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.