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Ahead of the Front Office Financial Resource and Capital Optimisation Conference, we spoke with Martin Doucet, Managing Director, Global Funding and Treasury - Regulatory Optimisation, at National Bank of Canada. Martin is dealing with derivatives and financial resource optimisation. He has been in the financial services industry for over 20 years, spending all but two of them at the National Bank of Canada. He is based in Montreal and has a Master of Finance from the Université du Québec à Montréal.

*The views and opinions expressed herein are those of the respondent and do not necessarily reflect the position of National Bank of Canada.

How do banks need to adapt to changing regulatory demands?

Since the last financial crisis, regulatory reforms have significantly increased the capital requirements, especially for financial market activities. Some institutions took a strategic approach by reducing capital consumption and risk-weighted assets on some business segments. The most significant impact has been a pivot from pro-trading and directional activities, to a risk management and fees business. Banks need to evaluate the profitability reflecting theses changes before they deploy capital.

What are the impacts of the new regulatory framework for XVA desk?

XVA desk optimisation processes will be impacted by the implementation of the new capital requirements, especially the SA-CVA. Some elements like collateral valuation adjustment (ColVa) or funding valuation adjustment (FVA) are currently not captured under the new capital requirement. Although some jurisdictions could provide exemptions to exposure and hedge for these risks, this could create challenge for an XVA desk that actively manages the risk on an holistic basis. XVA desks need to have a process to differentiate hedges made for market risk versus those for ColVa or FVA. The issue is even more problematic if banks opt to implement the BA-CVA approach, where market risk hedges are not recognized.

How can the XVA desk optimise its approach under the latest conditions?

XVA desk activities have expanded from where they had to deal with managing CVA and FVA, to managing the cost of capital under multiple constraints (i.e. risk-weight assets (RWA) or leverage). Now, some institutions will now have to consider the standardized floor as a new constraint as we move through the implementation of the Basel III Reform. The challenge will be to perform forecast when the standardized floor will hit the institutions and become the binding constraint. This creates uncertainty on the true capital cost of the trade, especially for long-dated ones.

What factors inform the approach towards generating a capital-efficient product mix?

Refinement of the KVA calculation, which is driven by internal processes and calculation approach chosen by the institutions (rather than observable market prices) can provide opportunity to generate a more efficient capital allocation and improve pricing.
Institutions should also consider elements such as the lack of diversification benefit between Delta and Vega sensitivities and lack of benefit of CVA index hedges in the new CVA calculation. Finally, the new regulatory rules will impact the recognition of index hedges as we move from risk factors based on the credit, to risk factors based on industry or economic sector.
Finally, as mentioned in our presentation – Reshaping your trading business around new capital constraints, efficient solutions to reduce KVA rely on specific organisation constraints. For example, if an institution is capital constrained from the leverage ratio, moving transactions through a clearing house might not be the best solution.

What do you hope to gain from attending the marcus evans Front Office Financial Resource and Capital Optimisation event?

This event hopes to provide a perspective of challenges faced by the finance industry on optimising capital deployment to financial markets. Not only should the event provide a perspective on issues we are currently facing, but also soon to come as we move to a different regulatory regime, such as Basel III reform or UMR. It’s becoming more and more critical that people in front office teams integrate in their day-to-day activities awareness around the challenges posed by ever-increasing regulatory changes, and perspectives on how to consider these constraints in their decision process.

Martin will be presenting during Day One!

Panel Discussion: Reshaping your trading business around new capital constraints

• Reset business models to adapt to changing regulatory demands
• Reflect capital constraints in pricing on the XVA desk
• What is the most capital-efficient product mix?
• Exploring the avenues of capital-focused business models

For more information about the event, please visit https://bit.ly/38ms5LD or contact:

Ria Kiayia, Digital Media and PR Marketing Executive

T: +357 22849 304
E: riak@marcusevanscy.com