Document ID: chunk:federal_register_of_legislation:F2022L01562:body:0:p13
Version: federal_register_of_legislation:F2022L01562
Segment Type: other
Provision Reference: 
Character Range: 32115–35213

change in
(A)         the systems and controls used for valuation purposes;
(B)        the valuation methodologies; or
(C)        the valuation adjustments employed to produce fair values of financial instruments; and
(e)          the ADI meets all requirements set out below as applicable, with respect to measurement of financial instruments at fair values.
2.             For the purposes of paragraph 1(c) of this Attachment, an ADI must:
(a)          have clear and robust governance structures for the production, assignment, verification and oversight of the valuation of financial instruments;
(b)          have adequate capacity, including during periods of stress, to establish and verify valuations. This capacity must be commensurate with the importance, risk and size of exposures being valued in the context of the business profile of the ADI;
(c)          for exposures that represent a material risk, have a capacity to produce valuations using alternative methods in the event that primary valuation inputs and valuation approaches become unreliable, unavailable or not relevant due to market discontinuities or illiquidity;
(d)          test and review on a regular basis the performance of its valuations, including under stress conditions, so that it understands the limitations of its valuations. This is of particular significance where an ADI makes use of models for valuation purposes; and
(e)          ensure the application of fair values is specifically addressed as part of the internal or external audit review of the ADI's risk management framework under Prudential Standard CPS 220 Risk Management (CPS 220), including in the internal review of the implementation of policies and procedures for producing fair values and their application.
3.             An ADI must advise APRA, if requested, of details of:
(a)          the ADI's use of fair values of financial instruments and the ADI's valuation policies and procedures;
(b)          the relationship between the ADI's use of fair values and its risk management policies and procedures; and
(c)          the ADI's assessment of the impact of the application of fair values on the value of financial instruments for capital adequacy purposes.
4.             If APRA considers that an ADI's policies and procedures for the application of fair values, or the fair values recognised by an ADI, are inadequate, not reliable, or adversely affect the ADI's safety and soundness, APRA may require the ADI, at Level 1 and Level 2, to:
(a)          amend its policies and procedures;
(b)          make adjustments to fair values of financial instruments included in Regulatory Capital, and for other stated prudential purposes;
(c)          discontinue using fair value measures for regulatory reporting; or
(d)          hold higher levels of capital.

Systems and controls
5.             An ADI's systems and controls used for valuation purposes must:
(a)          include documented policies and procedures for the process of valuation. This must incorporate clearly defined responsibilities of the various areas involved