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28 February 2014

Deloitte commented on credit and debit valuation adjustments

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Deloitte has published its comment letter to the IVSC's Standards Board ED 'Credit and Debit Valuation Adjustments'. As auditors, Deloitte's primary interest was how this paper interacts with the fair value measurement requirements as set out in IFRSs and US GAAP.

The ED provides a reasonably well written summary of the approach of large financial institutions to Credit Valuation Adjustments (CVA)/Debit Valuation Adjustments (DVA), but the paper is not clear in what context this is relevant. As noted in the Scope and Purpose section of the exposure draft and under the headings “CVA and DVA in Financial Reporting” and “CVA and DVA in Regulatory Capital”, valuations may be undertaken for a variety of purposes and valuations performed for each purpose may justifiably be different. For example, regulatory reporting may require prudential adjustments that would not be included in a valuation for financial reporting purposes. To the extent that these objectives differ and are not clearly acknowledged in describing a methodology that might be applied this could lead to confusion.

Deloitte believes that any guidance that is issued by the IVSC should clearly state the valuation objective and that this objective should be valuation for financial reporting purposes, whilst acknowledging that valuation for other purposes exist, e.g  those for risk management and regulatory reporting, and may result in the application of different valuation approaches.

Deloitte also questions who will be the primary beneficiary of a finalised paper. Deloitte´s experience is that large financial institutions have complex and well developed approaches to calculating CVA and DVA because of their large derivatives portfolios and therefore the paper will be of limited use to them. For those large financial institutions the debate has moved onto whether entity specific funding costs drive derivative pricing and therefore whether and how should it be included as a Funding Value Adjustments (FVA) in determining fair valuations for various purposes.

Full comment letter

© Deloitte LLP

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