Credit Value Adjustment

1. CREDIT VALUE ADJUSTMENT
Centralised Service Model
Counterpart Credit Risk Management Strategy
Minimize Loss Optimize Risk Position
Central Control and Expertise
Limit and Capital Management
Single Name Concentration Exposure
Hedging
Provisioning
Portfolio Approach

2. CREDIT VALUE ADJUSTMENT
Position valuation and exposure calculation at
trade level
MODEL COMPONENTS
CVA applied at netting level to account for expected loss
Risk neutral scenarios calibrated to current market
conditions
CVA Calc = Discounted Expected Exposure x Default
Probability x Loss Given Default
Incremental CVA charge for new trade
Aggregate portfolio level for netting, collateral,
wrong way risk

3. CREDIT VALUE ADJUSTMENT
Pre-Trade Pricing
• Exposure and pricing methodology
• Calculation of credit charge incorporating netting, wrong way risk and collateral
CVA PROCESS APPLIED
• Account for portfolio offset
• Transfer price between trading and central desk
• Default probability reference and assignment
Provisioning
• Method and agreement between Finance and Risk
Hedging
• Assessment of un-hedged / un-covered portion and methods
• Treatment of collateral
Reporting
• P&L impact analysis
• Counterparty assessment process
• Central limit and exposure management
• Treatment of incremental unexpected losses at portfolio level

4. CREDIT VALUE ADJUSTMENT
Credit and Debit Valuation Adjustments (CVA and DVA) are applied to over-the-counter
derivative exposures with counterparties that are not subject to standard interbank collateral
arrangements. These exposures largely relate to the provision of risk management solutions for
corporate entities.
A CVA is undertaken where there is a positive future uncollateralised exposure (asset).
A DVA is undertaken where there is a negative future uncollateralised exposure (liability).
CVA EXPLAINED
These adjustments reflect interest rates and expectations of counterparty creditworthiness and
the Bank’s own credit spread respectively.
The CVA is sensitive to:
• the current size of the mark-to-market position on the uncollateralised asset;
• expectations of future market volatility of the underlying asset; and
• expectations of counterparty creditworthiness.
The DVA is sensitive to:
• the current size of the mark-to-market position on the uncollateralised liability;
• expectations of future market volatility of the underlying liability; and
• the Bank’s own CDS spread.
Market Credit Default Swap (CDS) spreads are used to develop the probability of default for
quoted counterparties. For unquoted counterparties, internal credit ratings and market sector
CDS curves and recovery rates are used. The Loss Given Default (LGD) is based on market
recovery rates and internal credit assessments.
The combination of deterioration in the credit rating of derivative counterparties and an increase
in LGD increases the CVA. Current market value is used to estimate the projected exposure for
products not supported by the CVA model, for these, the CVA is calculated on an add-on basis.