Document ID: chunk:federal_register_of_legislation:F2022L01562:body:0:p14
Version: federal_register_of_legislation:F2022L01562
Segment Type: other
Provision Reference: 
Character Range: 34916–38158

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 in this process;
(b)          ensure clear and independent reporting lines for the areas responsible for the valuation process;
(c)          provide for the Board to receive reports from senior management on the valuation oversight and valuation performance issues that are notified to senior management for resolution, as well as all significant changes in valuation policies, methodologies and adjustments;
(d)          be integrated with other risk management systems within the ADI;
(e)          outline assets and liabilities and other positions to be recognised at fair value and the processes for approving use of fair values for new items, products and transactions. New product approval processes must include all internal stakeholders relevant to risk measurement, risk control and the assignment and verification of valuations of financial instruments involved;
(f)           enable the ADI to make choices regarding the alternative treatments for categorising financial instruments using fair value measures under Australian Accounting Standards in a fully informed and disciplined manner. If Australian Accounting Standards do not provide relevant guidance, a generally used accounting treatment must be utilised;
(g)          specify the relationship between the application of fair value measures and the ADI's risk management framework;
(h)          detail the processes for ensuring that the use of fair values is applied consistently across the ADI for capital adequacy, reporting and risk management purposes, including across similar instruments (risks) and business lines (books). This must include the frequency at which fair values will be calculated and reported; and
(i)            explicitly assess valuation uncertainties and ensure that assessments of material valuation uncertainties are included in the information provided to the Board and senior management.

Valuation methodologies
6.             An ADI's policies and procedures governing the use of fair value measurement must:
(a)          outline the methods used for the selection and validation of valuation processes used in calculating and reporting fair values including, where appropriate, independent review, analysis of model stability and performance under a variety of conditions, use of back-testing and frequency of validation. The ADI must retain data and supporting documentation for these purposes;
(b)          include rigorous and independent validation and control processes in relation to the design and validation of methodologies used to produce valuations. These valuations must maximise the use of relevant and reliable inputs in a controlled and disciplined 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;