Dealers grapple with netting valuation adjustments

Some banks are expressing netting uncertainty as a fair value adjustment to CVA, a practice that attracts regulatory capital add-ons

Quantifying netting risks is easier said than done

Dealers are becoming ever-more adept at breaking down the hidden risks in over-the-counter derivatives and reflecting these in the all-in price of a trade. Most firms already calculate valuation adjustments – so-called XVAs – for a menagerie of capital, credit, debt, funding, liquidity and margin costs. Still, some risks continue to elude their grasp.

One example is the legal risk associated with close-out netting clauses in standard trading agreements for OTC derivatives, which allow dealers to