Daily Archives: May 21, 2014

S&P : Funding Valuation Adjustments (FVA) May Represent A Continued Evolution In Fair Value Measurement For Derivatives

Several large global banks–including J.P. Morgan and Deutsche Bank–reported sizable charges to earnings in the fourth quarter of 2013 because of implementing a FVA framework for over-the-counter derivatives and structured notes. The charges ($1.5 billion and €364 million–or $501million–for JP Morgan and Deutsche, respectively) reflect a general migration by large global banks to incorporate the cost or benefit of unsecured funding into derivative valuations. Pre-financial crisis, derivative assets and liabilities were often valued with either minor or no adjustments for default risk, collateral cash flows, liquidity risk, funding costs, and other factors. Post-financial crisis, these costs have become more pronounced and industry practice has changed to take many of these factors into account. In our view, improved quantitative and qualitative disclosures are warranted to better enable analysis.

Read full report here : Funding Valuation Adjustments (FVA) May Represent A Continued Evolution In Fair Value Measurement For Derivatives