The Capital Adequacy Requirements (CAR) for banks (including federal credit unions), bank holding companies, federally regulated trust companies, federally regulated loan companies and cooperative retail associations, collectively referred to as 'institutions', are set out in nine chapters, each of which has been issued as a separate document. This document, Chapter 8 – Credit Valuation Adjustment (CVA) Risk, should be read in conjunction with the other CAR chapters which include:

Institutions with IMM approval for counterparty credit risk and approval to use the market risk internal models approach for the specific interestrate risk of bonds must calculate this additional capital charge by modelling the impact of changes in the counterparties' credit spreads on the CVAs of all OTC derivative counterparties, together with eligible CVA hedges according to paragraphs 12 and 14, using the institution's VaR model for bonds. This VaR model is restricted to changes in the counterparties' credit spreads and does not model the sensitivity of CVA to changes in other market factors, such as changes in the value of the reference asset, commodity, currency or interest rate of a derivative. Regardless of the accounting valuation method a institution uses for determining CVA, the CVA capital charge calculation must be based on the following formula for the CVA of each counterparty:
$\mathrm{CVA}=\left({\mathrm{LGD}}_{\mathrm{MKT}}\right)\times \sum _{i=1}^{T}\mathrm{MAX}\left[0;\mathrm{exp}\left(\frac{{s}_{i1}\times {t}_{i1}}{{\mathrm{LGD}}_{\mathrm{MKT}}}\right)\mathrm{exp}\left(\frac{{s}_{i}\times {t}_{i}}{{\mathrm{LGD}}_{\mathrm{MKT}}}\right)\right]\times \left(\frac{{\mathrm{EE}}_{i1}\times {D}_{i1}+{\mathrm{EE}}_{i}\times {D}_{i}}{2}\right)$
Where
 t_{i} is the time of the ith revaluation time bucket, starting from t_{0}=0;
 t_{T} is the longest contractual maturity across the netting sets with the counterparty;
 s_{i} is the credit spread of the counterparty at tenor t_{i}, used to calculate the CVA of the counterparty. Whenever the credit default swap (CDS) spread of the counterparty is available, this must be used. Whenever such a CDS spread is not available, the institution must use a proxy spread that is appropriate based on the rating, industry and region of the counterparty;
 LGD_{MKT} is the loss given default of the counterparty and should be based on the spread of a market instrument of the counterparty (or where a counterparty instrument is not available, based on the proxy spread that is appropriate based on the rating, industry and region of the counterparty). It should be noted that this LGD_{MKT}, which inputs into the calculation of the CVA risk capital charge, is different from the LGD that is determined for the IRB and CCR default risk charge, as this LGD_{MKT} is a market assessment rather than an internal estimate;
 the first factor within the sum represents an approximation of the market implied marginal probability of a default occurring between times t_{i1} and t_{i}. Market implied default probability (also known as risk neutral probability) represents the market price of buying protection against a default and is in general different from the realworld likelihood of a default;
 EE_{i} is the expected exposure to the counterparty at revaluation time t_{i}, as defined in Chapter 7 (regulatory expected exposure), where exposures of different netting sets for such counterparty are added, and where the longest maturity of each netting set is given by the longest contractual maturity inside the netting set;
 D_{i} is the default riskfree discount factor at time t_{i}, where D_{0} = 1.
[Basel Framework, MAR 50.3]

The formula in paragraph 5 must be the basis for all inputs into the institution's approved VaR model for bonds when calculating the CVA risk capital charge for a counterparty. For example, if this approved VaR model is based on full repricing, then the formula must be used directly. If the institution's approved VaR model is based on credit spread sensitivities for specific tenors, the institution must base each credit spread sensitivity on the following formula^{ Footnote 6}:
${\mathrm{Regulatory\; CS01}}_{i}=0.0001\times {t}_{i}\times \mathrm{exp}\left(\frac{{s}_{i}\times {t}_{i}}{{\mathrm{LGD}}_{\mathrm{MKT}}}\right)\times \left(\frac{{\mathrm{EE}}_{i1}\times {D}_{i1}{\mathrm{EE}}_{i+1}\times {D}_{i+1}}{2}\right)$
If the institution's approved VaR model uses credit spread sensitivities to parallel shifts in credit spreads (Regulatory CS01), then the institution must use the following formula^{Footnote 7}:
$\mathrm{Regulatory\; CS01}=0.0001\times \sum _{i}^{T}\left({t}_{i}\times \mathrm{exp}\left(\frac{{s}_{i}\times {t}_{i}}{{\mathrm{LGD}}_{\mathrm{MKT}}}\right){t}_{i1}\times \mathrm{exp}\left(\frac{{s}_{i1}\times {t}_{i1}}{{\mathrm{LGD}}_{\mathrm{MKT}}}\right)\right)\times \left(\frac{{\mathrm{EE}}_{i1}\times {D}_{i1}+{\mathrm{EE}}_{i}\times {D}_{i}}{2}\right)$
[Basel Framework, MAR 50.4 to MAR 50.6]

If the bank's approved VaR model uses secondorder sensitivities to shifts in credit spreads (spread gamma), the gammas must be calculated based on the formula in paragraph 5. [Basel Framework, MAR 50.7]

Institutions with IMM approval for the majority of their businesses, but which use SACCR for certain smaller portfolios, and which have approval to use the market risk internal models approach for the specific interest rate risk of bonds, will include these nonIMM netting sets into the CVA risk capital charge, according to paragraph 5, unless OSFI decides that paragraph 17 should apply for these portfolios. NonIMM netting sets are included into the advanced CVA risk capital charge by assuming a constant EE profile, where EE is set equal to the EAD as computed under SACCR for a maturity equal to the maximum of (i) half of the longest maturity occurring in the netting set and (ii) the notional weighted average maturity of all transactions inside the netting set. The same approach applies where the IMM model does not produce an EE profile. [Basel Framework, MAR 50.8]

For exposures to certain counterparties, the institution's approved market risk VaR model may not reflect the risk of credit spread changes appropriately, because the institution's market risk VaR model does not appropriately reflect the specific risk of debt instruments issued by the counterparty. For such exposures, the institution is not allowed to use the advanced CVA risk charge. Instead, for these exposures the institution must determine the CVA risk charge by application of the standardised method in paragraph 17. Only exposures to counterparties for which the institution has supervisory approval for modelling the specific risk of debt instruments are to be included into the advanced CVA risk charge. [Basel Framework, MAR 50.9]

The CVA risk capital charge consists of both general and specific credit spread risks, including Stressed VaR but excluding IRC (incremental risk charge). The VaR figure should be determined in accordance with the quantitative standards described in chapter 9. It is thus determined as the sum of (i) the nonstressed VaR component and (ii) the stressed VaR component.
 when calculating the nonstressed VaR, current parameter calibrations for expected exposure must be used;
 when calculating the stressed VaR future counterparty EE profiles (according to the stressed exposure parameter calibrations as defined in Chapter 7) must be used. The period of stress for the credit spread parameters should be the most severe oneyear stress period contained within the three year stress period used for the exposure parameters.^{Footnote 8}
[Basel Framework, MAR 50.10]

This additional CVA risk capital charge is the stand alone market risk charge, calculated on the set of CVAs (as specified in paragraph 5) for all OTC derivatives counterparties, collateralised and uncollateralised, together with eligible CVA hedges. Within this standalone CVA risk capital charge, no offset against other instruments on the institution's balance sheet will be permitted (except as otherwise expressly provided herein). [Basel Framework, MAR 50.11]

Only hedges used for the purpose of mitigating CVA risk, and managed as such, are eligible to be included in the VaR model used to calculate the above CVA capital charge or in the standardised CVA risk capital charge set forth in paragraph 17. For example, if a CDS referencing an issuer is in the institution's inventory and that issuer also happens to be an OTC counterparty but the CDS is not managed as a hedge of CVA, then such a CDS is not eligible to offset the CVA within the standalone VaR calculation of the CVA risk capital charge. [Basel Framework, MAR 50.12]

Only hedges that are with external counterparties are eligible to reduce CVA. A hedge that is only with an internal desk cannot be used to reduce CVA. [Basel Framework, MAR 50.12, FAQ #1]

The only eligible hedges that can be included in the calculation of the CVA risk capital charge under paragraphs 5 or 17 are singlename CDSs, singlename contingent CDSs, other equivalent hedging instruments referencing the counterparty directly, and index CDSs. In case of index CDSs, the following restrictions apply:
 the basis between any individual counterparty spread and the spreads of index CDS hedges must be reflected in the VaR. This requirement also applies to cases where a proxy is used for the spread of a counterparty, since idiosyncratic basis still needs to be reflected in such situations. For all counterparties with no available spread, the institution must use reasonable basis time series out of a representative bucket of similar names for which a spread is available;
 if the basis is not reflected to OSFI's satisfaction, then the institution must reflect only 50% of the notional amount of index hedges in the VaR.
[Basel Framework, MAR 50.13]

Other types of counterparty risk hedges must not be reflected within the calculation of the CVA capital charge, and these other hedges must be treated as any other instrument in the institution's inventory for regulatory capital purposes. Tranched or n^{th} to default CDSs are not eligible CVA hedges. Eligible hedges that are included in the CVA capital charge must be removed from the institution's market risk capital charge calculation. [Basel Framework, MAR 50.14]

Although market risk hedges of CVA are not recognized in the CVA capital charge, market risk hedges used for the purposes of mitigating CVA risk and managed as such, are exempt from market risk capital requirements.

When an institution does not have the required approvals to use paragraph 5 to calculate a CVA capital charge for its counterparties, the institution must calculate a portfolio capital charge using the following formula:
$K=2.33\times \sqrt{h}\times \sqrt{{\left(\sum _{i}0.5\times {w}_{i}\times \left({M}_{i}\times {\mathrm{EAD}}_{i}^{\mathrm{total}}{M}_{i}^{\mathrm{hedge}}\times {B}_{i}\right)\sum _{ind}{w}_{ind}\times {M}_{ind}\times {B}_{ind}\right)}^{2}+\sum _{i}0.75\times {w}_{i}^{2}\times {\left({M}_{i}\times {\mathrm{EAD}}_{i}^{\mathrm{total}}{M}_{i}^{\mathrm{hedge}}\times {B}_{i}\right)}^{2}}$
Where
 h is the oneyear risk horizon (in units of a year), h = 1;
 w_{i} is the weight applicable to counterparty 'i'. Counterparty 'i' must be mapped to one of the seven weights w_{i} based on its external rating, as shown in the table of this paragraph below. When a counterparty does not have an external rating, the institution must, subject to OSFI approval, map the internal rating of the counterparty to one of the external ratings. If the institution does not have an approved rating system, then any unrated counterparty will receive a weight of 2.0%;
 EAD_{i}^{total} is the exposure at default of counterparty 'i' (summed across its netting sets), including the effect of collateral as per the existing IMM or SACCR rules as applicable to the calculation of counterparty risk capital charges for such counterparty by the institution. For nonIMM institutions the exposure should be discounted by applying the factor (1‑exp (0.05×M_{i}))/(0.05×M_{i}). For IMM institutions, no such discount should be applied as the discount factor is already included in M_{i};
 B_{i} is the notional of purchased single name CDS hedges (summed if more than one position) referencing counterparty 'i', and used to hedge CVA risk. This notional amount should be discounted by applying the factor (1‑exp( 0.05×M_{i}^{hedge}))/(0.05×M_{i}^{hedge});
 B_{ind} is the full notional of one or more index CDS of purchased protection, used to hedge CVA risk. This notional amount should be discounted by applying the factor (1exp(0.05×M_{ind}))/(0.05× M_{ind});
 w_{ind} is the weight applicable to index hedges. The institution must map indices to one of the seven weights wi based on the average spread of index 'ind';^{ Footnote 9}
 M_{i} is the effective maturity of the transactions with counterparty 'i'. For IMM institutions, M_{i} is to be calculated as per Chapter 7. For nonIMM institutions, M_{i} is the notional weighted average maturity^{Footnote 10} as referred to in Chapter 5. However, for this purpose, M_{i} should not be capped at 5 years;
 M_{i}^{hedge} is the maturity of the hedge instrument with notional B_{i} (the quantities M_{i}^{hedge} x B_{i} are to be summed if these are several positions);
 M^{ind} is the maturity of the index hedge 'ind'. In case of more than one index hedge position, it is the notional weighted average maturity^{Footnote 11}.
For any counterparty that is also a constituent of an index on which a CDS is used for hedging counterparty credit risk, the notional amount attributable to that single name (as per its reference entity weight) may, with OSFI approval, be subtracted from the index CDS notional amount and treated as a single name hedge (B_{i}) of the individual counterparty with maturity based on the maturity of the index.
The weights are given in this table, and are based on the external rating of the counterparty^{Footnote 12}:
Rating 
Weight W_{i} 
AAA 
0.7% 
AA 
0.7% 
A 
0.8% 
BBB 
1.0% 
BB 
2.0% 
B 
3.0% 
CCC 
10.0% 
Similarly to institutions using the advanced CVA capital charge, market risk hedges used for the purposes of mitigating CVA risk and managed as such, are exempt from market risk capital requirements.
[Basel Framework, MAR 50.15 and 50.16]