Independent Price Verification

At each month-end, the Valuation Product Control Group (VPC) performs an independent fair valuation of all portfolios within Trading Products. This process results in independent price verification adjustments (IPV) and valuation adjustments (VA). IPV reflect the valuation difference between the line of business (LOB) view of valuation and the independent VPC view. VA’s are adjustments used to achieve fair value and include Close-Out, Uncertainty, Liquidity, Model Risk, and Administrative.

VPC holds a month-end meeting to review all IPV/VA with representatives from the line of business (LOB), Capital Markets Finance, Chief Accountant’s Group, and Risk Oversight. A report is distributed outlining the IPV and VA balances and month over month changes. Detailed reports for each LOB are also available.

VPC will identify material IPV and VA balance for each portfolio (as defined by a unique limit letter) that have a potential impact on VaR. Materiality will be set at total IPV adjustment or total VA greater than $1MM per portfolio. Note that individual rather than net IPV and VA balances should be reviewed as there may be offsetting effects within a portfolio.

Material IPV/VA balances will be assessed with respect to potential impact on the risk sensitivities of the corresponding portfolio. The IPV/Valuation Adjustment Review Stream is tasked with this responsibility.

The origin of IPV balances can generally be ascribed to two principle effects. The first effect originates from a difference between the existing source system market data and the independent VPC market data. The second effect originates from constraints in the source system valuation functionality. These constraints are typically addressed through out-of-system calculations performed by VPC.

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