How Novation Can Change NDF Valuation Through XVA

Summary

The document explains that novating a non-deliverable forward does not necessarily change its risk-free forward mark to market. The effect depends on how the trading desk separates the contract’s market value from adjustments for counterparty exposure, funding, capital, and other xVA components.

If xVA is calculated separately at the portfolio level, the forward’s standalone mark may remain unchanged, while the portfolio xVA can change when the novation changes the counterparty and is not offset by another portfolio event. If xVA is allocated into each trade’s mark, the trade’s net mark can change because its allocated xVA changes. The explanation is conditional on accounting and valuation conventions, and it does not specify a pricing formula or quantify the adjustment. Its central point is that post-trade events can affect reported net value through exposure adjustments even when the underlying forward pricing remains the same.

Key ideas

• A novation may leave an NDF’s risk-free forward mark to market unchanged.
• Counterparty, funding, and capital effects may be captured in separate xVA adjustments.
• Portfolio level xVA can change when novation changes counterparty exposure.
• A trade’s net mark can change if xVA is allocated directly to that trade.

Tags

# How does NDF contract pricing change on post trade events such as novation/termination


# How does NDF contract pricing change on post trade events such as novation/termination












If NDF contract gets novated, will it change the pricing?

If NDF contract gets novated, will it change the pricing?

## Answer by Dimitri Vulis (score 1)

https://quant.stackexchange.com/a/59734

It depends on how the desk has set up their accounting.

If the forward (or any other OTC trade) has a mark to market that does not include the counterparty exposure, capital, funding, etc; there are also a separate xVA charge that includes these things netted at a portfolio level, etc then the former doesn't change, but the latter may change ceteris paribus (if the novaton changes the counterpaty and is not offset by another novation in the portfolio).

If the xVA charge is somehow allocated into every OTC trade's MTM (so far I have not seen anyone do it in a transparent way that made sense to me:) then the forward's net MTM is the sum of the above risk-free forward and the allocated xVA. The latter may change, and therefore the net MTM can change.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.