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  • Valuation requirements

    • CA-1.3.14

      To establish a relevant base for measuring the market risk in the trading book, all positions should be marked to market daily, including the recognition of accruing interest, dividends or other benefits as appropriate. Banks are required to have, and discuss with the Agency, a written policy statement on the subject of valuing trading book positions, which in particular should address the valuation process for those items where market prices are not readily available. This policy statement should have been developed in conjunction with the bank's internal and external auditors. Having arrived at a valuation mechanism for a single position or a group of similar positions, the valuation approach should be applied consistently. In addition to the considerations of prudence and consistency, the bank's valuation policy should reflect the points set out below:

      (a) A bank may mark to market positions using either a close-out valuation based on two-way prices (i.e., a long position shall be valued at its current bid price and a short position at its current offer price) or, alternatively, using a mid-market price but making a provision for the spread between bid and offer prices for different instruments. The bank must have due regard to the liquidity of the position concerned and any special factors which may adversely affect the closure of the position.
      (b) Where a bank has obtained the Agency's approval for the use of a risk assessment model in the calculation of the capital requirements for options (in accordance with chapter CA-9 of these regulations), it may value its options using the values derived from that model.
      (c) Where a bank does not use a model and the prices are not published for its options positions, it must determine the market value as follows:
      (i) For purchased options, the marked-to-market value is the product of the "in the money" amount and the quantity underlying the option; and
      (ii) For written options, the marked-to-market value is the initial premium received for the option plus the product of the amount by which the current "in the money" amount exceeds either the "in the money" amount at the time the contract was written, or zero if the contract was "out of the money" at the time that it was written; and the quantity underlying the option.
      (d) A bank must calculate the value of a swap contract or an FRA having regard to the net present value of the future cash flows of the contract, using current interest rates relevant to the periods in which the cash flows will arise.
      (e) Where a bank is a market maker in an instrument(s), the valuation should be the bank's own bid or offer price which should reflect the bank's exposure to the market as a whole and its views on future prices. Where the bank is the sole market maker in a particular instrument, it should take proper care to ensure that the valuation used is prudent in all circumstances.
      (f) In the event that a bank is only able to access indicative prices, having regard to the fact that they are only a guide, such prices may have to be adjusted to some degree in order to arrive at a prudent valuation.
      (g) In the event that the bank is only able to access mid-market or single values, it should have regard to the fact that these prices will have to be adjusted to some degree in order to arrive at a prudent valuation.