The margin valuation adjustment (MVA) reflects the cost of funding the initial margin of a trade over its expected life. MVA optimisation is a way of selecting trades and counterparties such that the initial margin on a portfolio of trades is reduced through netting and offsetting effects.
This can be done in a number of ways. Some banks run optimisation algorithms internally to identify such trades and counterparties. Others use services that run optimisation algorithms over participating dealers’ bilateral portfolios to suggest new risk-offsetting trades or unwinds of old positions. Bilateral compression is another way to achieve this – the technique involves banks analysing their respective books, tearing up unnecessary trades and replacing them with a smaller number of transactions that achieve the same exposure.