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Application provision

1.1 Unless otherwise stated, this Part applies to:

7.1

01/01/2016

The recognition of any gains or losses arising from valuations subject to 3.3 must be recognised for the purpose of calculating capital resources in accordance with 4 to 7, unless a rule provides for another treatment of such gains or losses, in which case that other treatment must be applied.

7.2

01/01/2016

A firm using third-party valuations, or marking to model, must consider whether valuation adjustments are necessary.

7.3

01/01/2016

A firm must consider the need for making adjustments or establishing reserves for less liquid positions (including those arising from both market events and institution-related situations, including concentration positions and/or stale positions) and, on an ongoing basis, review their continued appropriateness in accordance with 7.5.

7.4

01/01/2016

A firm must consider adjustments or reserves in respect of unearned credit spreads, close-out costs, operational risks, early termination, investing and funding costs, future administrative costs and, where appropriate, model risk.

7.5

01/01/2016

A firm must consider at least the following factors when determining whether a valuation adjustment or reserve is necessary for less liquid positions:

  1. (1) the amount of time it would take to hedge out the position/risks within the position;
  2. (2) the average and volatility of bid/offer spreads;
  3. (3) the availability of market quotes (number and identity of market makers);
  4. (4) the average and volatility of trading volumes;
  5. (5) market concentrations;
  6. (6) the ageing of positions;
  7. (7) the extent to which valuation relies on marking to model; and
  8. (8) the impact of other model risks.

7.6

01/01/2016

If the result of making adjustments or establishing reserves under 7.1 to 7.5 is a valuation which differs from the fair value determined in accordance with 3.1, a firm must reconcile the two valuations.