Quaternion recently sponsored a September 14th Risk.net webinar discussion on the evolution of XVAs. Participants included Scott Sobolewski (Principal Consultant at Quaternion), Yann Coatanlem (MD, Head of Multi-Asset Quantitative Analysis at Citigroup,
Massimo Morini (‎Head of Interest Rate and Credit Models, Banca IMI), and ‎Peter Zeitsch (Solution Architect at Calypso Technology).

The list of valuation adjustments banks must apply when pricing a derivative has grown exponentially and given rise to an alphabet soup of new valuation adjustments. The term XVAs has been coined to describe the entire family, namely funding valuation adjustment (FVA), capital valuation adjustment (KVA), and now, margin valuation adjustment (MVA). The sheer volume of these adjustments coupled with the impact on profitability has led banks to compute the capital required to support them through the life of the trade. This has considerably increased the computational complexity as well as placed demands for real time calculation of all of this information. Needless to say, dealers attempting to manage their XVAs are finding the process extremely challenging and a few have joined-up in an effort to curb their XVAs, under the banner of optimisation and trade compression.

Discussion topics included:

• What is MVA and how does it interact with the other XVAs?
• How complex is MVA, relative to other adjustments?
• In practical terms, where is the industry on MVA at this point?
• Do you expect MVA to follow the same evolutionary path that we’ve seen for other XVAs?
• Interaction between MVA, KVA, CVA, DVA, FVA
• Rank order of the different XVAs, once IM regime has been fully implemented
• What are the key regulations that will determine the correct MVA/XVA treatment for a trade?
• What are the practical / implementation challenges?
• Given all of this, what timeline is likely for MVA to start showing up in pricing?
• How much pricing dispersion is it likely to produce?
• Can MVA already be seen for cleared trades with CCPs?
• Accounting treatment for MVA (IFRS 9, 13)
• What does the blending / blurring of XVAs mean for the way they are managed? What is the right organisational structure?

Listen to the webinar here.