China rates swap prices diverge on spotty CVA practices
Most local banks not passing on capital charge to clients, say traders
Traders are complaining of price distortions in the Chinese interest rate swap market due to patchy treatment of counterparty credit risk among local banks.
It is standard practice among international dealers to include a credit valuation adjustment (CVA) in the price of a swap, to compensate the dealer for counterparty credit risk. China's version of the Basel III bank capital rules also requires local banks to hold capital against this risk. However, there is no requirement to pass that cost
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