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An inevitable consequence
of the exponential growth of the OTC derivatives market has been the
emergence of credit capacity constraints, an increase in the volatility
of the Credit Valuation Adjustment (“CVA”) held against
CCR, and an escalation in the regulatory capital cost of retaining
CCR.
Credit availability is becoming increasingly constrained as retained
CCR crowds out new business opportunities. This is particularly acute
where customers are reluctant or prohibited from entering into margin
arrangements or where netting benefits are negligible. Furthermore,
changes in U.S. GAAP and IAS accounting rules requiring the use of
market inputs in the determination of CVA has dramatically increased
earnings volatility in firms that retain large or concentrated inventories
of CCR during periods of market disruption.
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