-196-
unknown to him to be the industry practice.63 Duffie’s inability
to state unequivocally that FNBC’s practices were consistent with
industry practice is particularly telling in view of his position
and status in the very field at issue in this case.
As to the G-30 report, it did not show any general consensus
on an industry standard. In fact, the G-30 report leads to a
contrary conclusion that there was very little in the way of
specific industry practice. See also BC-277, supra:
The best approach is to value derivatives portfolios
based on mid-market levels less adjustments.
Adjustments should reflect expected future costs such
as unearned credit spreads, close-out costs, investing
and funding costs, and administrative costs. Most
limited end-users (and some traders) may find it too
costly to establish systems that accurately measure the
necessary adjustments for mid-market pricing. In such
cases, banks may price derivatives based on bid and
offer levels, provided they use the bid side for long
positions and the offer side for short positions. This
procedure will ensure that financial derivatives
positions are not overvalued.
In this regard, the G-30 survey indicates that, during the
relevant years, there was no consistency among dealers on the use
63 For example, with respect to expected exposure, Duffie
was unable to state that FNBC’s use of a maximum exposure
methodology was consistent with industry practice. In fact, he
pointed to FNBC as the “one data point” for use of an 80-percent
confidence level. With respect to the question of whether FNBC
used a “system” that was consistent with industry practice,
Duffie stated that there was no consistent industry practice.
Duffie also opined that there was little standardization in the
techniques used by banks to value financial derivatives and
little consistency among bank financial derivatives dealers in
determining the amount of adjustments to be made to midmarket
values of financial derivatives during the early 1990s.
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