Financial Services (Investment and Fiduciary Services)
FINANCIAL SERVICES (CAPITAL ADEQUACY OF INVESTMENT FIRMS) REGULATIONS 2007
Systems and Controls.
1. An investment firm shall establish and maintain systems and controls sufficient to provide prudent and reliable valuation estimates.
Systems and controls shall include at least the following elements–
documented policies and procedures for the process of valuation, including clearly defined responsibilities of the various areas involved in the determination of the valuation, sources of market information and review of their appropriateness, guidelines for the use of unobservable inputs reflecting the institution’s assumptions of what market participants would use in pricing the position, frequency of independent valuation, timing of closing prices, procedures for adjusting valuations, month end and ad-hoc verification procedures;
reporting lines for the department accountable for the valuation process that are clear and independent of the front office.
The reporting line shall ultimately be to a main board executive director.
Prudent Valuation Methods
3. Institutions shall mark their positions to market whenever possible. Marking to market is the at least daily valuation of positions at readily available close out prices that are sourced independently. Examples include exchange prices, screen prices, or quotes from several independent reputable brokers.
4. When marking to market, the more prudent side of bid/offer shall be used unless the investment firm is a significant market maker in the particular type of financial instrument or commodity in question and it can close out at mid market.
5. Where marking to market is not possible, institutions shall conservatively mark to model their positions/portfolios before applying trading book capital treatment. Marking to model is defined as any valuation which has to be benchmarked, extrapolated or otherwise calculated from a market input.
6. The following requirements shall be complied with when marking to model–
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Repealed Subsidiary 2007/002