Markit has combined its credit valuation adjustment (CVA) and regulatory capital solutions on one platform with a view to helping banks reduce the costs and overheads of meeting Basel III capital requirements.
The Markit Analytics CVA & Capital platform integrates the management of CVA and internal model capital, allowing users to meet Basel III regulatory requirements and undercut the cost of multiple systems by using a unified simulation engine to calculate CVA and funding value adjustment, as well as internal model capital for CVA, counterparty credit risk and market risk.
Paul Jones, director at Markit Analytics, explains: “Basel III adds the CVA value at risk measure as a new charge to capitalise mark-to-market losses on CVA. Banks want to calculate CVA, the CVA capital charges and other internal model capital charges in a single system without the need to use and validate conservative approximations. They also have to manage their return on equity alongside their CVA profit and loss so they need the ability to allocate capital back to the individual parts of the business. With many banks looking at total cost of ownership, cost savings can be made by using one platform rather than a number of risk engines to calculate capital charges. Using Markit’s CVA & Capital platform the inputs are the same, there is no major migration effort and one set of data improves the validation of calculations.”
Jones says customers have been asking for an integrated CVA and capital solution to replace in-house or vendor solutions focused purely on either risk or CVA. “Banks expect a vendor to be able to provide both the accuracy required for CVA and the performance required for risk and capital in a single system. Better product coverage makes risk measures more sensitive and risk management easier by avoiding approximations. Basel III was designed to increase capital levels across the financial system, but banks are focussed on risk-weighted assets contributions within their trading book and effective risk analytics systems can help this,” says Jones.
Some Markit customers are already implementing the integrated enterprise solution in readiness for the introduction of Basel III next year. Markit, meantime, continues to build on its 2007 entry into the CVA solutions market with plans to add management of limits, such as credit limits, to the CVA & Capital platform.