Risk Annual Summit: DVA hedging creates systemic risk, says Brigo
King's College professor of finance Damiano Brigo says regulators should clamp down on dealers looking to hedge debit value adjustment gains by selling CDS protection on closely correlated names
Banks that seek to hedge debit value adjustment (DVA) by selling credit default swap (CDS) protection on their peers are creating systemic risk, and the practice should be clamped down upon by regulators, according to Damiano Brigo, a professor of finance at King's College London.
Speaking at the Risk Annual Summit today, Brigo said a proxy hedge of this type may offset DVA variations in normal times, but a sudden default in the reference entity would mean the bank has to pay out on the CDS
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