ISDA AGM: Goldman and JP Morgan Seek CVA and Netting Reforms

Representatives from Goldman Sachs and JP Morgan have called for revisions to the Basel III endgame capital requirements, specifically targeting rules surrounding cross-product netting, credit valuation adjustment (CVA) and default risk charges (DRC). The requests were raised during the International Swaps and Derivatives Association (Isda) Annual General Meeting (AGM) held in late April 2026.

The discussions center on the final implementation phases of the Basel III framework, often referred to as the endgame. These regulations dictate how much capital banks must hold against their risk-weighted assets to ensure financial stability. Bankers at the meeting argued that certain standardized approaches to counterparty credit risk (SA-CCR) and the Fundamental Review of the Trading Book (FRTB) create capital burdens that do not accurately reflect the actual risk profiles of modern derivatives portfolios.

Push for Cross-Product Netting Flexibility

A primary point of contention is the restriction on cross-product netting. Netting allows financial institutions to offset the value of multiple contracts with the same counterparty, reducing the total exposure and, the amount of capital required to be held. Current Basel III guidelines often limit this netting to similar product classes.

Bankers from Goldman Sachs and JP Morgan argued that the current rules ignore the economic reality of how hedges operate across different asset classes. By preventing banks from netting a position in one product against a highly correlated position in another, the regulations force banks to hold significantly more capital than would be necessary if the economic offset were recognized.

The industry maintains that this lack of flexibility increases the cost of hedging for corporate clients and reduces the overall liquidity of over-the-counter (OTC) derivatives markets.

CVA and Default Risk Charge Concerns

The delegates also focused on Credit Valuation Adjustment (CVA) and Default Risk Charges (DRC). CVA is a capital charge intended to protect banks against the risk that a counterparty’s credit quality deteriorates, even if a formal default does not occur. The DRC, a component of the FRTB, is designed to capture the risk of a sudden jump-to-default of an issuer.

Bankers expressed that the standardized approach for CVA is overly conservative and fails to account for the sophisticated risk-management tools banks use to mitigate these exposures. Similarly, the DRC calculations were described as punitive, particularly for banks with large, diversified trading books that employ complex hedging strategies to neutralize default risk.

The argument presented at the Isda AGM is that the current DRC framework treats diversified portfolios as a collection of individual risks rather than a managed whole, leading to an artificial inflation of capital requirements.

Broader Impact on Market Liquidity

The push for these changes is rooted in the potential for the Basel III endgame to diminish the capacity of global dealers to act as market makers. As capital charges increase, the cost of maintaining large inventories of derivatives rises, which can lead to wider bid-ask spreads and reduced availability of hedging instruments for non-financial corporations.

The industry’s goal is to move toward a more risk-sensitive framework. This would involve shifting away from rigid standardized formulas toward models that better capture the actual risk-mitigating effects of netting and hedging across different product lines.

Isda has historically acted as a bridge between the global banking community and regulatory bodies such as the Basel Committee on Banking Supervision (BCBS). The feedback gathered during the 2026 AGM is expected to inform Isda’s formal submissions to regulators as they refine the implementation timelines and technical standards for the endgame rules.