Powerful, multifaceted … and continuously evolving
xVA – the term used to describe the family of value adjustments now vital in derivatives pricing – is a powerful tool, enabling Financial Institutions (FIs) to allocate specific costs to trades and positions with considerable accuracy, and promoting better portfolio management. Although FIs’ front-office systems have had to transform to accommodate it, it has proved so successful that xVA desks are now a necessity in almost all trading institutions.
But to handle the volume of calculations and data xVA requires, FIs need computational muscle that meets specific technology and system requirements. Consequently, xVA-related technology has shifted toward more powerful hardware and software and, increasingly, innovative analytical methods.
xVA continues to develop: a fluid evolution that includes changes in the structure of the xVA/sales desk, the divergence between accounting and regulatory standards, and standardization – all of which will affect how FIs and vendors approach xVA. As they look for the best opportunities in this space, vendors must be aware of FIs’ different approaches to incorporating xVA into their workflow and organizational structure.
In this report we give an overview of xVA – what it is, why it is useful, and how FIs can ensure they implement and use it effectively. By necessity this is a simplified view of what is a highly technical subject; in our forthcoming research we will explore the technical aspects of xVA in more detail.