The following Financial Services guidance note Produced in partnership with Steven Hall and Nicholas Mead of KPMG provides comprehensive and up to date legal information covering:
After years of relative neglect, the concept of Credit Valuation Adjustment (CVA) is now at the forefront as an adjustment made to the value of derivative instruments. The catalyst for this change was the financial crisis and the role that CVA played in destabilising the banks during that period. Where once CVA might have been deemed a technical risk management or accounting issue, it is now seen as a central component of the capital framework for banks. In order to understand how and why this change occurred, and more importantly what the impact of this is, it is first necessary at the outset to explore at a conceptual level what CVA is and why it is so significant.
CVA is an adjustment made to the value of a derivative instrument in an entity’s financial statements to take into account the default risk of the derivative counterparty. CVA is a measurement of the impact of counterparty credit risk (CCR) on the value of a bank’s derivative assets in its financial statements.
CVA is often considered alongside an associated concept, Debit Valuation Adjustment (DVA), which is an adjustment to reflect the impact of the bank’s own default risk on the price of its derivative liabilities.
Clearly, therefore, CVA and DVA are at their root accounting concepts,
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