What is SA-CVA (Standardized Approach CVA) under Basel III?

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AcadiFi · Accepted Answer

SA-CVA is the standardized approach for calculating regulatory CVA capital, finalized in the Basel III reform package (BCBS d507) and becoming effective in most jurisdictions 2024-2026. Banks must have supervisory approval to use SA-CVA; otherwise they default to BA-CVA.

SA-CVA treats CVA like a traded market risk portfolio and requires banks to compute sensitivities to defined risk factors, then aggregate using supervisor-defined correlation parameters.

Six risk buckets:

1. Interest rate risk — delta and vega sensitivities across tenors and currencies
2. Foreign exchange risk — delta and vega
3. Reference credit spread risk — delta to counterparty and hedge CDS spreads
4. Equity risk — delta and vega
5. Commodity risk — delta and vega
6. Counterparty credit spread risk — separate bucket for WWR-exposed positions

**Capital calculation**:

CVA capital = m_CVA × √(Σ K_b^2 + Σ Σ ρ_bc × K_b × K_c)

Where K_b is the per-bucket capital charge, ρ_bc are cross-bucket correlations, and m_CVA = 1.25 (multiplier).

**Key differences from the old CVA framework (BA-CVA was IMA-CVA)**:
- Recognizes both credit and market risk hedges
- Includes vega and curvature risk
- Requires daily calculation of sensitivities
- Higher operational burden but better risk capture

Example: A mid-sized bank with $500M CVA notional might calculate:
- IR delta K = $180M
- FX delta K = $90M
- Credit spread K = $320M
- Aggregate with correlations ≈ $420M
- × 1.25 multiplier = $525M CVA capital

For FRM Part II, know that SA-CVA replaces the CCR capital charge on derivatives (not the EAD calculation — EAD still uses SA-CCR). SA-CVA and SA-CCR together form the Basel III CCR framework.

What is SA-CVA (Standardized Approach CVA) under Basel III?

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