LVA, FVA, CVA, DVA impacts on derivatives management Christophe MICHEL Head of RCCAD Quantitative Research AFGAP-PRMIA April 5th 2012

LVA, FVA, CVA, DVA impacts on derivatives management

Christophe MICHELHead of RCCAD Quantitative Research

AFGAP-PRMIA April 5th 2012

Contents02 Introduction to LVA

13 Introduction to CVA

19 Impact of CSA on CVA

26 A New Pricing Framework

31 Centralized Risk Management

Introduction to LVA

4Pricing principle

Discounting Forecasted Flows

To make a long story short, pricing is a question of forecasting future fixed, floating or conditional flows in a given currency and discounting them consistently with a funding level in this currency (in order to avoid arbitrage opportunities).

For a single flow we can formally write:

Collateral Impact

In case of collateral agreement, additional flows are to be taken into account in the valuation process.

Indeed, to be posted a collateral has to be funded and remunerated with the funding rate, on the other hand, the collateral posted is remunerated with a given collateral rate described within the collateral agreement.

The additional flows are all differentials of interest generated by the difference between funding and collateral rates applied to the collateral amount posted.

These additional flows have to be funded and their price is straightforward as soon as we know their forecasted value.

tff

t FTtBV ,Time t value of the future flowin a given currency

Time t forecasted value of the future flow in the given currency

Time t value of a unit of currency paid at TAccording to a funding level

5Valuation of Collateral Impact

Collateral Impact Value: an Implicit Problem

Coming back on the case of a single flow, additional flows linked to a collateral agreement depend upon the collateral amount paid at each period:

In general, the collateral amount to be posted is directly deduced from the value of the collateralized derivative i.e. including additional interest flows, say Vc, which is different from the value of the unsecured derivative (Vf).

Hence, the value of a collateralized derivative depends upon this value: we’re facing an implicit problem.

3333 trtrtC cf

Future derivative valueCollateral-linked flow paid at t4 equal to

the differential of interest of collateralRemuneration posted at t3 :

t0t1 t2

t3 t4

t5 t6

6Valuation of Collateral Impact: the Standard Case

Collateral Impact Value: the Special Case of Bilateral Contracts

In case of bilateral collateral agreement, we have:

In this special case, under model assumptions, one can show that the price of a collateralised contract is obtained by discounting with the collateral remuneration rate instead of the funding rate.

For a single flow, we can formally write:

Note that in this case, the value of the collateralized contract doesn’t depend any more upon the funding rate.

Note also that if a given derivative pays flows in a given currency but is collateralized in another currency then its collateralized value will depend upon FX-Term Changes.

ctVtC

tcc

t FTtBV ,Time t value of the future flow in a given Currency including collateral

additionaml flows

Time t forecasted value of the future flow in the given currency

Time t value of a unit of currency paid at Taccording to the collateral remuneration rate

7Valuation of Collateral Impact: the General Case

General Collateral

Many other possibilities exist in practice. For instance the unilateral collateral agreement can be written as follows:

In this case, the collateral impact remains implicit but cannot be explicitly solved like in the standard case.

Pricing Method

To treat the general case, one has to solve a high dimensional optimal control problem.

This is generally not do-able in practice but it is well approximated by Monte Carlo simulation methodMarket data are diffused on simulated paths

On each node of the simulation the Mark-to-Market of each product included in the collateral agreement are approximated

The collateral amount to be posted on each node can then be deduced

Additional flows resulting from collateral agreement can then be evaluated on each node

The average of their present value approximate the LVA impact

Note that the collateral impact crucially depends upon the global portfolio within the collateral contract and cannot be treated on a stand alone basis. A contribution to the global adjustment can be computed.

else 0

positive is portfolio izedcollateral theof MtM theif ctV

tC

8.

Pre-crisis

Bor rates were market convention for discounting all trades, independently on the counterparty, CSA, etc…

Implicit assumptionsIf the counterparty was uncollateralised, CA-CIB could lend/borrow (unsecured) @ Bor flat

If the counterparty was collateralised, it meant the interest paid on the collateral posted/received was Bor (which is consistent with interest - mainly OIS as defined in the CSA)

Historically

Access to liquidity was taken as granted

Basis were tight

The IR pricing framework was a SINGLE CURVE one based on -Bor.

Before the crisis

1%

2%

3%

4%

5%

6%

2000 2001 2002 2003 2004 2005 2006 2007

Eonia

3m Euribor

6m Euribor

Source: Bloomberg

EONIA, 3m Euribor 6m Euribor: historical values*

These assumptions were verified

9

.

During and post crisis

Liquidity crisis

Drying up of lending/borrowing between banks

Creditworthiness of banks questioned

Pre-crisis funding assumptions no longer hold

Unsecured funding much more expensive

Interest paid on collateral (usually OIS) significantly diverged from Bor rates

During and post crisis

3M EONIA/Euribor spread (LHS)5Y 3m EONIA/Euribor basis (LHS)5Y 3m/6m Euribor basis (RHS)

0%

1%

2%

3%

4%

5%

6%

2007 2008 2009 2010 2011 2012 2013

Eonia 3m Euribor 6m Euribor

EONIA, 3m Euribor 6m Euribor: historical values*

-50

0

50

100

150

200

2007 2008 2009 2010 2011 2012 2013

0

5

10

15

20

25

10Growing importance of Credit Support Annex (CSA)

Liquidity & credit risk issues are more and more actively managed by banks.

The main trend is a clear shift towards growing use of CSA as collateralization remains among the most widely used methods to mitigate counterparty credit risk in the OTC derivatives market.

Growth of collateral agreements

Source: ISDA Margin Survey 2011

Growth of value of total collateral (USD billions)

11Credit Support Annex (1/3)

Each CSA determines the collateralization terms between counterparties: bilateral or unilateral, type of collateral, currency, haircut, threshold, minimum transfer amount and all other details are stipulated in the CSA. The amount of margin posted and the margin interest – and consequently the valuation of the structure – will depend on the CSA terms.

CSA determines the range of assets that may be posted as a collateral – cash in different currencies, government bonds or corporate or mortgage backed securities

The choice of collateral currency will alter the expected return as the cash funding terms are tied to the corresponding currency’s overnight rate (need of cross currency swap if the collateral currency is not the same as the deal currency)

For cash-only CSA’s, the funding curve corresponds to the specified collateral interest rate

PV

-

+

Bank posts collateral and receives interest

Counterparty posts collateral and receives interest

The threshold level will determine how much of the exposure is collateralized. Margin transfers will be made only if the minimum transfer amount is exceeded.

Bilateral CSA collateral profile


Margin transfer form

Unilateral – only one way transfers – CA CIB posts a collateral but the counterparty dos not (required by some supranational entities )

Bilateral – symmetric transfer terms

Margin call frequency

Daily margin call is frequency required (becoming a market standard). Longer than daily margin call frequency can be practical for markets and assets that are not volatile

Threshold

This is the exposure amount below which collateral is not required (the threshold represents an amount of uncollateralized exposure). A threshold of zero implies that any exposure is collateralized

Minimum transfer amount

The smallest amount of collateral that can be transferred.

It is used to avoid the workload associated with a frequent transfer of insignificant amounts of collateral

Description of the CSA


What is a standard CSA ? Pay attention to the detail when negotiating CSA terms

Bilateral margin transfer form: symmetric transfer terms for both parties

Daily margin call frequency (weekly can be also accepted as standard)

No threshold – up to 5M threshold is considered as reasonable

Cash and G7 bonds (haircuts – 0%-2% on short term maturities and 5-10% on longer term maturities)

In EUR or in USD, remunerated at EONIA FLAT or Fed Funds FLAT

Standard CSA terms Non standard agreements

No CSA

Unilateral CSA (can be unilateral in our favour; often supranational institutions require an unilateral CSA in their favour)

CSA with very high threshold – 50-100M threshold will impact pricing

CSA with rating triggers (example: CA-CIB needed to post an independent amount to EIB due to the S&P rating action)

Sub-optimal CSAs – negative spreads on cash collateral, securities received that can’t be re-hypothecated

Introduction to CVA

15CVA Basics – Definition

To be or not to be paid ?

The Credit Value Adjustment appears in the pricing framework when a credit risk is taken into account.

Formally, one can explicit this risk by multiplying each payment flow by the following function:

In case of a counterparty default at time T, the key question is to measure the exposure.

A priori, the exposure is the sum of all positive mark to market of each transaction remaining at time T with this counterparty.

In case of netting agreement with the counterparty, the exposure becomes the sum of all netted positive mark to market of each set of transactions within each netting agreement contract.

A classical formula

A classical CVA formula can be expressed as the amount of discounted future Expected Losses

allat paidt isn' flow theif 0

at paidactually is flow theif 1 becomes at paid flow a

TFTF TT

Maturity

ttttt DFEPEPDLGDCVA

0,1 * * *

Loss Given Default Default Probability Exposure at Default (Discounted)

16CVA Basics – Key Ingredients

Expected Positive Exposure (EPE)

Calculated via simulations process (Monte Carlo…)

Computation including netting and collateral agreements

Involves only the Positive Exposures in case of Counterparty Default

Definition of Exposure linked to the mark to market of transaction

Evaluated Contingent on the default of the counterparty– including right way / wrong way risks

CSA or break clause have a huge impact on EPE

Default Probability

Implied from CDS spreads (market-implied) or,

Historical default probabilities

Loss Given Default / Recovery Rate

Market Implied (where possible) : LGDMarket

Internal Recovery measure : LGDInternal

Market CDS Curve

17CVA Basics – Key Ingredients

Risk parameters:

Peak Exposure: Maximum of the MtM of the transaction over its lifespan, given a high confidence level (VaR 95%)

Loan Equivalent: Average EPE over time (measure to determine risk equivalent in terms of loan for economic capital calculation)

Tail Credit Risk (CVaR): average of 5% maximum potential losses

10y EUR IRS CA-CIB Receives Fixed 2.3% 10y EUR IRS CA-CIB Receives Fixed 2.3%

18CVA Basics – Interpretation

CVA as an Accounting Provision

Measure of Expected Loss

Use of Historical Default Probabilities

Inactive Risk Management (Acceptance to ‘carry’ the Credit Risk)

No Market Hedges in Place (IR, FX or Credit)

Credit Risk remains in the individual traders books

CVA as a Mark to Market Adjustment

Market Cost of Dynamically Hedging Counterparty Risk

Use of Market Implied Default Probabilities (implied from CDS)

Active Risk Management Strategy in place

Local Sensitivities

Jump to Default Risks

Concentrations / Wrong Way risks

Market Hedges in place (IR, FX and Credit)

Credit Risk transferred to a centralised CVA desk

19

CVA is a fair market adjustment to the derivatives portfolio

CVA charges are there to offset losses in the global CVA portfolio due to new tradesIncremental impact on the portfolio

CVA P&L is flat provided the cash transfers take place

CVA hedges are initiated in order to offset future CVA P&L volatility for CA-CIBDue to portfolio MTM movements (IR, FX, Credit Hedges)

Due to counterparty CDS Spread Changes (Credit Hedges)

At inception: CVA P&L is flat, Hedge P&L is flat:1. CDS spreads increase: CVA increases (Loss) versus Hedge P&L (Gain)2. CDS spreads decrease: CVA decrease (Gain) versus Hedge P&L (Loss)3. CDS spreads stay static: Negative carry on Hedge (Loss) is offset against positive carry of CVA (Gain)

CVA Credit Hedges also provideJump to default risk management

Basel III capital reductions

Debit Value Adjustment (DVA) is the CVA seen from the counterparty. To take it into account allows symmetrical views on the shared portfolio.

CVA Basics – Summary

Impact of CSA on CVA

21CVA impact of collateral on stand alone transaction (IRS)

Start date: 10 Apr 2012

Maturity: 10Y

Notional: EUR 100M

CA-CIB receives: 2.30% (SA, act/360)

CA-CIB pays: 6M Euribor (SA, 30/360

Unilateral vs Bilateral

Threshold

Frequency

Currency

Minimum Transfer Amount (MTA)

Trade description Collateral features

The Credit Support Annex is a key tool for credit risk mitigation

EPE computation includes netting and collateral agreements

EPE is calculated up to the threshold

Above threshold, mark to market drift is calculated on margin call period + collateral lag period (10days)

CSA features are built into EPE simulations and consequently have an impact on CVA

Counterpart: XXX

5Y cds: 143bps

Internal rating: B


Peak exposure: 9 508 071

Market CVA: 137 124 (1.49 bps p.a)

Historical CVA: 9 942 (0.11 bps p.a)

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

10,000,000

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

EPE Credit Risk Loan equivalent

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

EPE Credit risk Loan equivalent

No collateral agreement in place Risk exposure is maximal for CA-CIB

CSA in place

Bilateral

Frequency: daily

Threshold: 0

MTA: 0

Currency: EUR

Sharp decrease of risk profile due to CSA risk mitigation




CSA agreement in place

Market CVA ~ hedging cost of loan lquivalent on cds market





0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000


CSA agreement in place Weekly frequency: drift is computed on one week + 10 days collateral lag

CSA in place

Bilateral

Frequency: daily

Threshold: 0

MTA: 0

Currency: EUR


0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000


CSA in place

Bilateral

Frequency: weekly

Threshold: 0

MTA: 0

Currency: EUR








0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000



CSA in place

Bilateral

Frequency: daily

Threshold: 0

MTA: 0

Currency: EUR


CSA in place

Bilateral

Frequency: daily

Threshold: 500K

MTA: 0

Currency: EUR

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2,000,000





25CVA impact of collateral on stand alone transaction (CRS)

Start date: 10 Apr 2012

Maturity: 10Y

Notional: EUR 100M

EURUSD: 1.3091

CA-CIB pays: 6M Euribor (SA, act/360)

CA-CIB receives: USD 2.25% (SA, act/360)

Notional exchange: Beg and end

Unilateral vs Bilateral

Threshold

Frequency

Currency

Minimum Transfer Amount (MTA)

Trade description Collateral features

Name: XXX

5Y cds: 143bps

Internal rating: B

Counterparty

26CVA impact of collateral on stand alone transaction (CRS)


Market CVA: 1 718 224 (18bps p.a)

Historical CVA: 192 376 (2 bps p.a)

No collateral agreement in place Risk exposure is maximal for CA-CIB

CSA in place

Bilateral

Frequency: daily

Threshold: 0

MTA: 0

Currency: EUR

CSA drastically minimizes risk exposure on cross-currency





0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000


0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

70,000,000

80,000,000

90,000,000

100,000,000

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

EPE Credit Risk Loan equivalent

A new pricing framework

28Collecting Information

Market Information

In the new pricing framework, market prices remain of course a central source of information but one has to interpret them consistently.

A price is at least dependent with the CSA of the product priced and when one observe the price of an OTC product on a screen the question of the implicit CSA of this price has to be solved.

To fix this problem, a standardization of market practice arise

Standard swap are assumed cleared with a collateral in the currency of the swap with a collateral remuneration at OIS rate.

Multi-currency products are often assumed collateralized in USD with a collateral remuneration at USDOIS rate.

Physical settlement swaption quotation often assumes the underlying swap to be a standard swap and quotes a forward premium in order to avoid the LVA impact on the discounted premium.

Once the implicit CSA question is answered, it becomes possible to strip from market prices cleaned market data (IR curves per tenor, FX forward, default probabilities, inflation forward, liquid volatilities, etc)

Additional Observable Information

Our own funding level will also intervene in the new pricing framework even if its monetisation isn’t straightforward.

From the CVA point of view, some new deal information are to be taken into account like break clause.

Lastly, the main new information type to input and which will impact all quotations is all information related to the client (CSA, netting agreement, rating, …)

29Forecasting Data

Diffusion Data

In addition to market data and client data, we have seen that most of xVA are linked to global portfolio measures based on Monte Carlo simulations.

Once the diffusion model is defined, its calibration can partly be implicit (calibration on a set of market prices) but will mainly linked to historical market behaviour.

Like for any diffusion model design for structured derivatives pricing, the calibration process is dependent with the sophistication of the diffusion process (from a theoretical point of view) and availability of implicit and historical information.

A key point to focus on is the joint behaviour between all class of market risks (let’s say correlation to simplify) implicitly defined in the diffusion process. It is indeed well known that this point will drive market risk netting from the global portfolio point of view.

Missing Credit Data

For a great number of counterparties there is no quoted CDS.

The CVA needs information on default probabilities and LGD for any counterparty. This information is to be forecasted.

Based on all internal works on counterparty risk management (sector classification, internal ratings, historical recovery rates, …), it becomes possible to map any counterparty on market information.

30“Stand alone Price” + “Portfolio-Linked Adjustment”

The new pricing workflow can be summarized as follows:

By definition, the “stand alone” price of a product is its value independent with the portfolio of deals

RawMarket Data

Strippingunder CSA

assumptions

Cleaned Market Data

t0t1 t2

t3 t4t5 t6

Product Description (Termsheet)

Client

Data ForecastingEngine

InternalClient

Portfolio

InternalClientData

Global SimulationEngine

Stand-AlonePricing Engine

BilateralCSA Input

BilateralCSA Input

Portfolio adjustment(CVA, DVA, FVA,

non standard LVA)

Portfolio adjustment(CVA, DVA, FVA,

non standard LVA)

++

Stand alone PriceStand alone Price

Calculation Engines

31About Portfolio-Linked Adjustments

A Non Linear Adjustment

Generally speaking, portfolio-linked adjustments aren’t linear i.e. the value adjustment of a given deal depends upon the portfolio (and market data) at the moment the valuation.

Same trade with two counterparties, with different credit profiles or portfolio vis-à-vis the bank, will have different market prices.

Example: Client receives Fixed on 10y Swap

Mid Market 10y Swap Rate = 2.31%– Client 1: Rated A- receives 2.27% 4bp CVA charge– Client 2: Rated B+ receives 2.23% 8bp CVA charge

In practice, an incremental portfolio value adjustment relating to the new trade is used. It corresponds to the differential of portfolio value adjustment with and without the deal.

This incremental value can either be positive or negative and a pricing policy is to be defined.

Adjustment Breakdown

The global portfolio value adjustment is made with several sources of risks (credit, liquidity, funding) and with several market data qualities (pure market data versus forecasted data).

To look into these, it is meaningful to evaluate the global portfolio value adjustment breakdown based on those different sources of risk and data qualities.

Similarly, this breakdown can be computed for incremental portfolio value adjustments at the deal level.

Centralized Risk Management

33Hedging Risks

Stand-alone Value Risk Management

A priori, the stand-alone product value can be hedged trading desk per trading desk without particular need of centralisation.

Nevertheless, the multiplicity of CSA may induce “not so material” additional sources of risks for trading desks (like cross-currency basis swap margin risks) which can pollute trading desk risk management and which could be centralised.

We have to keep in mind that any transaction has, from valuation and risk management point of view, a stand-alone part and a portfolio part. The implicit CSA of the stand-alone part of the deal isn’t necessarily the actual CSA of the deal.

Funding Risk

Funding risk could in theory be managed on a stand-alone basis since this risk isn’t explicitly linked to the portfolio view.

But this risk can’t be directly risk managed in the market.

Hence, this risk has to be risk managed jointly with ALM. Indeed, the stake is the remuneration or the charge of this adjustment. This has to be made consistently with the way these remuneration/charge are monetised by ALM.

Global simulation tools can of course be very used to obtain a complete view of the distribution of funding needs at any future maturity (expectation, standard deviations, … of funding needs including collateral simulation).

34Hedging Risks

Portfolio Adjustment Value Risk Management

By definition, this adjustment has to be centrally risk-managed. Indeed:

The value to risk manage make sense at the portfolio level only.

Global metrics to evaluate (EPE) are time consuming and depend upon a wide range of market data then standard complete local management is just numerically impossible and alternative risk management strategies has to be developed.

Some adjustments are based on forecasted/mapped data which as to be specifically risk managed

At the centralized level, impacts of global events like defaults, CSA changes, Funding changes can be anticipated, studied and quantified.

Conversely, a centralized desk can be pro-active on all portfolio-linked risks:

CSA change

Waives/Further discounted counterparties (to take into account liquidity providers or to be aligned with the Banks business strategy.

Wrong way / Right way risk.

RWA management

A centralised desk ensure a unique and consistent FO view internally and externally.

35

Capital CCR only covers default risk: MtM + standardized add-on based on issuer type, underlying and maturity

No capital requirement for MTM loss due to change in counterparty credit spread

Capital CCR only covers default risk

Internal Ratings-Based approach: Internal assessment of default risk via internal probability of default and LGD

No capital requirement for MTM loss due to change in counterparty credit spread

EPE: counterparty exposure estimated using non-stressed market data, on a 1Y horizon

Basel III Capital CCR = Capital Default (Basel II) + Capital CVA

Capital CVA: additional Capital requirement for MtM loss due to change in counterparty credit spread

Capital CVA: Market Risk capital charge estimated using stressed VaR on credit instruments

EPE: counterparty exposure estimated under stressed parameters on the full maturity

CVA VaR is calculated Net of Eligible Hedges

Other adjustments:– Assuming a higher correlation between financial institutions in the supervisory formula– Extending the collateral lag period from 10 days to 20 days

Capital requirements for Counterparty Credit Risk (CCR)

Basel I

Basel III

Basel II

36Regulatory impact on capital requirements

Changing Landscape

CVA VaR now a key component in Return on Capital calculations for New Trades

DVA not an allowable offset under Basel III, so competitors using DVA for pricing must consider capital usage

Active CDS Hedging encouraged Influences CDS pricing and volatility

Innovation needed to help reduce RWA costs

Cost of Novations / Intermediations now closely scrutinised

Need for CVA Pricing Tools to consider Basel III impacts

CVA Capital Methodology linked more closely to Market Dynamics

Regulatory Methodology is entirely Market Based --> No reliance on Historical Default Measures

Basel III extends maturity of Exposure at Default to the Full EPE Profile (previously 1y EPE under Basel II)

Capital Relief provided by Eligible Hedges

Includes Single name CDS, CDS index, CCDS and other hedges that directly reference the Counterparty

Hedging a CVA portfolio releases Capital

Challenge: focus on regulatory influence vs focus on competitive pricing

37Central Desk Mandate

Centralise and risk manage FO derivatives counterparty and portfolio-linked risk

Minimise xVA P&L impact for FO through:

Systematic Macro hedging of the overall xVA P&L impact

Single Name default hedging (where practical)

Active participation in RWA management

Target business model is to incentivise Sales Force not only on revenue generation but also on RWA and liquidity consumption

Sales recognition methodology has to be consistently defined

Establish a Pricing Policy aligned with the internal xVA methodology

Educate and train sales and support functions in xVA related issues

Involvement in Regulatory Discussions / Decisions affecting xVA

Involvement in ISDA / CSA discussions affecting xVA.

Need to remain Competitive in Pricing …

Must remain business-focused and incentivise the right types of trades:– Waiver / Exemption for Target Clients / Businesses– Additional Charge for Wrong Way trades – Benefits for Right Way Trades / Unwinds / Portfolio Diversifications– Need for feedback from clients relating to current market practices– Encourage risk mitigation (eg negotiation of Credit Support Annex (CSA) with counterparties)

38Interaction with other FO teams

Central Desk is there to Support the Business:In accurately pricing Credit and Liquidity into new trades, and

To manage the credit risk of derivatives portfolio through dynamic CVA hedging

To achieve this Central Desk needs:Active Dialogue with Trading / Sales / Structuring on new trades, and existing portfolio (risk reduction opportunities)

Involvement in Complex Trades, especially where replacement costs in default are hard to define

Clear Understanding of all key components of the trades

Identification of potential risk mitigants - break clauses, legal details (CSA, netting), etc

Feedback from Clients !

... and on problem namesTo ‘wall cross’ the CVA team in case non-public information needs to be shared. To check PV details in front/back office systems.

Involve Legal team to ensure appropriate modus operandi is followed

Goal is to streamline processRevised guidelines for involvement of Central desk in trade analysis (e.g. where CVA > 50k EUR, ... thresholds to be discussed/revised)

Improvement of CVA / LVA pricing tools (including capital costs/usage)

Clear communication is critical

... and to Adapt to Change Methodology is dynamic and intended to support business initiatives

39Disclaimer

© 2012, CRÉDIT AGRICOLE CORPORATE AND INVESTMENT BANK All rights reserved.

The information in this document (the “Information”) has been prepared by Crédit Agricole Corporate and Investment Bank or one of its affiliates (“Crédit Agricole CIB”) for informational purposes only.

Nothing in this document is to be construed as an offer for services or products or as an offer or solicitation for the purchase or sale of securities or any other financial product. The Information has no regard to the specific investment objectives, financial situations or particular needs of any recipient.

While the Information is based on sources believed to be reliable, no guarantee, representation or warranty, express or implied, is made as to its accuracy, correctness or completeness. Crédit Agricole CIB is under no obligation to update the Information.

Crédit Agricole CIB does not act as an advisor to any recipient of this document, nor owe any recipient any fiduciary duty and the Information should not be construed as financial, legal, regulatory, tax or accounting advice. Recipients should make their own independent appraisal of the Information and obtain independent professional advice from appropriate professional advisers before embarking on any course of action.

In no event shall Crédit Agricole CIB or any of its directors, officers or employees have any liability or responsibility to any person or entity for any direct or consequential loss, damage, cost, charge, expense or other liability whatsoever, arising out of or in connection with the use of, or reliance upon, the Information. Furthermore, under no circumstance shall Crédit Agricole CIB have any liability to any person or entity for any loss or damage, in whole or in part, caused by, resulting from, or relating to, any error (negligent or otherwise), omission, condition or other circumstances within or outside the control of Crédit Agricole CIB or any of its directors, officers or employees in connection with the procurement, collection, compilation, analysis, interpretation, communication or delivery of the Information.

This document and the Information are confidential and may not be copied, reproduced, redistributed, passed on, published, reproduced, transmitted, communicated or disclosed, directly or indirectly, in whole or part, to any other person without Crédit Agricole CIB’s prior written consent.

Recipients of this document in jurisdictions outside the United Kingdom should inform themselves about and observe any applicable legal or regulatory requirements in relation to the distribution or possession of this document to or in that jurisdiction. In this respect, Crédit Agricole CIB does not accept any liability to any person in relation to the distribution or possession of this document to or in any jurisdiction. This document is not directed at, or intended for distribution or use by, any person or entity who is a citizen or resident of any jurisdiction where such distribution, publication, availability or use would be contrary to applicable laws or regulations of such jurisdictions.

United Kingdom: Crédit Agricole Corporate and Investment Bank is authorised by the Comité des Etablissements de Crédit et des Entreprises d’Investissement (CECEI) and supervised by the Commission Bancaire in France and subject to limited regulation by the Financial Services Authority. Details about the extent of our regulation by the Financial Services Authority are available from us on request. Crédit Agricole Corporate and Investment Bank is incorporated in France and registered in England & Wales. Registered number: FC008194. Registered office: Broadwalk House, 5 Appold Street, London, EC2A 2DA.

Documents

LVA, FVA, CVA, DVA impacts on derivatives management Christophe MICHEL Head of RCCAD Quantitative Research AFGAP-PRMIA April 5th 2012