Beginning in April 2021, Japanese financial institutions will be required to calculate and subsequently report credit valuation adjustments (CVA) and debit valuation adjustments (DVA) under new Accounting Standards Board of Japan (ASBJ) guidelines. While CVA reporting has been in place for many years for international banks, many smaller regional Japanese banks are only now being asked to meet the requirement.
To get some perspective on what will be required of Japanese financial institutions in terms of CVA, and how they can prepare, in today’s blog we interview Amar Budhiraja, Managing Director, Strategic Business Development, FINCAD. At FINCAD, we have tailored our world-class pricing and risk analytics library to perform precise CVA calculations. We’ve recently launched our CVA service in Japan and will have several banks that will begin utilizing the FINCAD service starting in April.
1. Q. What exactly will be required of Japanese financial institutions in 2021 with regard to CVA?
A. Starting April 2021, Japanese financial institutions will be asked to evaluate, and account for counterparty credit risk (CVA) for the derivatives trades on their books and their own credit risk (DVA) in order to calculate and report fair value in compliance with ASBJ guidelines. These guidelines reflect the endorsement process of the International Financial Reporting Standards (IFRS 13) Fair Value Measurement standards. They will accordingly be expected to report CVA and DVA from June 30, 2021.
This significant change aims to align Japanese banks with their international peers. Moreover, any organization that applies Japanese GAAP will be subject to the new IFRS requirements.
2. Q. Are all Japanese financial institutions ready to meet the CVA requirement? Are their current systems already equipped for CVA?
Large banks in Japan would typically already have systems for running CVA in place, using their own in-house software. But this may be challenging for some small to mid-sized institutions. Not only would they need to review their data flows and infrastructure to see how the additional information can be handled through their existing financial reporting systems, CVA calculations can be complex. These calculations typically require extensive Monte Carlo simulations to calculate future exposure, which can be intricate and resource intensive, especially with some of the complex products held by these banks.
3. Q. What options are available to these firms that do not want to handle CVA in house?
Small- to mid-size financial institutions would benefit most from partnering with a provider that specializes in CVA calculation services that can assist them in meeting the complex requirements. This approach will typically be less costly and will eliminate the need to devote staff and computing resources to carrying out this function. Additionally, working with a leading provider that has a proven track record in handling CVA can enable firms to have confidence that their results will be accurate.
Recently launched, FINCAD’s CVA Service is backed by our 30-years of leadership in pricing and valuation of derivatives for some of the largest financial institutions in the world. In fact, we will begin assisting several banks in Japan with our CVA service from April 2021 onward. Consulting services are provided by Techmatrix, FINCAD’s local Japanese partner that has been servicing Japanese financial institutions for over 15 years.
One great thing about FINCAD’s CVA Service is that it gives small- to mid-sized firms the opportunity to gain cost-effective access to our world-class analytics that were once reserved for only large sell-side financial institutions. It’s also worth mentioning that auditors around the globe trust FINCAD calculations for their accuracy and transparency.
4. Q. Why is an outsourced CVA service advantageous?
An outsourced service for CVA can be quite beneficial, particularly for smaller firms, as CVA calculation and reporting often represents a large time and potential budgetary investment, if you need to add new tools or staff.
Managing and reporting CVA is not trivial and involves complex calculations and running scenarios potentially many thousands of times over. CVA reporting then needs to be performed either once monthly or each quarter, which is quite a bit.
In essence, using a CVA service enables firms to stay focused on their core business, lower overall cost, and guarantee accurate CVA results that your auditors will have confidence in.
5. Q. What other business benefits could a firm get from using a trusted CVA service?
Aside from meeting audit requirements, firms do stand to gain a competitive advantage from using a proven CVA service as its impact could extend to trading and risk management. These metrics can ultimately be used as part and parcel of a strong risk management strategy as firms seek to invest in ways that minimize hedging costs or credit utilization.
A trusted service equips you with the transparent information necessary to help you mitigate and manage risk with confidence.
Learn More: FINCAD CVA Services webpage
About our Interviewee:
Managing Director, Strategic Business Development
Amar has more than 20 years of experience driving revenue growth and creating innovative revenue streams. His experience includes building and managing strategic relationships, sales leadership, enterprise sales, channel management, and marketing across fintech, consumer goods, and media companies. He leads the FINCAD Alliance Program with responsibility for all partnerships and drives FINCAD’s business in the Asia Pacific region.