Quantifi: Funding Valuation Adjustment (FVA), Part 1: A Primer

Background: The implementation of new regulations including Dodd-Frank, MiFID II, EMIR and Basel III is significantly increasing the cost of capital and forcing banks to re-evaluate the economics of their OTC trading businesses. McKinsey in a recent paper (2012) estimates that without mitigation the average Return on Equity (ROE) of the flow rates business will go from 19% to 8% post regulation, while ROE in structured rate will drop from 15% to 4%.

Understanding trade profitability becomes

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