FVA, The Fake Debate: Why Are They Still Debating?

Funding Valuation Adjustment (FVA) has been introduced as the CVA and DVA after the default of Lehman Brother. After the subprime crisis, the basis spread was not negligible anymore, credit and liquidity risk became the first concern. In addition, regulators put in place reforms, which associate capital reserve for each of these new risks. It became natural to adjust the so called fair premium (price associated to risk neutral measure).In fact the debate is still opened, the industry is divided concerning its definition and its price adjustment status. The risk is real, academicians can argue but the fact is that default occur and occurred because of liquidity issues (in fact credit and liquidity are very linked to each other, as demonstrated in The Fear Pricing Theory: Credit and Liquidity Adjustment).In one hand, we have for non cleared trade a risk associated to unknown (risky) cashflow, in the other hand we have to answer to the margin call.We first introduce the problem and industry views, then in an objective maner we define FVA thanks to the analogy with the MLVA (Market Liquidity Valuation Adjustment) and establish the consequences of our approach in term of modeling and risks.