Use of ‘Internal CVA model’ for the calculation of the maturity factor ‘M’

2.1This section sets out the PRA’s expectations for granting a firm permission to use its own one-sided credit valuation adjustment internal models (an ‘Internal CVA model’) for the purpose of estimating the Maturity factor ‘M’ in accordance with CRR Article 162(2A)(h) of the Credit Risk: Internal Ratings Based Approach (CRR) Part.

2.2 The Maturity factor ‘M’ is intended to increase own funds requirements to reflect higher risks associated with medium and long-term over the counter (OTC) derivative portfolios where the exposure profile of contracts extends beyond one year. The adjustment is only applicable to firms using the Internal Model Method (IMM) for the calculation of exposure values.

2.3Subject to permission being granted by the PRA, firms may replace the formula for the Maturity factor ‘M’, as set out in CRR Article 162(2A)(g) of the Credit Risk: Internal Ratings Based Approach (CRR) Part, with the ‘effective credit duration’ derived from the firm’s Internal CVA model.

2.4 Internal CVA models are complex by nature and modelling practices vary significantly across the industry. The PRA considers the creation of an acceptable model resulting in an appropriate credit duration to be challenging. Accordingly, the PRA expects firms to demonstrate a strong case for permission to be granted.