XVA – Special report 2019

The term ‘margin valuation adjustment’ (MVA) was introduced in the pages of Risk magazine in April 2015, when Andrew Green and Chris Kenyon published their paper MVA by replication and regression. The pair spelt out the concept of a derivatives valuation adjustment (XVA) covering the cost of posting initial margin (IM) under new rules that would be phased in from the following year.

In a recent webinar, XVA traders agreed that MVA is taking time to grow but, as IM balances inevitably expand, banks need to think about what that means for pricing. This is particularly the case for clients with directional positions, whose trades by their very nature attract more IM with every new line-item.

Whether MVA will eventually end up as a standard component of pricing, or even an accounting adjustment, is hard to say. But it seems the heady days of the early to mid-2010s, when every obscure derivatives cost discovered by a quant was immediately incorporated into standard market pricing, are far behind us.

 

Download the full 2019 XVA special report in PDF format

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