Changes in CSA parameters drive valuation changes of OTC derivatives in a number of intricate and complex ways. Understanding the CSA-specific value drivers of their OTC portfolio has become a competitive advantage for Dealer banks and other Financial Institutions, such as fund managers, in the recent past e.g. when moving from one-way to two-way CSAs or when negotiating the removal of CSA floors with their counterparties due to recent negative interest rate environments.

The imminent replacement of benchmark rates (IBOR replacement) makes it paramount to understand the financial impact of contractual changes in CSAs: Many derivatives dealers will insist on renegotiating the existing CSAs in an effort to standardize them and get rid of legacy features, or lock in spreads for collateral interest rates and/or discounting rates.

Fair value changes resulting from contractual renegotiations, are likely to be in the order of millions of dollars for portfolios of a reasonable size. Therefore, understanding the value drivers of CSA valuation is not just sound business practice, but a key competitive advantage during renegotiations.

With the CSA Valuation Service, AcadiaSoft in partnership with Quaternion Risk Management supports its clients in understanding how key valuation metrics shift due changes in CSAs and what this means for their business. In particular we calculate or validate the calculation of changes of key metrics such as netting set valuations, expected positive and negative exposure, CVA, DVA, and ColVA as well as more advanced valuation adjustments such as Funding Value Adjustments (FVA), Capital Value Adjustments (KVA) and Margin Value Adjustments (MVA). We also advise our clients during ensuing negotiations of compensation payments with their counterparties and offer support with further scenario or what-if analyses.

AcadiaSoft has partnered with Quaternion Risk Management since they are recognized leaders in the theory and application of derivative valuation and has a specific track record in supporting international clients in their CSA restructuring projects. With our combined experience and technology, we can quickly help firms identify the true value drivers and calculate the fair value of CSA changes. This helps to save valuable resources and reduce the effort otherwise spent on the development of bespoke complex methodologies and in-house processes.

Read more on our dedicated factsheet.

Download Factsheet

You can also learn more by watching our CSA related webinars:

IBOR Transition - What is the financial impact on CSAs?

Identifying the financial impacts of IBOR on your CSAs - Workshop