ISDA CEO Scott O'Malia called for specific changes to the current credit valuation adjustment ("CVA") capital framework, criticizing the requirements for not being appropriate or risk-sensitive.
In a post on ISDA's derivatiViews blog, Mr. O'Malia argued that, based on the results gathered from a quantitative impact study,1 the CVA framework as it stands could:
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cause an "inappropriate[]" rise in capital requirements for derivatives businesses;
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hurt users by making derivatives (i) more costly and (ii) less accessible for users when hedging their risks;
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increase capital charges on exposures hedged at the portfolio level due to a lack of recognition of CVA hedges (in particular, those that employ index credit default swaps ("CDS") and proxy single-name CDS); and
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require capital beyond what is appropriate, due to the insufficient "convergence" between regulatory CVA and market practice.
Footnotes
1 Mr. O'Malia indicated that the results of the study are subject to nondisclosure agreements but have been presented to the Basel Committee on Banking Supervision for consideration.
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