Small banks underpricing FVA, dealers claim
Dealers claim to be losing trades because smaller rivals are mispricing, particularly for trades with one-way CSAs and thresholds
Dealers say they are losing derivatives business to competitors that are not charging enough for funding valuation adjustment (FVA) – the costs and benefits associated with uncollateralised or partly collateralised trades. Smaller banks are said to be the primary offenders.
FVA arises when a dealer has executed an uncollateralised trade with a client and hedged it under the terms of a two-way credit support annex (CSA), which requires both sides to post collateral. When the dealer is in-the
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