Complexity of valuation and risk management is increasing for both sell and buy side institutions, especially when cost of capital, counterparty credit risk and funding costs are included. To support best execution and risk reporting, firms need transparency into all aspects of a given price—including CVA, and preferably other valuation adjustments (xVA’s) as well.
However, the reality is that properly managing CVA and performing adequate P&L attribution are challenges that remain unsolved for numerous financial institutions. Many struggle with the development of appropriate models for CVA and accurately assessing wrong-way risk.
To overcome the complexity of valuation adjustments, many firms are implementing new solutions. At FINCAD, we’ve helped multiple clients successfully solve their xVA challenges, and in today’s blog post, I would like to share a couple of their stories.
Client 1: Mitsubishi UFJ Financial Group (MUFG)
MUFG is a bank holding and financial services company headquartered in Tokyo. MUFG is Japan's largest financial group and the world's second largest bank holding company.
The bank needed to calculate CVA for their various trading counterparties in order to meet Basel III requirements, and thus they sought a reliable solution for CVA reporting. Already a satisfied FINCAD client, the natural choice was to look at FINCAD’s F3 CVA service offering.
“We find FINCAD solutions to be easy-to-use and extremely reliable. Additionally, the support team provides knowledgeable answers and quick service which makes a big difference to us. These factors had a large impact on our decision to go ahead with FINCAD’s CVA service offering,” said Ronald Hart, Associate Director, Treasury Division, MUFG Bank (Europe) N.V.
MUFG now relies on FINCAD for accurate and efficient CVA calculation and reporting on a book of interest rate swaps, basis swaps, and cross currency swaps, in addition to approximately 2,200 FX forward contracts. This covers a total of 55 counterparties.
Client 2: Latin American Multilateral Bank
Another client, a leading Latin American Bank needed help calculating CVA for both regulatory demands and internal reporting requirements. The bank had already been working with FINCAD for more than a decade and turned to FINCAD for help with this new challenge.
Richer risk calculations such as scenario analysis, CVA, and P&L attribution offered via FINCAD F3 now enable the bank to maintain greater control over its business. “Having the ability to move our risk reporting from a once monthly to a daily function has made a world of difference. Producing results more frequently means there is less risk involved and we are operating more efficiently,” said the Head of Market Risk.
Coming to Terms with Valuation Adjustments
More attention than ever is being paid to verifying the accuracy of valuation adjustment calculation assumptions, methodologies and related market data. As such, firms need a solution that enables accurate computation of these calculations on a near real-time basis, in line with regulatory demands.
Furthermore, accurate valuation and risk analytics that provide the full range of risk calculations including CVA, DVA and FVA enable better portfolio and risk decisions, as well as regulatory compliance.
To learn more, check out our full-length case studies on the following FINCAD clients:
Latin American Bank