It is a type of cross valuation adjustment/ x-value adjustment (XVA) that takes out the effects of changes in the market value/ valuation of own debt. An example of own debt and its effect on derivatives is the case where this adjustment is calculated in relation to a credit default swap (CDS) against the institution’s own debt (e.g., long-term debt, subordinated debt, etc.)

The fluctuation in the CDS spreads dictates, or affects, the changes in the market value of own debt (through income statement/ reported earnings).

Debt value adjustment is typically applied by firms which heavily trade in OTC derivatives and have exposures to counterparty risk.

It is also known as bilateral credit value adjustment.