Document ID: chunk:federal_register_of_legislation:F2022L01562:body:0:p15
Version: federal_register_of_legislation:F2022L01562
Segment Type: other
Provision Reference: 
Character Range: 37883–41089

manner and incorporate all other important information so that fair value estimates are as reliable as possible;
(c)          maximise the use of relevant observable inputs, and minimise the use of unobservable inputs, when estimating fair values using a valuation technique; and
(d)          only mark-to-model where mark-to-market is not possible. The ADI must be able to demonstrate that any use of mark-to-model is prudent.
7.             The relevance and reliability of valuations that an ADI makes are directly related to the quality and reliability of the inputs used in the valuation methodology applied. In determining whether a source of market prices or values used in the methodology applied is reliable, an ADI must consider, amongst other things:
(a)          accounting guidance provided in Australian Accounting Standards applicable to the determination of relevant market information and other factors likely to have a material effect on a financial instrument's fair value;
(b)          the frequency and availability of the prices/quotes utilised;
(c)          whether those prices/quotes represent, or are supported by, actual regularly occurring transactions on an arm's-length basis;
(d)          the breadth of the distribution of the price or value data and whether it is generally available to relevant participants in the market;
(e)          the timeliness of the information relative to the frequency of valuations required to be undertaken;
(f)           the number of independent sources that produce the prices/quotes; and
(g)          the similarity between a financial instrument sold in a transaction and the actual instrument held by the ADI.

Mark-to-market valuation methodologies
8.             An ADI must mark-to-market at least daily utilising readily available close-out prices in orderly transactions.
9.             An ADI must ensure that prices utilised for mark-to-market valuation purposes:
(a)          are sourced independently; and
(b)          use the more prudent side of the bid/offer close-out prices unless the ADI can demonstrate it is a significant market maker in a particular position type and can close out at mid-market closing prices.
10.         Observable inputs must be considered but need not be determinative in valuation processes where an ADI has reasonable grounds to believe that:
(a)          observable inputs or transactions may not be relevant, such as in forced liquidation or distressed sale scenarios; and
(b)          inputs or transactions may not be observable such as where markets are inactive.

Mark-to-model valuation methodologies
11.         Mark-to-model means any valuation that has to be benchmarked, extrapolated or otherwise calculated from a market input, other than valuations calculated from market inputs using market-convention pricing formulae (where such inputs are generally considered to be mark-to-market equivalents).
12.         An ADI may only use mark-to-model if:
(a)          marking-to-market is not possible;
(b)          use of mark-to-model valuation can be demonstrated to be prudent; and
(c)          the valuation procedure applies an extra degree of conservatism.
13.         In order for