SD-08.2 — Independent / Mark-to-Model Valuation

Business Domain: BD-08 Valuation & Pricing (Middle office) · Applies: BOTH

Purpose

Produces a value for every instrument that has no usable market price — by modelling it. Where SD-08.1 selects a price the market supplies, SD-08.2 builds one: it discounts the instrument’s cash flows, prices its optionality and decomposes its structure. This is the home of the firm’s quantitative valuation library — the discount curves, the volatility surfaces and the pricing models. It is “mark-to-model”, and the model, its inputs and its limitations are themselves the things the firm must govern (SD-08.4) and reserve against (SD-08.5). SD-08.2 is not private-asset valuation — that is SD-08.3, which values illiquid holdings on a periodic estimate rather than from market data — and it does not own the model inventory or the independent model validation, which are SD-14.4’s.

Service Operations

Construct discount curves — build the multi-curve framework: the overnight-indexed / risk-free-rate discount curve separated from the projection (forward) curves, with cross-currency basis where the instrument is collateralised or funded in another currency.
Build volatility surfaces — calibrate the volatility surfaces and skews the option models price against.
Value OTC derivatives — discount and price interest-rate, credit, FX, equity and commodity derivatives — swaps, forwards, options — on the constructed curves and surfaces.
Value structured and complex products — price structured notes, securitised and tranched instruments, and bespoke contracts whose value is a function of a model rather than a quote.
Value cash instruments without a price — discounted-cash-flow and comparable-based valuation for bonds and loans with no usable evaluated price.
Record model, inputs and version — capture the model used, its calibration inputs and its version against each valuation, so the mark is reproducible and auditable.

Inputs and outputs

Inputs: market data — rates, curves, volatility surfaces, credit spreads, FX — from SD-13.4; instrument and contract terms from SD-13.3, and for derivatives the trade record from SD-12.14 Derivatives Lifecycle Processing; the approved model library and the model-governance sign-off from SD-14.4; the valuation policy from SD-08.4.
Outputs: modelled valuations with their model and input provenance — recorded as Valuation (E-07), consumed by SD-12.9 Fund Accounting & NAV, BD-07 Investment Risk, BD-09 Performance & Analytics, SD-08.5 (which reserves against model uncertainty) and SD-08.6 (which independently verifies them).

Entities

Consumes: E-02 Instrument / Asset, E-08 Price & Market Data, E-03 Portfolio / Mandate, and for derivatives the derivative contract and position records (DR-01 / DR-02); the SD-08.4 valuation policy; the SD-12.14 derivatives trade record; the SD-13.3 instrument and contract terms; the SD-13.4 market data; the SD-14.4 approved model library and the model-governance sign-off.
Owns: the mark-to-model valuations within E-07 Valuation — E-07 names SD-08.2 as the owner for marked, non-observable valuations.

Standards

IFRS 13 / ASC 820 — a model-based value built on observable inputs is a Level 2 measurement; one resting on significant unobservable inputs is Level 3.
The multi-curve / OIS-discounting framework that became market standard after 2008, and the transition from LIBOR to overnight risk-free rates (SOFR, €STR, SONIA).
ISDA definitions and the ISDA CDM for the contract terms the derivative models price; option-pricing theory — Black-Scholes-Merton and its extensions.
SR 11-7 model-risk governance — the models SD-08.2 runs are within the scope of the SD-14.4 model inventory.

Open extensions

The curve and volatility-surface construction sub-model.
The Service-Operation-level input/output contracts.
The boundary with SD-14.4 — SD-08.2 uses and calibrates the models; SD-14.4 owns the enterprise inventory and independent validation.