Collateral value adjustment (ColVA) is the valuation adjustment that captures the costs and benefits from embedded optionality in collateral agreements and any deviation from “perfect collateralisation”. Perfect collateralisation is the idealised case where continuous, zero-threshold, zero-MTA variation margin is exchanged in cash denominated in the currency of the transaction and remunerated at the OIS rate. ColVA measures the value impact of departures from this ideal, such as the ability to choose the currency or type of collateral to post (cheapest-to-deliver optionality), non-standard remuneration rates, thresholds, or minimum transfer amounts.
The key driver of ColVA is the cheapest-to-deliver (CTD) optionality. When a collateral agreement permits posting margin in multiple currencies, the posting party should optimally choose the currency remunerated at the highest rate (after adjusting for cross-currency basis spreads). This creates a dynamic valuation problem: the CTD currency can change over time, and modelling requires joint evolution of OIS curves in each eligible currency together with FX rates. A common simplification assumes static remuneration curves and free substitution, producing a composite CTD discount curve.
ColVA is becoming less significant over time as market practice converges toward the perfect collateralisation ideal. The clearing mandate requires CCPs to use variation margin in the transaction currency; bilateral margin rules impose zero thresholds and restrict collateral types; and bilateral CSA renegotiations have simplified terms. However, ColVA remains relevant for multicurrency products (e.g. cross-currency swaps), one-way margin agreements, and situations involving non-cash collateral with repo haircuts.
Key Details
- ColVA can be computed either by adjusting the discount curve directly (CTD discounting) or as a spread-based adjustment to a base OIS-discounted value (Eq. 16.2 in Gregory).
- For two-way margin agreements, ColVA equals the difference between CTD-discounted and single-currency-discounted valuations.
- For one-way agreements, the party receiving margin is short optionality and ColVA is typically negative.
- Non-cash collateral adds complexity: repo rates and haircuts determine whether posting securities is more efficient than posting cash.
Textbook References
The xVA Challenge (Gregory, 2020)
- Section 16.2.3 (pp. 474—478): Detailed treatment of CTD optionality across currencies. The CTD curve is constructed by converting forward rates in each eligible currency into a base currency (via cross-currency basis spreads) and taking the maximum. Under static curves and free substitution, this gives the CTD discount curve.
- Section 16.2.4 (pp. 478—479): Non-cash margin and the role of repo rates and haircuts. Securities are more efficient to post when the repo rate exceeds the cash remuneration rate times the ratio of haircuts.
- Section 16.2.5 (pp. 479—480): “The End of ColVA” — market trends (renegotiation of CSAs, bilateral margin rules, clearing mandate) are reducing ColVA, though it will not disappear completely due to multicurrency products and end-user preferences.
- Section 3.2.3 (p. 57): ColVA captures costs and benefits from embedded collateral optionality (e.g. choice of currency or security to post) and non-standard collateral terms.
- Section 16.3.2 (p. 482): ColVA is defined as adjustments due to deviations from perfect collateralisation in terms of margin type and remuneration.