Credit valuation adjustment exemptions

4.9 The PRA proposed that CVA capital requirements would be calculated by all firms undertaking covered transactions in both the non-trading book and trading book. Covered transactions included:

• over-the-counter (OTC) derivatives that are not cleared with a qualifying central counterparty, or that are not client clearing transactions; and

• securities financing transactions (SFTs) that are fair-valued by a firm for accounting purposes and where CVA risk arising from these transactions is material, in accordance with supervisory statement (SS) 12/13 - Counterparty credit risk.

4.10 Following a holistic review of capital requirements for derivatives under the CVA and CCR capital frameworks, the PRA proposed to remove existing exemptions from CVA capital requirements for transactions with sovereigns, non-financial corporates, and pension funds. The PRA proposed to retain the CVA exemption for transactions associated with client clearing. The PRA also proposed to introduce a new, firm-specific approach to exempt intragroup exposures from CVA capital requirements, subject to firms meeting certain risk management requirements.

4.11 The PRA received seven responses on the proposal to include transactions with currently exempted counterparties within the scope of CVA risk capital requirements. Respondents generally did not dispute that the CVA risk from such transactions is non-zero, but raised a number of concerns related to the impact of the proposal: