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Raeburn blogged a couple of months ago about the future of the CVA exemption within CRD IV/CRR – the EU implementation of Basel III (view blog). He was flagging concern about the attitude of the large US banks and the pressure being exerted by them on their trade association (SIFMA), on the US Treasury and through both these channels on the BIS.
He wrote in the name of the EACT to JPMorgan seeking reassurances that the bank was not seeking to “kill” the CVA exemption (read his letter here and the reply from the bank here).
Whatever the pressure from the US banks there are undoubtedly reasons to worry about the future of the CVA exemption. Buying into the theory that smoke is generally linked with fire, we hear stories suggesting that central bankers in a number of key countries are unhappy with the [favourable] treatment of uncollateralised bilateral derivative contracts. It seems an age ago that we were making the arguments about focusing on systemic risk and encouraging regulators to recognise that non financial companies do not of themselves create systemic risk within the financial system. Maybe we need to promote the same debate one more time.
More encouragingly, Raeburn says he understands that Brussels is ‘solid’ on the CVA exemption, even if it never had the support of the European Commission. Equally clearly there are good grounds for believing that pressure on Europe from the US (through Basel) will fall on barren ground. Such pressure would be seen in the context of the apparently large area of disagreement (outing this politely) that exists between Washington and Brussels on the next but crucial issues around extraterritoriality and global consistency in derivatives regulation.
So the real risk for the CVA exemption must be that the central bank community seeks to impose a purist implementation of Basel III. Watch for signs of fire and not just smoke.