Question 1: Are all transactions with Central Counterparties excluded from the CVA capital calculation?
No, only transactions for which the direct counterparty is a qualifying CCP (QCCP) are excluded. Note that under the CCR Standard, the bank must have a determination of non-objection from the Central Bank with regard to any specific QCCP.

Question 2: Should debit valuation adjustment (DVA) be netted from CVA for the capital calculation?
No, DVA cannot be taken into account to reduce regulatory CVA for the capital calculation.

Question 3: What types of transactions can qualify as CVA hedges?
A CVA hedge can be any financial instrument or contract that refers specifically to the counterparty by name, and whose value increases when the credit quality of the counterparty being hedged deteriorates. However, the Standards does not permit "nth-to-default" credit derivatives (index or basket credit derivatives in which payment is made only on the event of the “nth” default by a reference entity in the basket, rather than the first default) to be used as CVA hedges.

Question 4: If a CDS serves as an eligible CVA hedge for one counterparty, does it also create counterparty exposure to the counterparty for the CDS?
Yes, a CDS or other hedging instrument used for CVA hedging also can create counterparty exposure, and in that case requires capital to cover the associated risks presented by that counterparty, including CVA. For example, if a bank has CVA exposure to counterparty A, and hedges that exposure by purchasing a credit default swap from counterparty B, the CVA charge for exposure to counterparty A may be reduced, but the bank now likely is exposed to CVA risk on counterparty B.

Question 5: For calculating the weighted average maturity, should we use the original deal notional values, or the effective notional values per the CCR standards?
Either approach is acceptable, provided the bank is consistent in its selected approach.

Question 6: If there is no valid netting set with a counterparty, how should average maturity be calculated?
Average maturity is calculated at the netting set level, for each netting set with each counterparty. If netting is not valid, then the “netting set” consists of a single transaction, which will have its own maturity per the contractual terms of the transaction. Without valid netting, there may be as many “netting sets” for a counterparty as there are derivative transactions with that counterparty.

Question 7: To compute weighted average maturity, we have conservatively treated each trade as a stand-alone netting set. Is this conservative treatment acceptable?
Yes, this treatment is acceptable.

Question 8: When calculating average maturity for a netting set, should we consider each asset class separately?
Maturity calculations for CVA must be calculated for each netting set, reflecting all covered transactions within a given netting set, regardless of asset class.

Question 9: If an entity has ratings from multiple rating agencies, which one should be used to determine the risk weight for CVA capital?
If there are ratings from two different rating agencies that map to different risk weights, the higher risk weight should be applied. If there are ratings from three or more rating agencies that map to different risk weights, the two ratings that correspond to the lowest risk weights should be referred to. If these two ratings give rise to the same risk weight, that risk weight should be applied. If the two are different, the higher of the two risk weights should be applied.

Question 10: If a counterparty is within a legal organizational structure that includes multiple entities with different ratings, which rating should be used for the CVA capital calculation?
The bank should use the rating for the entity that is actually obligated as a counterparty to the bank under the terms of the transactions within the applicable netting set.

Question 11: Is there any special CVA treatment for counterparties that have a zero risk weight for credit risk under the risk-based capital standards?
No, they are treated like all other counterparties (other than CCPs). Note that CVA risk is different from the more general type of credit risk treated under the risk-based standards. The risk weights in the CVA standards are intended to reflect credit spread risk, and generally differ from the risk weights used for other capital requirements. For all counterparties, apply the CVA risk weight that corresponds to the rating of the entity, or if unrated, apply the approach specified for unrated counterparties.

Question 12: We prefer to map unrated counterparties to CCC as a conservative treatment; is that acceptable, or must they be mapped to BBB?
The bank is free to apply a more conservative treatment to unrated counterparties, and should do so if it considers the more conservative treatment to be appropriate. However, the bank should be consistent in its approach, and should not apply this process in a way that might reduce exposure for the CVA calculation relative to the treatment stated in the standards.

Question 13: Should all SFT exposures be considered in scope for the CVA calculation, or only those that create gross SFT assets per the leverage ratio exposure measure? Will SFT exposures be classified separately for the computation of Credit RWAs in CAR computation?
All SFTs should be reflected in the CVA calculation, whether or not they create non-zero gross SFT asset values for the leverage ratio.

Credit risk capital for SFT exposures is addressed as part of the general credit risk standards for risk-based capital adequacy requirements.

Question 14: When determining exposure for SFTs, are haircuts to be applied to the fair value of the securities?
No, haircuts should not be applied – use the fair value without haircuts.

Question 15: Can the weighted average maturity for SFT exposures be based on the exposure amounts?
Yes, that approach is acceptable, provided it is applied consistently.

Question 16: Can we consider Global Master Repo Agreements signed with banks in the UAE as qualifying master netting agreements (MNA) for SFT exposure computation?
Banks should apply the requirements for valid netting agreements as stated in the Central Bank’s Standards for Counterparty Credit Risk to determine whether netting is valid in any particular case, rather than using broad categorical criteria.

Question 17: Will the Central Bank establish a specific quantitative materiality threshold to determine whether SFTs are in scope for CVA capital?
The Central Bank does not intend to establish a specific threshold, but instead will determine the materiality of CVA risk from SFTs on a case-by-case basis, taking into account all relevant factors that may affect the CVA risk posed by SFTs at each bank.

Question 18: The CVA guidelines require computation of single-name exposure (SNE), while the CCR Standards is based on hedging sets; different names may be included in the same hedging set. Does this create an inconsistency?
It does not. Note that the single “name” for CVA capital is the derivatives or SFT counterparty. It does not depend on any underlying reference names for credit derivatives or other transactions with a given counterparty. Suppose for example that a bank has two credit derivatives that depend on the performance of Company A and Company B (that is, those are the underlying reference names for the credit derivatives), and that the bank’s counterparty for both credit derivatives is another bank, Bank C. Under the CCR standards, assuming that the netting requirements are met, the two credit derivatives would be in a single hedging set within a netting set with Bank C. For calculation of CVA capital, the SNE would reflect the bank’s CCR exposure to the single “name” that is Bank C; neither the names nor the ratings of Company A or Company B enter the CVA calculation directly. The CVA risk-weight for the bank’s CVA capital calculation would depend on the credit rating of Bank C, not the ratings of either Company A or Company B.

Question 19: Should we multiply the sum of replacement cost and potential future exposure by the same 1.4 scaling factor used in the SA-CCR standards issued by Central Bank?
Yes, that is correct; the same multiplicative scaling factor of 1.4 should be used for the CVA calculation as well.

Question 20: Can banks used the Basic Approach for CVA (BA-CVA) recently published by the Basel Committee on Banking Supervision in December 2017?
Not at this time. The Central Bank may consider the BA-CVA at a later date.

Question 21: Bank ask in case of calculating discounted counterparty exposure is a double count and will inflate CVA Capital charge given SA-CCR EAD already factors in maturity adjustment while computing adjusted notional which is product of trade notional & supervisory duration?
The use of the discount factor in the CVA capital charge does not result in double counting. While there is superficial similarity between the supervisory duration (SD) adjustment in SA-CCR and the discount factor (DF) in CVA, they are actually capturing different aspects of risk exposure. The use of SD in SA-CCR adjusts the notional amount of the derivatives to reflect its sensitivity to changes in interest rates, since longer-term derivatives are more sensitive to rate changes than are shorter-term derivatives. In contrast, the use of DF in the CVA calculation reflects the fact that a bank is exposed to CVA risk not only during the first year of a derivative contract, but over the life of the contract; the DF term recognizes the present value of the exposure over the life of the contract. Thus, these two factors, although they have similar functional forms and therefore appear somewhat similar, are not in fact duplicative.

Question 22: Further elaboration on "equivalent hedging instrument that directly references the counterparty being hedged"?
This could be any instrument or contract that refers specifically to the counterparty by name, and whose value increases when the credit quality of the counterparty being hedged deteriorates.

However, it does not include "nth-to-default" credit derivatives.

Question 23: What if a Bank hold a CVA liability in our books, charged to P&L, once we have the additional capital requirement on CVA, will this liability be netted off against the CVA capital requirement, or an add back to the capital for this P&L charge will be incorporated?
Incurred CVA losses should be used to reduce EAD.