We develop an XVA analysis of centrally cleared trading, parallel to the one that has been developed in the last years for bilateral transactions. A dynamic framework incorporates the sequence of the cash-flows involved in the waterfall of resources of the CCP . The total cost of the clearance framework for a member of the clearinghouse , called CCVA for central clearing valuation adjustment, is decomposed into a nonstandard CVA corresponding to the cost of the losses on the default fund in case of defaults of other members, an FVA corresponding to the cost of funding its position (including all the margins ) and a KVA corresponding to the cost of regulatory capital (and for completeness we also incorporate a DVA term). This framework can be used by a clearinghouse to assess the right balance between initial margins and default fund in order to minimize the CCVA, hence optimize its costs for a given level of resilience. A clearinghouse can also use it to analyze the benefit for a dealer to trade centrally as a member, rather than on a bilateral basis, or to help clearing members risk manage their CCVA. The potential netting benefit of central clearing and the impact of the credit risk of the members are illustrated numerically .
This paper develops an XVA (costs) analysis of centrally cleared trading, parallel to the one that has been developed in the last years for bilateral transactions. We introduce a dynamic framework that incorporates the sequence of cash-flows involved in the waterfall of resources of a clearing house . The total cost of the clearance framework for a clearing member , called CCVA for central clearing valuation adjustment, is decomposed into a CVA corresponding to the cost of its losses on the default fund in case of defaults of other member, an MVA corresponding to the cost of funding its margins and a KVA corresponding to the cost of the regulatory capital and also of the capital at risk that the member implicitly provides to the CCP through its default fund contribution. In the end the structure of the XVA equations for bilateral and cleared portfolios is similar, but the input data to these equations are not the same, reflecting different financial network structures. The resulting XVA numbers differ, but, interestingly enough, they become comparable after scaling by a suitable netting ratio .
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We develop an XVA
This paper develops an XVA (costs)
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A dynamic framework
We introduce a dynamic framework that
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the CCP
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member of the clearinghouse
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nonstandard
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members, an FVA
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position (including all the margins )
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regulatory capital (and for completeness we also incorporate a DVA term). This framework can be used by a clearinghouse to assess the right balance between initial margins and default fund in order to minimize the CCVA, hence optimize its costs for a given level of resilience. A clearinghouse can also use it to analyze the benefit for a dealer to trade centrally as a member, rather than on a bilateral basis, or to help clearing members risk manage their CCVA. The potential netting benefit of central clearing and the impact of the credit risk of the members are illustrated numerically
the regulatory capital and also of the capital at risk that the member implicitly provides to the CCP through its default fund contribution. In the end the structure of the XVA equations for bilateral and cleared portfolios is similar, but the input data to these equations are not the same, reflecting different financial network structures. The resulting XVA numbers differ, but, interestingly enough, they become comparable after scaling by a suitable netting ratio