Under FAS 157, non-performance risk refers to the risk that the obligation will not be fulfilled and thus affects the value at which the liability is transferred. Therefore, FAS 157 requires the fair value of the liability to include an adjustment for the non-performance risk related to the liability.
In order to comply with FAS 157 and prior to adjusting a liability's fair value by the non-performance risk, one must understand how a liability's value is derived; especially for those hard-to-value derivatives with level 2 or 3 inputs. For hard-to-value derivatives, which require models to derive their values, OTC Val has implemented a procedure to account for non-performance risk in its valuation process.
Bob Sangha, one of the founders of OTC Val, elaborates, âWe are pleased that we could assist our clients with their non-performance risk adjusted valuations and obtain sign-off from their auditors. Expanding our services once again is a reflection of our commitment to evolving our services and working with our clients to address their non-performance risk requirements."
OTC Val employs multiple valuation techniques to address the Level 1, 2, and 3 input requirements of FAS 157. For derivatives that can be replicated with vanilla, liquidly-traded, instruments and valued in a model-independent way, the focus is on mark-to-market valuation using high-quality market data from leading brokers and data vendors. For hard-to-value derivatives with limited price discovery and imperfect replication, OTC Valâs market professionals offer mark-to-model valuation based on careful calibration of industry standard models.