7.The CVA standards covers all of a bank’s non-centrally cleared derivative exposures. In the context of the CVA standards, derivatives are instruments whose value is based upon the price or value associated with an underlying reference entity. In general, derivatives exhibit the following abstract characteristics:

1. •The transactions generate a current exposure or market value.
2. •The transactions have an associated random future market value based on market variables.
3. •The transactions have contractual terms that provide for an exchange of payments or an exchange of a financial instrument (including commodities) against payment.
4. •The transactions are undertaken with an identified counterparty.

8.Other common characteristics of derivative transactions may include the following:

1. •Collateral may be used to mitigate risk exposure, and may be inherent in the nature of some transactions.
2. •Netting may be used to mitigate risk or to simplify operational aspects of the transaction.
3. •Positions are frequently valued (most commonly on a daily basis), with the value dependent on market variables or their changes.
4. •Margin payments may be employed, with margin held in various forms, and with re-margining agreements that allow for the adjustment of margin either daily or at some other established frequency.

9.In addition, the Central Bank has used national discretion to include securities financing transactions (SFTs) – transactions such as repurchase agreements, reverse repurchase agreements, security lending and borrowing, and margin lending transactions – within the scope of the CVA calculation. However, as the Standards note, if the Central Bank determines that SFT exposures at any individual bank are not a material source of CVA risk, the Central Bank may direct the bank to exclude SFTs from CVA capital calculations.

10.Consistent with the BCBS framework, all derivative transactions for which a central counterparty is the direct counterparty are excluded from the CVA capital calculation. Banks must calculate RWA for those centrally cleared transactions as specified in the Central Bank’s CCR Standards.