Event Date Details:
Refreshments served at 3:15 p.m.
- South Hall 5607F
Stéphane Crépey — Evry University
Title: Central Clearing Valuation Adjustment
Abstract: We develop an XVA (costs) 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 cash-flows involved in the waterfall of resources of a clearinghouse (CCP for short, or central counterparty). The total cost of the clearance framework for a member of the clearinghouse, called CCVA for central clearing valuation adjustment, is decomposed into a credit valuation adjustment (CVA) corresponding to the cost of its losses on the default fund in case of defaults of other members, a margin valuation adjustment (MVA) corresponding to the cost of funding its margins and a capital valuation adjustment (KVA) corresponding to the cost of the capital it implicitly provides to the CCP through its default fund contribution. This framework can be used by a CCP to assess the right balance between initial margins and default fund in order to minimize the CCVA of its members, hence optimize its costs for a given level of resilience. A CCP 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 its 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.