European capital rules could squash CVA feedback loop
The European Parliament version of CRD IV exempts trades with non-financials from Basel III's CVA capital charge - and dealers are hoping it covers sovereigns as well as corporates
Banks will not be required to hold capital against the credit value adjustment (CVA) generated by trades with non-financial counterparties under the latest raft of amendments to European proposals on bank capital – a carve-out designed to apply to trades with corporate end-users of derivatives, but which banks believe could also cover debt management offices, central banks and other sovereigns.
If the exemption does apply to sovereign derivatives users, it would tackle what dealers see as one of
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