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  • Valuation Methodologies

    • Marking to Market

      • CA-5.1.11

        Marking-to-market is at least the daily valuation of positions at readily available close out prices that are sourced independently. Examples of readily available close out prices include exchange prices, screen prices, or quotes from several independent reputable brokers.

        January 2015

      • CA-5.1.12

        Islamic bank licensees must mark-to-market as much as possible. The more prudent side of bid/offer must be used unless the bank is a significant market maker in a particular position type and it can close out at mid-market. Islamic bank licensees must maximise the use of relevant observable inputs and minimise the use of unobservable inputs when estimating fair value using a valuation technique. However, observable inputs or transactions may not be relevant, such as in a forced liquidation or distressed sale, or transactions may not be observable, such as when markets are inactive. In such cases, the observable data must be considered, but may not be determinative.

        January 2015

    • Marking to Model

      • CA-5.1.13

        Only where marking-to-market is not possible must Islamic bank licensees mark-to-model, but this must be demonstrated to be prudent. Marking-to-model is defined as any valuation which has to be benchmarked, extrapolated or otherwise calculated from a market input.

        January 2015

      • CA-5.1.14

        When marking to model, an extra degree of conservatism is appropriate. The CBB will consider the following in assessing whether a mark-to-model valuation is prudent:

        (a) Senior management should be aware of the elements of the trading book or of other fair-valued positions which are subject to mark to model and should understand the materiality of the uncertainty this creates in the reporting of the risk/performance of the business;
        (b) Market inputs should be sourced, to the extent possible, in line with market prices (as discussed above). The appropriateness of the market inputs for the particular position being valued should be reviewed regularly;
        (c) Where available, generally accepted valuation methodologies for particular products should be used as far as possible;
        (d) Where the model is developed by the licensee itself, it should be based on appropriate assumptions, which have been assessed and challenged by suitably qualified parties independent of the development process. The model should be developed or approved independently of the front office. It should be independently tested. This includes validating the mathematics, the assumptions and the software implementation;
        (e) There should be formal change control procedures in place and a secure copy of the model should be held and periodically used to check valuations;
        (f) Risk management should be aware of the weaknesses of the models used and how best to reflect those in the valuation output;
        (g) The model should be subject to periodic review to determine the accuracy of its performance (e.g. assessing continued appropriateness of the assumptions, analysis of P&L versus risk factors, comparison of actual close out values to model outputs); and
        (h) Valuation adjustments should be made as appropriate, for example, to cover the uncertainty of the model valuation (see also valuation adjustments in Paragraphs CA-5.1.7 to CA-5.1.20).
        January 2015