The CVA-CDS feedback loop
Dealers claim regulators have cooked up a pro-cyclical credit value adjustment (CVA) capital charge that encourages CVA desks to buy credit default swap protection as a hedge. This could push spreads wider, increasing the CVA capital charge and so prompting more protection buying
Following more than a year of wrangling, European parliamentarians managed to persuade the Polish presidency of the European Union to support tough restrictions on so-called ‘naked’ sovereign credit default swaps (CDSs) – the buying of protection on government debt as an outright short position. The deal, announced on October 18, was hailed as a great victory. Since Germany imposed a unilateral ban on the naked short selling of sovereign CDSs in May 2010, the market had been seen by many as a
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