Central Clearing Valuation Adjustment

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Authors Yannick Armenti, Stéphane Crépey
Journal/Conference Name SIAM Journal on Financial Mathematics
Paper Category
Paper Abstract We develop an XVA (costs) analysis of the clearance framework for a member of a clearing house. The systemic consequences of the default of the clearing house itself are outside the scope of such an XVA analysis. Hence the clearing house is assumed default-free. We introduce a dynamic framework that incorporates the sequence of cash flows involved in the waterfall of resources of a clearing house. The overall XVA cost for a member, dubbed CCVA for central clearing valuation adjustment, is decomposed into CVA, MVA and KVA components. The CVA is the cost for a member of its losses on the default fund due to the defaults of other members. The MVA is the cost of funding initial margin. The KVA mainly consists in the cost of the capital at risk that the member provides to the CCP through its default fund contribution. In the end the structure of the XVA equations for bilateral and cleared portfolios is similar, but the data of the equations are of course not the same, reflecting the different financial network structures. The numerical experiments emphasize the multilateral netting benefit of central clearing. However, it is known that this multilateral netting comes at the expense of a loss of netting across asset classes. If we compensate the first order multilateral netting effect by a suitable scaling factor accounting for the loss of netting across asset classes, then the bilateral and centrally cleared XVA numbers become comparable. The second more explanatory factor of the numerical results is the credit risk of the members and the ensuing MVA, especially in the bilateral setup, where even more initial margin is required.
Date of publication 2017
Code Programming Language Jupyter Notebook
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