Prudential Regulation Authority Rulebook

7.1

The recognition of any gains or losses arising from valuations subject to 3.3 must be recognised for the purpose of calculating capital resources in accordance with 4 to 7, unless a rule provides for another treatment of such gains or losses, in which case that other treatment must be applied.

7.2

A firm using third-party valuations, or marking to model, must consider whether valuation adjustments are necessary.

7.3

A firm must consider the need for making adjustments or establishing reserves for less liquid positions (including those arising from both market events and institution-related situations, including concentration positions and/or stale positions) and, on an ongoing basis, review their continued appropriateness in accordance with 7.5.

7.4

A firm must consider adjustments or reserves in respect of unearned credit spreads, close-out costs, operational risks, early termination, investing and funding costs, future administrative costs and, where appropriate, model risk.

7.5

A firm must consider at least the following factors when determining whether a valuation adjustment or reserve is necessary for less liquid positions:

1. (1) the amount of time it would take to hedge out the position/risks within the position;
2. (2) the average and volatility of bid/offer spreads;
3. (3) the availability of market quotes (number and identity of market makers);
4. (4) the average and volatility of trading volumes;
5. (5) market concentrations;
6. (6) the ageing of positions;
7. (7) the extent to which valuation relies on marking to model; and
8. (8) the impact of other model risks.

7.6

If the result of making adjustments or establishing reserves under 7.1 to 7.5 is a valuation which differs from the fair value determined in accordance with 3.1, a firm must reconcile the two valuations.