4.36 The PRA proposed to introduce a standardised approach for CVA (SA-CVA). Firms would require permission from their supervisors to use this approach. The SA-CVA methodology:

• relies on firm-computed CVA risk sensitivities to counterparty credit spreads and market risk factors, where these sensitivities estimate the movement of CVA risk due to changes in the value of each risk factor ('delta risk'), and changes in the volatility of each risk factor ('vega risk');

• recognises the hedging of both counterparty credit spread and market risk drivers of CVA risk; and

• specifies criteria for the use of substitute data for the calculation of the probability of default and expected loss given default, where spread data is not directly available (known as 'proxy credit spreads').

Treatment of financial counterparties

4.37 The SA-CVA methodology assigns exposures to sector buckets, aligned with broad industry classifications. Firms then apply different specified risk weights by sector and counterparty credit quality. The PRA proposed to aggregate risk positions into eight risk categories based on the sector of the counterparty. Financial counterparties would be allocated to one of two risk categories: one for financial and quasi-financial entities, and one for pension funds. The introduction of a pension fund category was a deviation from international standards introduced in the PRA's proposals to reflect the lower counterparty credit spread risk of transactions with pension funds. A similar adjusted approach for pension funds was included in the BA-CVA.