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FVA move to drive huge losses 

March 3, 2014
Christopher Whittall, IFR

Investment banks are expected to embrace accounting frameworks to measure the cost of funding derivatives books en masse this year, even though firms continue to take markedly different approaches to the subject. The moves are likely to result in banks collectively being forced to recognise billions of dollar of losses related to funding their derivative holdings.

Major dealers are split virtually fifty-fifty on whether to incorporate funding valuation adjustments into their accounts at present. Pinpointing evidence of FVA’s existence in swaps prices remains the biggest stumbling block to building consensus – even senior executives within individual firms remain at loggerheads over this fundamental issue.

But the debate is no longer confined to academic circles and bank treasury desks following publication of banks’ 2013 financial results. While a handful of firms adopted FVA when reporting their 2013 numbers, it was the detailed public announcement from JP Morgan of a US$1.5bn loss that brought the issue into the mainstream and may well force other banks to follow suit.

Read more: IFR


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