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FRM Part II · FRM Exam Part II · Basel III: Finalising Post-crisis Reforms

A bank's SA-CVA approval has been granted for its main desk. Which statement about SA-CVA is correct?

SA-CVA is a sensitivities-based approach: it measures how regulatory CVA responds to counterparty credit spreads and to market risk factors driving exposure, recognises eligible hedges, and requires supervisory approval. It is not limited to credit spreads, and it is not mandatory for all banks.

  1. AIt captures counterparty credit spread risk only, ignoring market risk drivers of exposure
  2. BIt is based on sensitivities of regulatory CVA to market risk factors and credit spreads, with eligible hedges recognised, and requires supervisory approvalCorrect
  3. CIt uses the bank's own PD and LGD models with no sensitivity inputs
  4. DIt is mandatory for every bank with any uncleared derivatives

Explanation

SA-CVA derives capital from sensitivities of regulatory CVA to counterparty credit spreads and to exposure-driving market risk factors (interest rate, FX, equity, commodity, reference credit spread), reusing market risk sensitivities-based concepts, and needs supervisory approval. It is not credit-spread-only, not PD/LGD-based, and not mandatory.

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