The regulatory landscape has changed swiftly over the last few years and banks and clients are still digesting the implications of new regulations such as CVA VaR. In this paper, we explain the background, the differences between standardised and advanced approaches and also examine the potential capital relief achievable through hedging.

We note that CVA will be assumed to be defined with respect to market parameters, which is a growing trend and supported by future accounting standards (IRFS 13) and Basel III regulation. We will focus all arguments around the current Basel III capital requirements2 and not take into account any changes that may be applied by local regulators.

Finally, we will not discuss funding costs or funding value adjustment (FVA) components.

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