Gross Negative Fair Value (GNFV)

Gross negative fair value (GNFV) is an assessment of the total fair value of a bank's contracts in which the bank currently has a balance outstanding to the counterparty. Gross negative fair value represents the maximum amount that would be lost by all counterparties if the bank defaulted; it is further assumed that bilateral contracts are not netted and that the other parties do not have claims on the bank's assets.

Credit risks arise when banks trade derivatives with one another. The volatility of underlying assets - interest rates, currencies, commodities, equities, etc. - as well as maturity and liquidity of derivatives contracts and the creditworthiness of trading counterparties are the key variables that influence the amount of credit risk​​​​​​​. On its books at any given point in time, a bank will have a total derivatives position of either gross positive fair value (GPFV) or gross negative fair value, the former indicating that the bank carries derivatives receivable and the latter indicating that it has derivatives payable. GNFV is an approximation of the total credit risk that the bank exposes to its counterparties if it defaulted on its derivatives contracts.

Using "gross" numbers is a way to measure maximum loss risk, but in practice, because of netting arrangements among banks, the amount of potential loss is less. A bilateral netting agreement is an arrangement whereby all receivables and payables are offset in the event of a default or insolvency of one of the counterparties. The Office of the Comptroller of the Currency (OCC) tracks derivatives activities of banks and publishes quarterly reports. The OCC reports GNFV as well as GPFV, but it's the preferred metric in evaluating credit risk is net current credit exposure (NCCE), which is equivalent to the net amount owed to banks if all derivatives contracts were immediately liquidated.