Investor Presentaiton
MORGAN STANLEY BANK ASIA LIMITED
NOTES TO THE FINANCIAL STATEMENTS
Year ended 31 December 2020
3.
d.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair value (continued)
Valuation process
Valuation Control ("VC") within Finance is responsible for the Company's fair value valuation
policies, processes and procedures. VC is independent of the business units and reports to the Chief
Financial Officer of the Morgan Stanley Group ("CFO"), who has final authority over the valuation
of the Company's financial instruments. VC implements valuation control processes designed to
validate the fair value of the Company's financial instruments measured at fair value including those
derived from pricing models.
Model Review. VC, in conjunction with the Model Risk Management Department ("MRM"),
which reports to the Chief Risk Officer of the Morgan Stanley Group ("CRO"), independently
reviews valuation models' theoretical soundness, the appropriateness of the valuation
methodology and calibration techniques developed by the business units using observable
inputs. Where inputs are not observable, VC reviews the appropriateness of the proposed
valuation methodology to determine that it is consistent with how a market participant would
arrive at the unobservable input. The valuation methodologies utilised in the absence of
observable inputs may include extrapolation techniques and the use of comparable observable
inputs. As part of the review, VC develops a methodology to independently verify the fair value
generated by the business unit's valuation models. The Company generally subjects valuations
and models to a review process initially and on a periodic basis thereafter.
Independent Price Verification. The business units are responsible for determining the fair
value of financial instruments using approved valuation models and valuation methodologies.
Generally on a monthly basis, VC independently validates the fair values of financial
instruments determined using valuation models by determining the appropriateness of the
inputs used by the business units and by testing compliance with the documented valuation
methodologies approved in the model review process described above.
The results of this independent price verification and any adjustments made by VC to the fair
value generated by the business units are presented to management of the Morgan Stanley
Group's three business segments (i.e. Institutional Securities, Wealth Management and
Investment Management), the CFO and the CRO on a regular basis.
VC uses recently executed transactions, other observable market data such as exchange data,
broker/dealer quotes, third-party pricing vendors and aggregation services for validating the
fair values of financial instruments generated using valuation models. VC assesses the external
sources and their valuation methodologies to determine if the external providers meet the
minimum standards expected of a third-party pricing source. Pricing data provided by approved
external sources are evaluated using a number of approaches; for example, by corroborating the
external sources' prices to executed trades, by analysing the methodology and assumptions used
by the external source to generate a price and/ or by evaluating how active the third-party
pricing source (or originating sources used by the third-party pricing source) is in the market.
Based on this analysis, VC generates a ranking of the observable market data designed to ensure
that the highest-ranked market data source is used to validate the business unit's fair value of
financial instruments.
VC reviews the models and valuation methodology used to price new material Level 2 and
Level 3 transactions and both Finance and MRM must approve the fair value of the trade that
is initially recognised.
Level 3 Transactions. VC reviews the business unit's valuation techniques to assess whether
these are consistent with market participant assumptions.
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