Brief Overview:
Counterparty risk does not begin at default. A deterioration in a counterparty’s credit quality can erode the value of derivatives exposures well before an actual credit event occurs. Recognising this, the new Credit Valuation Adjustment (“CVA”) framework requires banks to hold capital against such losses and further aligns India’s prudential framework with international standards. Banks have until 1st April 2027 to prepare for the new regime.
Technical Details:
Key Highlights
1) New CVA capital charge: Banks will be required to hold capital against losses arising from deterioration in a counterparty’s credit quality, even before a default occurs.
2) BA-CVA introduced: The directions introduce the Basic Approach for Credit Valuation Adjustment (“BA-CVA”) as the primary methodology for calculating CVA capital requirements.
3) Recognition of eligible hedges: Certain CDS-based hedges may be recognised for reducing CVA capital requirements under the full BA-CVA framework.
4) Alternative treatment for smaller banks: Banks with non-centrally cleared derivatives below the prescribed threshold may opt for a simplified approach linked to their counterparty credit risk capital requirement.
5) Basel alignment: The framework aligns India’s capital treatment of CVA risk more closely with international Basel standards.
6) Enhanced disclosures: Banks will be required to make dedicated Pillar 3 disclosures relating to CVA risk and CVA capital charges.
Takeaways:
The message from the RBI is clear: counterparty risk is no longer just about default. Banks should use the implementation period to reassess counterparty exposures, optimise hedging arrangements and evaluate the capital impact of their derivatives portfolios before the framework takes effect on 1st April 2027.
For further details, please see:
Reserve Bank of India (Commercial Banks – Credit Valuation Adjustment Framework) Directions, 2026
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