Basel III and XVAs

Gunter Meissner

“I’m very close to thinking the United States shouldn’t be in Basel anymore”

– Jamie Dimon

In this chapter, we will discuss the Basel Accord’s view on the adjustments to the no-default value of a derivatives portfolio, collectively called XVAs. There is no shortage of XVAs. We have the following.

  1. CVA: credit value adjustment. Addresses counterparty credit risk in a derivatives portfolio.

  2. DVA: debt value adjustment. Also addresses counterparty credit risk in a derivatives portfolio. However, it addresses an entity’s own credit risk. If allowed, DVA will increase the no-default value of the derivatives portfolio.

  3. FVA: funding value adjustment. An adjustment to the price of a transaction due to the cost of funding the transaction or the related hedge.

  4. ColVA: collateral value adjustment. Also termed IOS (index overnight swap) adjustment. Is an adjustment for the cost of funding the collateral in a derivatives transaction or the related hedge. ColVA can increase or decrease the value of a derivatives portfolio.

  5. KVA: regulatory capital adjustment. An adjustment for holding regulatory capital during the life of the derivative.

  6. MVA: adjustment for

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