February 25, 2020

Secretariat of the Basel Committee on Banking Supervision
Bank for International Settlements
CH-4002 Basel, Switzerland
Japanese Bankers Association

JBA Comments on the BCBS Consultative Document: Credit Valuation Adjustment
risk: targeted final revisions
Dear Basel Committee members:
The Japanese Bankers Association (the JBA) 1 appreciates the opportunity to provide comments on the BaselCommittee on Banking Supervision’s (the BCBS) Consultative Document “Credit Valuation Adjustment risk:targeted final revisions” (the Proposal).
In general, the JBA supports the Proposal as it brings material improvements over the CVA risk framework in theBasel III standards finalized in December 2017 2 by ensuring consistency between the CVA risk framework and themarket risk framework finalized in January 2019. The JBA, however, believes that there remain several requirementsthat need further consideration to establish a better balanced framework in a manner consistent with other Basel III
requirements.
The following sections provide the details of our comments.

1. Consistency with the market risk framework
While the proposal largely ensures consistency between the CVA risk framework and market risk framework, thefollowing two points remain inconsistent. It is recommended to provide greater harmonization between the twoframeworks.
(i) Base currency approach for FX delta risks (¶50.59)-When the base currency approach was introduced in “Calculation of RWA for market risk,” 3 the JBA
understands the BCBS’ intention was to align the currency used to calculate risk-weighted assets to thefunctional currency of the reporting bank, in order to reduce operational burdens, specifically aggregating FX
data of currency pairs between a currency and the reporting currency even when the reporting currency is not
the functional currency of the reporting bank.

-Given that the same operational challenge happens in the calculation of CVA risk-weighted assets, the JBA
believes that it is reasonable to introduce the same approach to the CVA risk framework, taking a consistent
approach between the market risk framework and CVA risk framework.

(ii) Currency bucket for FX vega risks (¶50.59)-As is the case with the issue described above, consistency with the market risk framework should be consideredfor FX vega risks. In regard to the FX delta risks, MAR 21.14 of the market risk framework provides detailed

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The Japanese Bankers Association (JBA) is a premier financial organization whose members consist of banks, bank holding companies and bankersassociations in Japan. As of January 1st, 2020, JBA has 117 Full Members (banks), 3 Bank Holding Company Members (bank holding companies), 74
Associate Members (banks & bank holding company), 58 Special Members (regionally-based bankers associations) and 1 Sub-Associate Member for a
total of 253 members.

2 “Consolidated Basel Framework”: https://www.bis.org/basel_framework/index.htm
3 MAR 21.14 of “Consolidated Basel Framework”

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provisions on the method to split the bucket in terms of reference currencies, which is explicit and clear. On theother hand, the provision for FX vega risks in MAR 21.14 is simple compared with the explanation for deltarisks; it just states “the FX vega risk factors are the implied volatilities of options that reference exchange rates
between currency pairs.” It can be understood that this provision does not necessarily require splitting the bucketin terms of reference currencies, in consideration of a concern that it may be difficult, in particular for non-USD
reporting banks, to calculate precise FX volatilities for all pairs between the reporting currency and anothercurrency because of significant operational burdens.
-For instance, the following undue burdens would arise if it were to be required to split the bucket in terms ofcurrency pairs for vega risks.
(a) Consider the case where a bank whose reporting currency is JPY and functional currency is USD, has FX
swap transactions of USD/JPY and USD/BRL but has no transaction of the JPY/BRL pair. In this case, if
the bank is required to split the bucket, it has to calculate the vega risks of the JPY/BRL pair just because
JPY is the reporting currency of the bank.
(b) It causes significant operational burdens for this non-USD reporting bank, because it is impossible for it tocalculate the vega risks of the JPY/BRL pair from the vega risks of the other two pairs above due to thenonlinear characteristics of vega risks, even if the vega risks of both the USD/JPY and the USD/BRL pairs
are known.

-In the Proposal, however, the provision regarding vega risks 4 requires banks to split the bucket per currency
pairs as it has not been amended from the finalized Basel III standards. In light of the facts above and the BCBS’
objective of promoting consistency between the market risk framework and the CVA risk framework, the BCBS
should not require banks to split the bucket in terms of currency pairs regarding vega risks. The wording “must”
in paragraph 50.59 of the Proposal should be replaced with “may” to allow discretion to jurisdictional regulatorsor reporting banks.

2. CDS swaptions as eligible hedge (¶50.18)-One of the objectives of the revision to the CVA framework published in July 2015 is to “capture all CVA risks
and better recognition of CVA hedges.” However, CDS swaptions were dropped from eligible hedge instrumentsin the revision, while it can be recognized as eligible hedge instruments under the current Basel framework(Basel 2.5) 5.

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CDS swaptions are just options for selling/buying CDSs and these lead similar hedging functions as CDSs.
Therefore, the JBA recommends again that the provision which allows banks to recognize CDS swaptions as
eligible hedge should be included in the final Basel framework, considering the objective of the revision of theCVA framework and continuity from the current regulation.

3. Technical issues to be clarified(i) CVA hedge through an internal trading desk (¶50.11)-In the case where a CVA Desk (Desk 1) has a CVA hedge transaction through an internal trading desk (Desk2), there is an ambiguity as to which party (i.e. Desk 2 or the External Counterparty) would be the appropriate
target of CVA risk measurement of Desk 1.
CVA Desk (Desk 1)

Internal Trading Desk (Desk2)

External Counterparty

Hedge transaction through Desk 2

4 “For FX delta and vega risks, buckets must be set per individual currencies...” in paragraph 50.59 of the Proposal.
5 According to the Consolidated Basel framework, MAR 50.13, FAQ2, “A CDS swaption can be considered as an equivalent hedging instrument, andtherefore CDS swaptions are eligible hedge instruments, in both single-name and index CDS cases…”

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(ii) Cross-bucket correlation of the equity delta and vega risks (¶50.71)-Although bucket numbers 12 and 13 are added in Table 11 “Buckets for equity risk,” cross-bucket correlationγbc for bucket number 12 (Large cap, advanced economies) and 13(Other) is not described in the Proposal.
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