| 11.1. | The risk-weighted assets for Credit Value Adjustment risk are determined by multiplying the capital requirements calculated as set out in Chapter 11 of this Framework by 12.5.
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| 11.2. | In the context of this framework, CVA stands for Credit Valuation Adjustment specified at a counterparty level. CVA reflects the adjustment of default risk-free prices of derivatives and Securities Financing Transactions (SFTs) due to a potential default of the counterparty.
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| 11.3. | Unless explicitly specified otherwise, the term CVA in this framework means regulatory CVA. Regulatory CVA may differ from CVA used for accounting purposes as follows:
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| | (1) | regulatory CVA excludes the effect of the bank's own default; and
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| | (2) | several constraints reflecting best practice in accounting CVA are imposed on calculations of regulatory CVA.
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| 11.4. | CVA risk is defined as the risk of losses arising from changing CVA values in response to changes in counterparty credit spreads and market risk factors that drive prices of derivative transactions and SFTs.
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| 11.5. | The capital requirement for CVA risk must be calculated by all banks involved in covered transactions in both banking book and trading book. Covered transactions include:
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| | (1) | all derivatives except those transacted directly with a qualified central counterparty and except those transactions meeting the conditions of 8.14 to 8.16 of this framework; and.
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| | (2) | SFTs that are fair-valued by a bank for accounting purposes, if SAMA determines that the bank's CVA loss exposures arising from SFT transactions are material. In case the bank deems the exposures immaterial, the bank must justify its assessment to SAMA by providing relevant supporting documentation.
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| | (3) | SFTs that are fair-valued for accounting purposes and for which a bank records zero for CVA reserves for accounting purposes are included in the scope of covered transactions.
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| 11.6. | The CVA risk capital requirement is calculated for a bank's “CVA portfolio” on a standalone basis. The CVA portfolio includes CVA for a bank's entire portfolio of covered transactions and eligible CVA hedges.
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| 11.7. | Two approaches are available for calculating CVA capital: the standardized approach (SA-CVA) and the basic approach (BA-CVA). Banks must use the BA- CVA unless they receive approval from Saudi Central Bank (SAMA) to use the SA-CVA.40
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| 11.8. | Banks that have received approval of Saudi Central Bank (SAMA) to use the SA- CVA may carve out from the SA-CVA calculations any number of netting sets. CVA capital for all carved out netting sets must be calculated using the BA-CVA. When applying the carve-out, a legal netting set may also be split into two synthetic netting sets, one containing the carved-out transactions subject to the BA-CVA and the other subject to the SA-CVA, subject to one or both of the following conditions:
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| | (1) | the split is consistent with the treatment of the legal netting set used by the bank for calculating accounting CVA (e.g. where certain transactions are not processed by the front office/accounting exposure model); or
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| | (2) | SAMA approval to use the SA-CVA is limited and does not cover all transactions within a legal netting set.
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| 11.9. | For banks that are below the materiality threshold where aggregate notional amount of non-centrally cleared derivatives is less than or equal to 446 billion SAR may opt not to calculate its CVA capital requirements using the SA-CVA or BA-CVA and instead choose an alternative treatment.
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| | (1) | Subject to the above conditions and treatment,
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| | | a. | Banks may choose to set its CVA capital equal to 100% of the bank's capital requirement for counterparty credit risk (CCR);
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| | | b. | Banks CVA hedges will not be recognized; and
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| | | c. | Banks must apply this treatment to the bank's entire portfolio instead of the BA-CVA or the SA-CVA.
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| | (2) | SAMA, however, may not allow banks to apply the above treatment if it determines that CVA risk resulting from the bank's derivative positions materially contributes to the bank's overall risk.
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| 11.10. | Eligibility criteria for CVA hedges are specified in11.17 to 11.19 for the BA-CVA and in 11.37 to 11.39 for the SA-CVA.
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| 11.11. | CVA hedging instruments can be external (i.e. with an external counterparty) or internal (i.e. with one of the bank's trading desks).
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| | (1) | All external CVA hedges (including both eligible and ineligible external CVA hedges) that are covered transactions must be included in the CVA calculation for the counterparty to the hedge.
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| | (2) | All eligible external CVA hedges must be excluded from a bank's market risk capital requirement calculations under Chapter 2 through Chapter 14 of the Minimum Capital Requirements for Market Risk.
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| | (3) | Ineligible external CVA hedges are treated as trading book instruments and are capitalized under Chapter 2 through Chapter 14 of the Minimum Capital Requirements for Market Risk.
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| | (4) | An internal CVA hedge involves two perfectly offsetting positions: one of the CVA desk and the opposite position of the trading desk.
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| | | a) | If an internal CVA hedge is ineligible, both positions belong to the trading book where they cancel each other, so there is no impact on either CVA portfolio or the trading book.
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| | | b) | If an internal CVA hedge is eligible, the CVA desk's position is part of the CVA portfolio where it is capitalized as set out in this chapter, while the trading desk's position is part of the trading book where it is capitalized as set out in Chapter 2 through Chapter 14 of the Minimum Capital Requirements for Market Risk.
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| | (5) | If an internal CVA hedge involves an instrument that is subject to curvature risk, default risk charge or the residual risk add-on under the standardized approach as set out in Chapter 6 to Chapter 9 of the Minimum Capital Requirements for Market Risk, it can be eligible only if the trading desk that is the CVA desk's internal counterparty executes a transaction with an external counterparty that exactly offsets the trading desk's position with the CVA desk.
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| 11.12. | Banks that use the BA-CVA or the SA-CVA for calculating CVA capital requirements may cap the maturity adjustment factor at 1 for all netting sets contributing to CVA capital when they calculate CCR capital requirements under the Internal Ratings Based (IRB) approach.
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