Price Verification and Prudent Valuation

Checking the marks, and holding capital for doubt

A trading desk marks its own positions, and nobody else in the bank is supposed to take that number on trust. Independent price verification tests every mark against sources the desk does not control, valuation adjustments move the accounting value away from mid where exiting would cost money, and prudent valuation goes one step further: it deducts from capital the amount by which a cautious valuer could reasonably have marked lower. Together they decide how much of a desk’s reported profit is real.

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What the lesson covers

1. What it is
2. How it works
3. Why it’s used
4. Prudent valuation
5. Risks to watch

Key terms

• Independent price verification — Testing front-office marks against prices and inputs from sources the desk does not control.
• Valuation control group — The function, independent of trading, that verifies marks and books valuation adjustments.
• Fair value hierarchy — IFRS 13’s Levels 1 to 3, classifying positions by how observable their valuation inputs are.
• Day-one P&L deferral — Holding back profit on a trade valued with significant unobservable inputs until they become observable.
• Additional valuation adjustment — A prudent valuation deduction from CET1 capital, computed at 90% confidence for one of nine uncertainty sources.
• Bid–offer reserve — A fair value adjustment for the cost of closing out the book’s net risk positions.

Every key term, A to Z

In practice

Every bank with a trading book runs a monthly IPV cycle, and its results go to a valuation committee chaired outside the business. Regulators and auditors read the Level 3 roll-forward and the AVA breakdown closely, because together they show where a bank’s reported value depends most on its own judgement.

Read next

• Valuation and Marking — What a trade is worth, and which curve says so
• P&L Attribution — Yesterday’s profit, accounted for line by line
• Value at Risk — One number for tomorrow’s loss, and what it leaves out

In the app, Price Verification and Prudent Valuation carries a five-step lesson, a worked example and a bank of twelve questions drawn differently every sitting.

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Educational content only. Nothing here is financial advice, an offer to trade, or a recommendation to buy or sell any instrument.