18 for complex products including but not limited to

18. For complex products, including but not limited to securitisation exposures and
n th -to-default credit derivatives, an ADI must explicitly assess the need for
valuation adjustments to reflect model risk associated with using:
(a) a possibly incorrect valuation methodology; and
(b) unobservable (and possibly incorrect) calibrations in the valuation model.
19. An adjustment to the current valuation of less liquid positions must, unless
otherwise provided for in this Prudential Standard, impact on Common Equity
Tier 1 Capital and may exceed valuation adjustments made under Australian
Accounting Standards and those other adjustments required to be made (refer to
paragraph 14 of this Attachment).
Independent price verification
20. An ADI must arrange independent price verification to be performed at regular
intervals so that market prices or model inputs used in valuation processes are
verified for accuracy. Such verification must be performed by parties independent
of dealing, trading or asset or liability origination areas.
21. Independent price verification entails a higher standard of accuracy than market
prices or model inputs used for daily marking-to-market purposes. For
independent price verification where pricing sources are more subjective, an ADI
must consider whether prudent measures such as valuation adjustments (see
above) may be appropriate and make such adjustments as necessary.
Own creditworthiness
22. An ADI’s policies and procedures must set out how it determines the fair value
gains and losses arising from changes in the ADI’s own creditworthiness and that
of other group members at Level 2.

January 2018
APS 111 – Attachment B - 21
Attachment B — Criteria for classification as paid-up
ordinary shares
1. To be classified as paid-up ordinary shares in Common Equity Tier 1 Capital, an
instrument must satisfy the following criteria:
(a) the instrument represents the most subordinated claim in liquidation of the
issuer;
(b) the instrument holder is entitled to a claim on the residual assets that is
proportional to its share of issued capital, after all senior claims have been
repaid in liquidation (i.e. there is an unlimited and variable claim, not a
fixed or capped claim);
(c) the principal amount of the instrument is perpetual (i.e. it has no maturity
date) and is never repaid outside of liquidation (other than discretionary
repurchases subject to APRA ’s approval);
(d) the issuer, and any other member of a group to which the issuer belongs,
does nothing to create an expectation at issuance that the instrument will be
bought back, redeemed or cancelled and the statutory or contractual terms
of the instrument do not include any feature that might give rise to such an
expectation;
(e) distributions on the instrument are paid out of distributable items (retained
earnings included) of the issuer, and the terms of the instrument do not
provide for payment to investors other than in the form of a cash payment.