OSFI – Proposed regulatory changes to the treatment of Credit Valuation Adjustments (CVA)

June 18, 2021 – Proposed revisions to Ch 8 of OSFI capital adequacy requirements guideline, CAR Ch 8. Revisions are the continuation of consultation on incorporating the latest, the final round of Basel III reforms into capital, leverage, and related bank disclosure guidelines.

Enhanced Risk Sensitivity
Expanded scope of coverage for CVA market risk factors. The current CVA capital framework does not give recognition to market risk sensitivities and/or hedges. Previously, OSFI determined these hedges represented acceptable risk management practices, and should not be capitalized as open risk positions. Given that the revised CVA capital framework will recognize hedging, capture effects of market risk factors on CVA, the exemption will be removed upon implementation of changes.

Other Key Changes
Increased robustness, aligned CVA sensitivities with standardized approach (SA) for market risk, and basic approach (BA) which is benchmarked to the standardized approach. The revised scope of application of CVA capital requirements to only those deposit-taking institutions (DTIs) that are subject to OSFI’s market risk capital requirements.

Proposed Treatment of Other XVAs
Hedges of exposure component of FVA and Colva (subject to sound governance, risk management verification), may be removed from DTI’s market risk capital obligations. The remainder, including hedges of DTI’s cost of funds component of FVA, all other XVAs, must be capitalized under market risk capital rules in revised Ch. 9 of CAR guideline. OSFI has provided draft wording on the proposed treatment of other XVAs, final language will be included in the publication of the final CAR guideline, Ch 9, expected in late 2021.

Revised CAR guideline, Ch 8 on CVA risk and a paragraph on the treatment of market risk hedges of XVA (to be added to CAR guideline, Ch 9) will come into effect in Q1 2024.

Comments are due by July 30, 2021, and OSFI plans to release final guidance in late 2021.

For more information, visit www.osfi-bsif.gc.ca.

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