As part of any independent price verification process, any discrepancy between internal and independent sources above a certain threshold would typically trigger an investigation as part of the exception handling process. Note – this threshold is typically set in relation to the exposure that the firm has to a given asset (or liability). As part of the price verification process, firms will also therefore need to collect up to date information relating to exposures (delta, vega and cash positions).
The price investigation requires a controller to research circumstances that might have legitimately caused the discrepancy (for example – if the ‘independent’ price was the result of a distressed sale). This would involve speaking to relevant trader/s, broker/s and/or evaluated pricing provider/s, as well as reviewing all available data. The independent nature of price verification also refers to more than just the independence of the pricing source. For example, under the EU’s Capital Requirements Regulation (CRR) it also refers to the individual in charge of the process; specifying that the verification process “shall be performed by a person or unit independent from persons or units that benefit from the trading book.” Once price verification reviews have been completed, a decision will be made on whether to amend the internal price. This decision is subject to review and possibly also a price challenge process from the relevant trader. Only once the decision has been approved via a 4-eyes check, will it then be finalised.