CHAPTER III

CORE APPROACH FOR THE DETERMINATION OF AVAs

Calculation of future administrative costs AVA
Article 15
1
Where an institution calculates market price uncertainty and close-out cost AVAs for a valuation exposure, which imply fully exiting the exposure, the institution may assess a zero AVA for future administrative costs.
2
Where a valuation exposure cannot be shown to have a zero AVA according to paragraph 1, institutions shall calculate the future administrative cost AVA (‘individual future administrative costs AVA’) considering the administrative costs and future hedging costs over the expected life of the valuation exposures for which a direct exit price is not applied for the close-out costs AVA, discounted using a rate which approximates the risk free rate.
3
For the purposes of paragraph 2, future administrative costs shall include all incremental staffing and fixed costs that are likely to be incurred in managing the portfolio but a reduction in these costs may be assumed as the size of the portfolio reduces.
4
Institutions shall calculate the total category level AVA for future administrative costs AVA as the sum of individual future administrative costs AVAs.