Since the crisis, different adjustments are needed to account for counterparty risk and funding costs in the risk management of OTC derivatives, notably credit valuation adjustment (CVA), debt valuation adjustment (DVA) and funding valuation adjustment (FVA). These adjustments, which are, to some extent, interdependent and must be computed jointly, count today among the main P&L centers of investment banks. They touch on many areas: modeling, computation, pricing, risk management, regulation, economics, legal, lobbying, politics, often in conflicting perspectives. Banks have to cope simultaneously with economic risk, accounting P&L and regulatory capital con¬siderations. The current trend of the regulation is to push participants to negotiate centrally via clearing houses or to bring strong guarantees in terms of collateralization. But this evolution poses liquidity and systemic risks issues.

Stéphane Crépey

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