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

A risk manager reviews the finalised Basel III CVA framework. Which transaction type is generally excluded from the CVA risk capital requirement?

Derivative transactions cleared through a qualifying central counterparty are excluded from the CVA risk capital requirement. Bilateral uncleared OTC derivatives, whether interest rate, FX, or equity, with corporates, hedge funds, or insurers remain in scope because they expose the bank to counterparty credit spread volatility.

  1. AUncleared OTC interest rate swaps with corporate counterparties
  2. BTransactions with a qualifying central counterparty (QCCP), i.e. cleared derivativesCorrect
  3. CUncleared FX forwards with hedge funds
  4. DUncleared equity options with insurers

Explanation

Transactions with a qualifying central counterparty are excluded from the CVA capital charge. Uncleared OTC derivatives with corporates, hedge funds, or insurers carry CVA risk and are included. The distractors are all bilateral trades whose counterparty credit spread exposure is capitalised.

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