Counterparty Credit Risk and Credit Value Adjustment: A Continuing Challenge for Global Financial Markets, 2nd Edition

14.5 Future Trends

14.5.1 Standard CSA

Whilst we have quantified, above, the joint impact of BCVA and FVA in collateralised situations, many of the complexities of CSAs are simply too complex to quantify rigorously. A tremendous amount of optionality exists in a CSA since there are so many possibilities about the type of collateral that can be delivered (and substituted) across currency, asset class and maturity. Knowing the cheapest-to-deliver collateral in the future depends on many aspects, such as the future exposure, basis swap spreads and haircuts. An accurate valuation, via CollVA, of the optionality that an institution has in a CSA (and that their counterparty has) is clearly not achievable. However, an alternative solution is to remove, structurally, most of the optionality to simplify some of the valuation problems linked to funding and CSAs.

The ISDA Standard Credit Support Annex (SCSA) aims to achieve such standardisation and greatly reduce embedded optionality in CSAs, whilst improving collateralisation and promoting the adoption of OIS discounting. At the same time, the mechanics of a SCSA are focussed on being closely aligned to central clearing collateral practices. Additionally, the SCSA aims at creating a homogeneous valuation framework, minimising valuation disputes and making trading and novation more straightforward. The SCSA is still being developed and the reader is referred to the ISDA website (www.isda.org) for the latest status.

In a typical CSA, a single ...