Document ID: chunk:federal_register_of_legislation:F2022L01562:body:0:p17
Version: federal_register_of_legislation:F2022L01562
Segment Type: other
Provision Reference: 
Character Range: 43636–46900

matters:
(i)            close-out costs;
(ii)         unearned credit spreads;
(iii)       operational risks;
(iv)        early termination;
(v)          investing and funding costs;
(vi)        any future administrative costs; and
(vii)     as appropriate, model risk.
15.         Valuation adjustments that need to be made must, unless otherwise provided for in this Prudential Standard, impact on Common Equity Tier 1 Capital and may exceed those made under Australian Accounting Standards.

Illiquid positions
16.         An ADI must have procedures in place, if needed:
(a)          to adjust current fair value measurements to account for any illiquidity of positions;
(b)          to calculate the necessary adjustments where positions are judged to be illiquid; and
(c)          to review the appropriateness of those adjustments, or lack thereof, on a regular (at least monthly) basis.
This applies whether or not a position is marked-to-market using market prices, observable inputs or third-party valuations, or is marked-to-model.
17.         Relevant factors an ADI must consider in determining valuation adjustments for illiquidity include, but are not limited to:
(a)          the average volatility of bid/offer spreads;
(b)          the availability of independent market quotes (number and identity of market makers);
(c)          the average volatility (under normal market conditions and in periods of market stress) of trading volumes and volumes of assets and liabilities that are exchanged;
(d)          market concentrations;
(e)          ageing of positions;
(f)           the amount of time it would take to hedge the position/risks within the position or to otherwise dispose of an asset or liability or other position;
(g)          the extent to which the valuation relies on mark-to-model; and
(h)          the impact of other model risks.
18.         For complex products, including but not limited to securitisation exposures and nth-to-default credit derivatives, an ADI must explicitly assess the need for valuation adjustments to reflect model risk associated with using:
(a)          a possibly incorrect valuation methodology; and
(b)          unobservable (and possibly incorrect) calibrations in the valuation model.
19.         An adjustment to the current valuation of less liquid positions must, unless otherwise provided for in this Prudential Standard, impact on Common Equity Tier 1 Capital and may exceed valuation adjustments made under Australian Accounting Standards and those other adjustments required to be made (refer to paragraph 15 of this Attachment).

Independent price verification
20.         An ADI must arrange independent price verification to be performed at regular intervals so that market prices or model inputs used in valuation processes are verified for accuracy. Such verification must be performed by parties independent of dealing, trading or asset or liability origination areas.
21.         Independent price verification entails a higher standard of accuracy than market prices or model inputs used for daily marking-to-market purposes. For independent price verification where pricing sources are more subjective, an ADI must consider whether prudent measures such as valuation adjustments