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White Paper - Introducing Margin Value Adjustment

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Calypso’s R&D team explains the role of MVA.

The concept of funding value adjustment (FVA) – the cost over-and-above the risk-free rate incurred by the institution to fund derivative positions – is now well-known by the market. It arises primarily due to the asymmetry in the funding of uncollateralized client trades versus the hedges that are executed in the professional market under two-way zero threshold collateral support agreements (CSA).

What has received little attention are the additional funding costs associated with initial margin (IM) in the context of central clearing and bilateral collateralization. This article shows that when trades are collateralized, the FVA is still present but there is an additional adjustment, namely margin value adjustment (MVA). This is the cost of funding the initial margin.

 

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Calypso Technology, Inc. is a cloud-enabled provider of cross-asset front-to-back solutions for financial markets with over 35,000 users in 60+ countries. Its award-winning software improves reliability, adaptability, and scalability across several verticals, including capital markets, investment management, central banking, clearing, treasury, liquidity, and collateral. Calypso is leveraging innovative cloud microservices and blockchain distributed ledger technology (DLT) based solutions to reduce trading costs and improve time to value.

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