Re: Mark to Market

From: Bill Russell
Affiliation:
Address: bill.russell@charter.net
Date: 02 Mar 2004
Time: 21:47:20

Comments

Use your judgment. United States' Generally accepted accounting principles (GAAP) states that the fair value (read “MTM” or mark-to-model value) of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced liquidation.

GAAP further says that if a quoted market price is available for a financial instrument, the fair value or MTM is the product of the number of units held multiplied by the market price. If a quoted market price is not available, an estimate of the MTM value should be made using the best information available. If you have to 'estimate' MTM, the key is that your valuation approach have wide market acceptance, be applied consistently period to period, and be well documented. The potential impact of a downward market move if you were to liquidate a large position is not a factor when estimating MTM value.

That being said, bank regulators in the US (and the G-30 back in ’93) allow derivative dealers to establish valuation reserves to reflect the potential for market illiquidity upon closing out a thinly traded derivatives position (a valuation reserve reduces the MTM value). There is no requirement that you employ this.

Bottom Line: Use market-accepted valuation techniques, use your good judgment, and be consistent over time.