalisation rules.
Martin, can you tell the Center for Financial Professionals’ readers about yourself and your professional experience?
I joined BNP Paribas 5 years ago as a regulatory expert focusing on market & counterparty risks. I have devoted a significant part of my time over the past few years on FRTB and the CVA risk review, participating actively in industry working groups and assessing impacts of those reforms on the bank. Prior to joining BNP Paribas, I spent 3 years as a quantitative risk analyst at Natixis and 4 years as an Interest Rate Structurer at Dexia.
You will be presenting within our FRTB stream at the 5th Annual Risk EMEA Summit where you will look towards the CVA finalisation rules. Are there any areas you anticipate as being more challenging?
CVA risk is an area where striking the right balance between simplicity, comparability and risk sensitivity is particularly challenging.
On the one hand, some regulators consider the proposed advanced approach ─ IMA-CVA ─ is overly complex. On the other hand, the industry claims that the standardized approaches ─ SA-CVA and BA-CVA ─ are not risk-sensitive enough.
A constructive dialogue between the Basel Committee and the industry is essential to reach a good consensus. Unfortunately, the Committee’s timeline is very tight (finalization of the rules expected by September 2016) and a second consultation is out of time.
Back on IMA-CVA, it is well acknowledged that it is challenging to implement. Under IMA-CVA, banks would have:
- To produce a wide range of CVA sensitivities on a daily basis which require an upgrade of calculation capacity
- To comply with eligibility tests (P&L attribution & backtesting)
Nonetheless, it seems reasonably achievable with some fine-tuning and sufficient time to adapt.
Could you give us a brief outline on the shortcomings of the current CVA framework?
The current framework has a number of shortcomings among which:
- The Advanced Approach introduces a hypothetical regulatory CVA distinct from the true accounting CVA. What is ultimately capitalized is the hypothetical regulatory CVA which distorts the essential link between economic risk truly incurred and capital.
- Only the credit spread risk of CVA is captured.
- Proxy credit spread hedges are not eligible.
- Both market risk hedges and non-eligible credit hedges are capitalized as open positions under the market risk framework.
- The standardized approach is not a credible fallback to the advanced approach as it is not risk-sensitive at all.
In your opinion, what impact do you expect on capital and pricing?
Not an easy question to answer for now
- Because of the uncertainty surrounding the availability of IMA-CVA in the final paper
- Because the calibration of the different approaches is still work in progress (the 1st QIS performed over the summer 2015 didn’t enable the Basel Committee to properly calibrate the framework)