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3. G-30 Report
The G-30 report set forth an unofficial but authoritative
review of industry practices and performances, mainly for the
benefit of the risk management activities of dealers and end
users. The G-30 report included a primary section on
recommendations and the following additional and integral parts:
Appendix I Working Papers, dated July 1993
Appendix II Legal Enforceability, Survey of Nine
Jurisdictions, dated July 1993
Appendix III Survey of Industry Practices, dated
March 1994
Follow-up Surveys of Industry Practice, dated December
1994
As to the valuation of financial derivatives, Recommendation
3 of the G-30 report stated:
Recommendation 3: Market Valuation Methods
Derivatives portfolios of dealers should be valued
based on mid-market levels less specific adjustments,
or on appropriate bid or offer levels. Mid-market
valuation adjustments should allow for expected future
costs such as unearned credit spread, close-out costs,
investing and funding costs, and administrative costs.
The G-30 report explained as to this recommendation:
Marking to mid-market less adjustments specifically
defines and quantifies adjustments that are implicitly
assumed in the bid or offer method. Using the mid-
market valuation method without adjustment would
overstate the value of a portfolio by not deferring
income to meet future costs and to provide a credit
spread.
Two adjustments to mid-market are necessary even for a
perfectly matched portfolio: the “unearned credit
spread adjustment” to reflect the credit risk in the
portfolio; and the “administrative costs adjustment”
for costs that will be incurred to administer the
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