Sovereign volatility puts Basel III CVA charge in spotlight

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A month of extreme volatility in the sovereign credit default swap (CDS) market – in which both Italy and Portugal saw single-day moves of around 20% – has put the Basel III capital charge for credit value adjustment (CVA) under the spotlight, with market participants concerned its introduction could make markets more chaotic.

CVA is the market value of changes in derivatives counterparty exposure, and a key determinant of the Basel III capital treatment is CDS spread volatility. Dealers worry a

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