The RBI on Friday announced a proposal to make the Credit Valuation Adjustment (CVA) framework more risk‑sensitive and consistent. The changes aim to help banks better manage the risk of counterparty default in derivative trading.
CVA risk refers to potential losses that arise when the value of a derivative changes due to shifts in counterparty credit spreads and other market factors. It is a key measure of the credit exposure that banks face.
To protect against these risks, banks are required to hold a CVA capital charge. This charge ensures that banks keep enough capital to cover possible losses from changes in CVA values.
The current CVA rules were issued by the RBI in 2011 and were based on the Basel Committee on Banking Supervision (BCBS) standards from 2010. BCBS has since updated its guidelines under the final Basel III framework.
Under the new draft, the RBI will issue revised instructions that allow banks to adopt the Basic Approach for CVA (BA‑CVA). Banks can choose either the full or a reduced version of this approach.
If a bank’s non‑centrally cleared derivatives volume is very small, it can calculate its CVA capital charge as 100 % of its counterparty credit risk (CCR) capital charge, following BCBS guidance.
The proposal also makes it easier for banks to use a simpler method and clarifies when CVA hedges are eligible. It increases the sensitivity of supervisory risk weights for counterparties, taking into account sector and credit quality.
The draft states that a bank must use BA‑CVA for computing its CVA capital charge. However, if the bank’s total notional amount of non‑centrally cleared derivatives is Rs 10 lakh crore or less, it can opt out of the BA‑CVA calculation and choose an alternative treatment.
The RBI has opened the draft to comments from regulated entities, market participants and other stakeholders. The comment period runs until 28 August 2026.
These changes aim to bring India’s CVA framework in line with global Basel III standards and to improve the overall management of counterparty risk by Indian banks.