Client engineering of XVA in crisis and normality: Restructuring, Mandatory Breaks and Resets

TL;DR

This paper examines client XVA management strategies during crises, comparing restructuring, mandatory breaks, and resets, and finds resets can be more effective unless there is significant credit recovery.

Contribution

It introduces a comparative analysis of XVA reduction strategies using resets and restructuring during crises, highlighting conditions where each is most effective.

Findings

Resets can be twice as effective as mandatory breaks without credit recovery.

Mandatory breaks outperform resets when credit recovery exceeds one-third of the shock.

Analysis based on historical CDS data informs strategy effectiveness during crises.

Abstract

Crises challenge client XVA management when continuous collateralization is not possible because a derivative locks in the client credit level and the provider's funding level, on the trade date, for the life of the trade. We price XVA reduction strategies from the client point of view comparing multiple trade strategies using Mandatory Breaks or Restructuring, to modifications of a single trade using a Reset. We analyse previous crises and recovery of CDS to inform our numerical examples. In our numerical examples Resets can be twice as effective as Mandatory Break/Restructuring if there is no credit recovery. When recovery is at least 1/3 of the credit shock then Mandatory Break/Restructuring can be more effective.