International accounting standard IFRS 13 requires the reporting of CVA and debit value adjustment (DVA) when determining the fair value of OTC derivatives. Auditors and regulators are now increasing scrutiny of the accuracy and robustness of CVA and DVA calculation assumptions, methodologies and input market data.
Simplified, present value-based approaches and historically estimated default probabilities are not consistent with IFRS 13 principles.
Current industry best practices recommend simulation-based approaches and market-implied default probabilities from counterparty CDS curves.
Markit offers a hosted, end-to-end CVA calculation solution. It encompasses market data sourcing, cleaning and storage as well as the estimation of market-implied credit curves for illiquid counterparties, an analytics library of calibrated pricing models and a risk simulation engine. Flexible workflow and configuration tools allow for customisation to specific requirements.