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Alternative Market Briefing

Other Voices: Are your pricing policies and procedures for less liquid instruments adequate?

Thursday, June 22, 2017

Komfie Manalo, Opalesque Asia:

The unrelated position mismarking incidents that quickly precipitated the closures of both Visium Asset Management and Marinus Capital have been recent focal points for market participants, but regulatory scrutiny of valuation choices for less liquid instruments is certainly not new. Askin, Piper Capital Management, and other market participants have also faced high profile regulatory/legal consequences when valuation issues exceeded regulatory tolerances (see the walk down memory lane below). However, even market participants who have had the good fortune of avoiding Wall Street Journal headlines likely still face challenges on a daily basis when marking less liquid and hard-to-value positions.

Capital Market Risk Advisors (CMRA) recommends:

  • Updating written policies and procedures to reflect new transaction types, new data sources, and new "lessons learned" from others' stumbles. It is all too easy to make policies a one-time exercise rather than monitoring and updating them as circumstances change.
  • Ensuring that written policies and procedures reflect your firm's actual practices rather than being aspirational. It is far better to "say what you do and do what you say" rather than memorializing an aggressive policy that you hope to one day achieve but that is not currently implemented.
  • Implementing a pricing process that results in a documented set of challenges and ......................

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