DVA, energy trading and auto-quoting

The week on Risk.net, February 19–25, 2016


DVA HEDGES could be undermined by rule change

ENERGY TRADERS get good news on capital from Mifid II

SEFS – auto-quote race hots up


COMMENTARY: Mixed news on CVA and DVA

Regulatory developments on credit valuation adjustments (CVA) and debit valuation adjustments (DVA) bring good and bad news for banks and corporates active in the derivatives market. The news that US accounting standards setters would follow their international peers in shifting DVA out of the earnings statement was generally welcomed last December, but it will cause problems for banks that have already hedged the DVA away, leaving them with a naked hedge sitting in their income statement and the DVA itself in the 'other income' category.

The numbers involved can be large. In the third quarter of last year, Credit Suisse recorded a Sfr370 million DVA gain on structured notes. Banks using international accounting standards hope they may be able to carry on hedging.

In the world of CVA, banks and corporates are protesting about European Banking Authority (EBA) guidelines that would partly reverse the CVA exemption granted to trades with non-financial counterparties. The EBA argues dealers are not holding enough capital to make up for the lack of CVA at their non-bank customers.



From 2002 to 2015, four Florida utility firms lost a combined $5.985 billion by hedging their gas purchases, compared to the price they would have paid if they had simply bought the gas unhedged



"In late 2014, it might have taken me 30 minutes to get a price on a market-agreed coupon curve, whereas now I can get it done in minutes if not seconds. And outrights are now largely auto-quoted, so a price can come back to you in milliseconds. It is essentially a stream of liquidity you can hit or lift" – New York swaps trader



MEPs split on how to protect package trades from Mifid II
Ferber warns amending text "risks opening Pandora's box"

US dollar/yen basis blows out to –100 on negative rates
Bank of Japan policy adds to domestic banks' dollar funding dilemma

Firms weigh impact of blockchain on post-trade services
Participants discuss advantages and uncertainties of using distributed ledgers in OTC market

Banks struggling with IFRS 9 impairment rules
Firms seek clarity on use of probabilistic scenarios ahead of January 2018 deadline

EU's foreign benchmark equivalence rules under fire
Critics fear repeat of CCP approvals saga

Hungary central bank action ‘distorting' swaps curve
The Central Bank of Hungary has offered up 1 trillion forint notional of cheap interest rate swaps, driving down bids for receiver swaps and government bond yields, say dealers


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