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  • Adjustment to the Current Valuation of Less Liquid Positions for Regulatory Capital Purposes

    • CA-5.1.18.A

      Islamic bank licensees must establish and maintain procedures for judging the necessity of and calculating an adjustment to the current valuation of less liquid positions for regulatory capital purposes. This adjustment may be in addition to any changes to the value of the position required for financial reporting purposes and must be designed to reflect the illiquidity of the position. Islamic bank licensees must consider the need for an adjustment to a position's valuation to reflect current illiquidity whether the position is marked to market using market prices or observable inputs, third-party valuations or marked to model.

      January 2015

    • CA-5.1.19

      Bearing in mind that the underlying 10-day assumptions made about liquidity in the market risk capital charge may not be consistent with the Islamic bank licensee's ability to sell or hedge out less liquid positions, where appropriate, Islamic bank licensees must take an adjustment to the current valuation of these positions, and review their continued appropriateness on an on-going basis. Reduced liquidity may have arisen from market events. Additionally, close-out prices for concentrated positions and/or stale positions must be considered in establishing the adjustments. Islamic bank licensees must consider all relevant factors when determining the appropriateness of the adjustments for less liquid positions. These factors may include, but are not limited to, the amount of time it would take to hedge out the position/risks within the position, the average volatility of bid/offer spreads, the availability of independent market quotes (number and identity of market makers), the average and volatility of trading volumes (including trading volumes during periods of market stress), market concentrations, the aging of positions, the extent to which valuation relies on marking-to-model, and the impact of other model risks not included in Paragraph CA-5.1.18.A.

      January 2015

    • CA-5.1.20

      The adjustment to the current valuation of less liquid positions made under Paragraph CA-5.1.19 must impact Tier 1 regulatory capital and may exceed those valuation adjustments made under financial reporting standards and Paragraphs CA-5.1.17 and CA-5.1.18.

      January 2015