PrevioRisk CVA module enables you to estimate aggregate and stressed Credit Valuation Adjustment (CVA) as well as CVA factor sensitivities. Basic stress testing of CVA can be done to assess performance under adverse scenarios, incorporating any hedging mismatches.

PrevioRisk ensures the implementation of the following regulatory standards for CVA measurement:

• CVA calculations should include all products and counterparties, including margined counterparties.
• The method for incorporating counterparty credit quality into CVA should be reasonable and subject to ongoing evaluation. CVA should reflect the fair value of the counterparty credit risk for OTC derivatives, and inputs should be based on current market prices when possible.
• Credit spreads should be reflected in the calculation where available, and banking organizations should not overly rely on non-market-based probability of default estimates when calculating CVA.
• Banking organizations should attempt to map credit quality to name-specific spreads rather than spreads associated with broad credit categories.
• Any proxy spreads should reasonably capture the idiosyncratic nature of the counterparty and the liquidity profile.
• The term structure of credit spreads should be reflected in the CVA calculation.
• The CVA calculation should incorporate counterparty-specific master netting agreements and margin terms; for example, the CVA calculation should reflect margin thresholds or minimum transfer amounts stated in legal documents.
• Banking organizations should identify the correlation between counterparty’s credit-worthiness and its exposure to the counterparty, and seek to incorporate the correlation into their respective CVA calculation.

Moreover, PrevioRisk allows you to combine appropriate CVA management with sound risk-management practices for other mark-to-market risks, imposing that:

• Business units engaged in trades related to CVA management should have independent risk management functions overseeing their activities.
• Systems that produce CVA risk metrics should be subject to the same controls as used for other MTM risks, including independent validation or review of all risk models, including alternative methodologies.
• Upon transaction execution, CVA costs should be allocated to the business unit that originates the transaction.
• Banking organizations should measure sensitivities to changes in credit and market risk factors to determine the material drivers of MTM changes. On a regular basis, but no less frequently than quarterly, banking organizations should ensure that CVA MTM changes are sufficiently explained by these risk factors – for example, through profit and loss attribution for sensitivities, and back testing for value at risk (VaR).
• Banking organizations hedging CVA MTM should gauge the effectiveness of hedges through measurements of basis risk or other types of mismatches. In this regard, it is particularly important to capture non-linearities, such as the correlation between market and credit risk, and other residual risks that may not be fully offset by hedging.

In addition to regular stress tests of CVA, PrevioRisk enables you to take advantage of VaR models that include CVA to measure potential losses. A proper CVA VaR model, as described by regulatory guidance, is based on the following considerations:

• All material counterparties covered by CVA valuation should be included in the VaR model.
• A CVA VaR calculation that keeps the exposure or the counterparty probability of default static is not adequate. It will not only omit the dependence between the two variables, but also the risk arising from the uncertainty of the fixed variable.
• CVA VaR should incorporate all forms of CVA hedging. Banking organizations and examiners should assess the ability of the VaR measure to accurately capture the types of hedging used by the banking organization.

To support convenient CVA management, PrevioRisk platform helps you organize the relevant data:

• Automate legal and operational information, such as netting and collateral terms. Banking organizations should be able to adjust exposure measurements, taking into account the enforceability of legal agreements.
• Automate processes to track and manage legal documentation, especially when there is a large volume of legal agreements.

PrevioRisk CVA module also offers you proper functionality for establishment of potential limits for the market risk arising through CVA, imposed on CVA or CVA VaR. These limits can be effectively combined with limits imposed on counterparty credit exposure (e.g. through a measure of potential future exposure).

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Credit spreads should be reflected in the calculation where available, and banking organizations should not overly rely on non-market-based probability of default estimates when calculating CVA.
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Credit spreads should be reflected in the calculation where available, and banking organizations should not overly rely on non-market-based probability of default estimates when calculating CVA.
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