Question
For the purposes of calculating AVAs for Market Price Uncertainty, where a valuation input consists of a matrix of parameters (for example a curve or a surface), can the AVAs be calculated at the level of the matrix as a whole (i.e. the curve or surface) based on the valuation exposures related to each parameter within that matrix, rather than be calculated at the individual parameter level?
Background on the question
Where AVAs can be calculated at the level of the matrix as a whole, then the interrelationship in market price uncertainty between the constituent parameters are implicitly taken into consideration. This removes the dependency on the ratio of variance test to permit some interrelationship via netting on the basis of historical price or spread movements when AVAs are calculated at the individual parameter level. This also helps ensure that the curve or surface will be internally consistent helping to prevent issues such as implying impossible forward curve or surface constructions.
Answer
In accordance with Article 9(4)(b) of Regulation (EU) 2016/101, where a valuation input consists of a matrix of parameters (for example a curve or surface), the AVAs for Market Price Uncertainty can be calculated at the level of the matrix as a whole (i.e. the curve or surface) rather than calculated at the individual parameter level. This is also applicable for the calculation of close-out costs AVAs under Article 10(5)(b) of Regulation (EU) 2016/101.