11.13.	The BA-CVA calculations may be performed either via the reduced version or the full version. A bank under the BA-CVA approach can choose whether to implement the full version or the reduced version at its discretion. However, all banks using the BA-CVA must calculate the reduced version of BA-CVA capital requirements as the reduced BA-CVA is also part of the full BA-CVA capital calculations as a conservative means to limit hedging recognition.
	(1)	The full version recognizes counterparty spread hedges and is intended for banks that hedge CVA risk.
	(2)	The reduced version eliminates the element of hedging recognition from the full version. The reduced version is designed to simplify BA-CVA implementation for less sophisticated banks that do not hedge CVA.
	Reduced version of the BA-CVA (hedges are not recognized)
11.14.	The capital requirement for CVA risk under the reduced version of the BA-CVA (DSBA-CVA × Kreduced, where the discount scalar DSBA-CVA = 0.65) is calculated as follows (where the summations are taken over all counterparties that are within scope of the CVA charge), where:
	(1)	SCVAC is the CVA capital requirement that counterparty c would receive if considered on a stand-alone basis (referred to as “stand-alone CVA capital” below). See 11.15 for its calculation;
	(2)	? = 50%. It is supervisory correlation parameter. Its square, ?2 = 25% represents the correlation between credit spreads of any two counterparties.41 In the formula below, the effect of p is to recognize the fact that the CVA risk to which a bank is exposed is less than the sum of the CVA risk for each counterparty, given that the credit spreads of counterparties are typically not perfectly correlated; and
	(3)	The first term under the square root in the formula below aggregates the systematic components of CVA risk, and the second term under the square root aggregates the idiosyncratic components of CVA risk.
11.15.	The stand-alone CVA capital requirements for counterparty ? that are used in the formula in 11.14 (SCVAc) is calculated as follows (where the summation is across all netting sets with the counterparty), where:
	(1)	RWc is the risk weight for counterparty c that reflects the volatility of its credit spread. These risk weights are based on a combination of sector and credit quality of the counterparty as prescribed in 11.16.
	(2)	MNS is the effective maturity for the netting set NS. For banks that have SAMA’s approval to use IMM, NNS is calculated as per 7.20 and 7.21 of this framework, with the exception that the five year cap in 7.20 is not applied. For banks that do not have SAMA’s approval to use IMM, MNS is calculated according to chapter 12.46 to 12.54 of the Minimum Capital Requirements for Credit Risk, with the exception that the five-year cap in chapter 12.46 of the Minimum Capital Requirements for Credit Risk is not applied.
	(3)	EADNS is the exposure at default (EAD) of the netting set NS, calculated in the same way as the bank calculates it for minimum capital requirements for CCR.
	(4)	DFNS is a supervisory discount factor. It is 1 for banks using the IMM to calculate EAD, and is for banks not using IMM.42
	(5)	∝ = 1.4.43
11.16.	The supervisory risk weights (RWc) are given in Table 1. Credit quality is specified as either investment grade (IG), high yield (HY), or not rated (NR). Where there are no external ratings or where external ratings are not recognized within a jurisdiction, banks may, subject to SAMA's approval, map the internal rating to an external rating and assign a risk weight corresponding to either IG or HY. Otherwise, the risk weights corresponding to NR is to be applied.
	Table 1: Supervisory risk weights, RWc Sector of counterparty Credit quality of counterparty IG HY and NR Sovereigns including central banks, multilateral development banks 0.5% 2.0% Local government, government-backed nonfinancials, education and public administration 1.0% 4.0% Financials including government-backed financials 5.0% 12.0% Basic materials, energy, industrials, agriculture, manufacturing, mining and quarrying 3.0% 7.0% Consumer goods and services, transportation and storage, administrative and support service activities 3.0% 8.5% Technology, telecommunications 2.0% 5.5% Health care, utilities, professional and technical activities 1.5% 5.0% Other sector 5.0% 12.0%

	Full version of the BA-CVA (hedges are recognized)
11.17.	As set out in 11.13(1) the full version of the BA-CVA recognizes the effect of counterparty credit spread hedges. Only transactions used for the purpose of mitigating the counterparty credit spread component of CVA risk, and managed as such, can be eligible hedges.
11.18.	Only single-name credit default swaps (CDS), single-name contingent CDS and index CDS can be eligible CVA hedges.
11.19.	Eligible single-name credit instruments must:
	(1)	reference the counterparty directly; or
	(2)	reference an entity legally related to the counterparty; where legally related refers to cases where the reference name and the counterparty are either a parent and its subsidiary or two subsidiaries of a common parent; or
	(3)	reference an entity that belongs to the same sector and region as the counterparty.
11.20.	Banks that intend to use the full version of BA-CVA must calculate the reduced version (Kreduced) as well. Under the full version, capital requirement for CVA risk DSBA-CVA × Kfull is calculated as follows, where DSBA-CVA = 0.65, and β= 0.25 is the SAMA supervisory parameter that is used to provide a floor that limits the extent to which hedging can reduce the capital requirements for CVA risk:
Kfull = β ∙ Kreduced + (1 - ?) ∙ Khedged
11.21.	The part of capital requirements that recognizes eligible hedges (Khedged) is calculated formulas follows (where the summations are taken over all counterparties c that are within scope of the CVA charge), where:
	(1)	Both the stand-alone CVA capital (SCVAc) and the correlation parameter (ρ) are defined in exactly the same way as for the reduced form calculation BA-CVA.
	(2)	SNHc is a quantity that gives recognition to the reduction in CVA risk of the counterparty c arising from the bank's use of single-name hedges of credit spread risk. See 11.23 for its calculation.
	(3)	IH is a quantity that gives recognition to the reduction in CVA risk across all counterparties arising from the bank's use of index hedges. See 11.24 for its calculation.
	(4)	HMAc is a quantity characterizing hedging misalignment, which is designed to limit the extent to which indirect hedges can reduce capital requirements given that they will not fully offset movements in a counterparty's credit spread. That is, with indirect hedges present Khedged cannot reach zero. See 11.25 for its calculation.
11.22.	The formula for Khedged in 11.21 comprises three main terms as below:
	(1)	The first term (ρ • ∑?(SCVA? - SNH?) - IH)2 aggregates the systematic components of CVA risk arising from the bank's counterparties, the singlename hedges and the index hedges.
	(2)	The second term (1- ρ2) . ∑?(SCVA? - SNH?)2 aggregates the idiosyncratic components of CVA risk arising from the bank's counterparties and the single-name hedges.
	(3)	The third term ∑?HMA? aggregates the components of indirect hedges that are not aligned with counterparties' credit spreads.
11.23.	The quantity SNH? is calculated as follows (where the summation is across all single name hedges h that the bank has taken out to hedge the CVA risk of counterparty c), where:
	(1)	rhc is the supervisory prescribed correlation between the credit spread of counterparty c and the credit spread of a single-name hedge h of counterparty c. The value of rhc is set out the table 2 of 11.26. It is set at 100% if the hedge directly reference the counterparty c, and set at lower values if it does not.
	(2)	MhSN is the remaining maturity of single-name hedge h.
	(3)	BhSN is the notional of single-name hedge h. For single-name contingent credit default swaps (CDS), the notional is determined by the current market value of the reference portfolio or instrument.
	(4)	DFhSN is the supervisory discount factor calculated as .
	(5)	RWh is the supervisory risk weight of single-name hedge h that reflects the volatility of the credit spread of the reference name of the hedging instrument. These risk weights are based on a combination of sector and credit quality of the reference name of the hedging instrument as prescribed in Table 1 of 11.16.
11.24.	The quantity IH is calculated as follows (where the summation is across all index hedges i that the bank has taken out to hedge CVA risk), where:
	(1)	Miind is the remaining maturity of index hedge i.
	(2)	Biind is the notional of the index hedge i.
	(3)	DFiind is the supervisory discount factor calculated as
	(4)	RWi is the supervisory risk weight of the index hedge i. RWi is taken from the Table 1 of 11.16 based on the sector and credit quality of the index constituents and adjusted as follows:
		(a)	For an index where all index constituents belong to the same sector and are of the same credit quality, the relevant value in the Table 1 of 11.16 is multiplied by 0.7 to account for diversification of idiosyncratic risk within the index.
		(b)	For an index spanning multiple sectors or with a mixture of investment grade constituents and other constituents, the name-weighted average of the risk weights from the Table 1 of 11.16 should be calculated and then multiplied by 0.7.
11.25.	The quantity HMA? is calculated as follows(where the summation is across all single name hedges h that have been taken out to hedge the CVA risk of counterparty c), where rh?, MhSN, BhSN, DFhSN and RWh have the same definitions as set out in 11.23.
11.26.	The supervisory prescribed correlations rhc between the credit spread of counterparty c and the credit spread of its single-name hedge h are set in Table 2 as follows:
	Table 2: Correlations between credit spread of counterparty and single-name hedge Single-name hedge h of counterparty c Value of rhc references counterparty c directly 100% has legal relation with counterparty c 80% shares sector and region with counterparty c 50%

⁴¹ One of the basic assumptions underlying the BA-CVA is that systematic credit spread risk is driven by a single factor. Under this assumption, ? can be interpreted as the correlation between the credit spread of a counterparty and the single credit spread systematic factor.
⁴² DF is SAMA discount factor averaged over time between today and the netting set's effective maturity date. The interest rate used for discounting is set at 5%, hence 0.05 in the formula. The product of EAD and effective maturity in the BA-CVA formula is a proxy for the area under the discounted expected exposure profile of the netting set. The IMM definition of effective maturity already includes this discount factor, hence DF is set to 1 for IMM banks. Outside IMM, netting set effective maturity is defined as an average of actual trade maturities. This definition lacks discounting, so SAMA discount factor is added to compensate for this.
⁴³ ∝ is the multiplier used to convert Effective Expected Positive Exposure (EEPE) to EAD in both SACCR and IMM. Its role in the calculation, therefore, is to convert the EAD of the netting set (EAD_NS) back to EEPE.