I am looking for a qualitative assessment regarding the (negotiable) 'cost' incurred when two counterparties agree on collateralizing existing derivatives business. I think the core of my question is:

What is the admissible / theoretically justifiable 'negotiation space' when it comes to (trying to) charging fees from a derivatives desk's client?

I am happy to try to make my question more precise where necessary.

Assume that a swap dealer bank $D$ and a (small) client bank $C$ have a Master Agreement in place and have recently extended it with a standard CSA (single currency cash collateral, zero thresholds / no MTA, single netting set across all derivatives). There is no bilateral initial margin requirement.

The two are now 'negotiating' the fee of collateralizing their existing bilateral (i.e. non-cleared) swap derivatives business. We may assume that - at time of negotiation - the netting set has a positive PV to the dealer bank $D$.

I am looking for a (qualitative) assessment of the valuation adjustments the dealer bank $D$ will consider and try to exert from the client bank $C$ in form of a fee. My thoughts so far:

  • CVA decreases. It is not reasonable for $D$ to charge for a CVA component as CVA is being reduced. The same reasoning should hold from $C$'s perspective.
  • KVA decreases: $D$ will not incorporate a capital requirement in its fee considerations as the regulatory counterparty credit risk (and the regulatory CVA risk) decreases. Same holds for $C$.
  • FVA: It depends: Depending on the current market environment and $D$'s calibration of its xVA models, it might / might not reasonably charge for its potential future collateral funding requirements. On the other hand, wouldn't $C$ claim that it has to fund the collateral as well?

In total, I'd argue that $D$ may (reasonably) only try to charge a fee for their increase in FVA. Is that reasoning comprehensible, or is there a flaw? Happy to get your thoughts on this. If the problem is undecidable as is, I am happy to provide additional assumptions.

Thanks in advance.


1 Answer 1


I think that the negotiating space is to ask how much will D have to pay (not receive). The dominant economic effect is that C will have to send collateral to D, which is really the same as saying the CVA is being removed. In those situations usually a percentage of the CVA may sometimes be paid but why would C do this unless they were getting paid something. If D can do the trade for zero , it’s a home run.

  • $\begingroup$ Hi @dm63, thanks for your input on this. I'll keep the question open for a bit longer. $\endgroup$ Dec 10, 2022 at 14:20
  • $\begingroup$ Hi @dm63, could you elaborate what you think would happen if the client $C$ is effectively a credit risk free entity? If possible, I'd update my question accordingly. Thanks in advance. $\endgroup$ Dec 11, 2022 at 8:03
  • $\begingroup$ In this case D would still like to do the trade for nothing. The benefit is now just FVA (D will now receive collateral for which it will pay Fed Funds instead of having to raise unsecured money to fund the receivable). C will probably ask for some compensation for this. $\endgroup$
    – dm63
    Dec 11, 2022 at 9:16
  • $\begingroup$ Thanks for the update. $\endgroup$ Dec 11, 2022 at 9:17

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