RBI seeks public feedback on draft Credit Valuation Adjustment (CVA) framework

The Reserve Bank of India (RBI) has invited public comments on a draft set of Directions aimed at updating how banks measure and hold capital for **Credit Valuation Adjustment (CVA) risk** arising from derivatives transactions. The draft is titled **“Reserve Bank of India (Commercial Banks – Credit Valuation Adjustment Framework) Directions, 2026”**.

The consultation is open to **Regulated Entities, market participants, and other interested parties**. Feedback may be submitted through the **‘Connect 2 Regulate’** section on the RBI website. The RBI has set **28 August 2026** as the deadline for comments.

What CVA is—and why regulators care CVA is, in simple terms, an adjustment applied to the default risk-free price of a derivative to reflect the possibility that a counterparty may default. Because that adjustment can move over time—based on changes in a counterparty’s credit spread as well as market risk factors—banks can face **CVA risk**, i.e., potential losses due to changes in CVA values.

To ensure banks remain resilient, regulators require a **CVA capital charge**, which is intended to make sure banks hold adequate capital buffers against these risks.

India’s existing CVA framework was issued by the RBI in **2011**, based on the Basel Committee on Banking Supervision (BCBS) standards released in **2010**. Since then, the BCBS has issued revised guidance under the **final Basel III framework**, prompting the RBI to propose updated instructions aligned with the newer international approach.

What changes the draft Directions propose The RBI’s draft outlines a revised CVA framework that would permit banks in India to adopt the **Basic Approach (BA-CVA)**. Under the proposal, banks could choose between:

• A **full** version of BA-CVA, or
• A **reduced** version of BA-CVA.

In addition, consistent with BCBS guidelines, banks with an **insignificant volume of non-centrally cleared derivatives** would have an alternative option: they may calculate their CVA capital charge as **100% of their counterparty credit risk (CCR) capital charge**.

The RBI said the revised instructions are designed to:

1. **Allow eligible banks to choose a simpler approach**, offering flexibility in implementation; 2. **Clarify eligibility and recognition of CVA hedges**, which can help ensure risk mitigation is treated consistently; 3. **Increase the sensitivity of supervisory risk weights** for counterparties, taking into account sector and credit quality; and 4. **Separate systematic and idiosyncratic components of CVA risk** in the full BA-CVA calculation, including addressing imperfect alignment of indirect CVA hedges.

Together, these changes aim to **enhance risk sensitivity** and **improve consistency** in how CVA risks are captured for capital purposes.

A consultation-focused step towards stronger risk management By releasing draft Directions and seeking public input, the RBI is signalling a consultative approach to fine-tuning an important part of bank risk management—especially relevant for institutions active in derivatives markets.

For banks and market participants, the consultation window offers an opportunity to share practical feedback on implementation choices (such as the full versus reduced BA-CVA) and on how hedges and counterparty risk weights would be recognised.

The RBI’s move also reflects an effort to keep India’s prudential standards aligned with updated global regulatory thinking, while providing options that can suit banks with different levels of derivatives activity.

**Why it matters:** A clearer, more risk-sensitive CVA framework can strengthen banks’ capital planning for derivatives-related risks, support confidence in risk management practices, and help build a more consistent foundation for India’s evolving financial markets.