Independent Price Verification (IPV): building a defendable view of the market 

In highly transparent markets, determining a valuation can be relatively straightforward. In many OTC markets, however, observable pricing may be limited, market activity may be sporadic and consensus views may not tell the whole story.

This creates a fundamental challenge for valuation and control functions: how do you build a defendable view of the market when observable pricing may be limited?

Within banks, Independent Price Verification (IPV) teams play a critical role in independently validating and challenging valuations. At its core, IPV is not simply about checking a price. It is about testing whether a valuation can be supported, evidenced and defended using available market information.

As markets become more complex and regulatory scrutiny increases, firms are increasingly expected not only to produce valuations, but also to demonstrate the rationale behind them.

That raises an important question: what evidence is required to support a valuation with confidence?

Does the valuation reflect market reality?

A valuation may be supported by models, assumptions or internal marks, but does it genuinely reflect where the market is?

This is one of the core responsibilities of IPV. Rather than simply accepting a valuation, IPV teams are tasked with independently challenging it. That challenge may involve reviewing front-office marks, testing valuation assumptions, assessing internal pricing views and identifying potential outliers.

The objective is not to prove that a valuation is incorrect. Instead, it is to determine whether the valuation can be credibly supported by available market evidence.

This distinction is important. A valuation may be mathematically sound, but if it cannot be supported by observable market information, valuation teams may struggle to demonstrate confidence in the result. In this sense, IPV acts as an independent validation framework, helping firms assess whether valuations reflect market reality rather than simply internal views.

Ultimately, the challenge is not whether a valuation exists. The challenge is whether it can withstand independent scrutiny.

Is the consensus representative?

Consensus services play an important role in valuation workflows by providing an aggregated view of market pricing.

However, they also create a natural follow-up question: how do you know the consensus is right?

For valuation teams, the challenge is often not obtaining a consensus view. The challenge is understanding whether that consensus remains aligned with observable market activity.

This is where backtesting becomes particularly valuable.

By comparing valuation assumptions and consensus levels against market evidence, firms can assess whether consensus remains representative of prevailing market conditions. Backtesting can help identify situations where market activity supports a consensus view, as well as instances where additional investigation may be required.

The process is not about proving consensus right or wrong. Rather, it is about understanding how well consensus levels align with observable market behaviour and whether there is sufficient evidence to support valuation decisions.

In many ways, backtesting sits at the centre of the IPV process. It creates a framework for testing whether valuation assumptions remain consistent with market evidence and provides an objective basis for challenge and validation.

As regulatory expectations continue to evolve, the ability to demonstrate that valuations are supported by observable market activity is becoming increasingly important. Backtesting helps firms move beyond opinion and towards evidence.

Could the position actually be exited?

A valuation may appear reasonable on paper, but would it be achievable in practice?

This introduces another important dimension of valuation validation: executable market levels.

IPV teams often need to distinguish between indicative values, consensus views and levels that could realistically be achieved in the market. A valuation may appear reasonable based on a model or consensus level, but firms must still consider whether the position could be exited at that valuation.

This becomes particularly relevant when assessing factors such as exit costs, bid-offer dynamics and market liquidity.

The question is simple: could this position realistically be exited at the level being used for valuation?

Answering that question can be especially challenging in less liquid markets, where observable activity may be limited and executable levels may differ from indicative or consensus values.

Understanding executable market conditions provides important context for valuation decisions. It helps firms assess whether valuations are grounded in practical market realities rather than purely theoretical assumptions.

A defendable valuation should therefore be supported not only by pricing information, but also by an understanding of how the market functions in practice.

Is there sufficient market activity to support the valuation?

The amount of observable market activity available can have a significant impact on confidence in a valuation.

This challenge becomes particularly relevant in more complex or less liquid areas of the market, including exotic structures, CMS products, Bermudans, callable structures and less liquid tails or tenors.

In these markets, observable pricing information may be less readily available, increasing the importance of market evidence and independent validation.

IPV teams must therefore assess whether sufficient market activity exists to support a valuation and the assumptions underpinning it.

This question extends beyond valuation itself. It can also influence related activities such as concentration risk assessments, fair value hierarchy classifications and broader valuation governance processes.

The underlying principle remains the same: confidence in a valuation is influenced by the availability and quality of observable market evidence.

As transparency decreases, the importance of independent challenge and validation increases.

Building a defendable view of the market

To answer these questions, firms typically rely on multiple sources of market evidence.

These may include:

• Consensus services
• Trade data
• Order data
• Internal observations
• External market evidence

No single source provides a complete view of market activity.

Consensus services remain an important component of the valuation ecosystem, helping firms establish market views across a broad range of instruments. At the same time, firms may also draw on additional forms of market evidence to develop a more complete understanding of market conditions.

The objective is not to rely on one source of information over another. It is to build sufficient evidence to support, challenge and defend valuation decisions.

The broader and more robust the evidence base, the stronger the foundation for valuation governance.

Confidence starts with independent evidence

Independent Price Verification is not simply about finding a price. It is about answering four critical questions:

1. Does the valuation reflect market reality?
2. Is the consensus representative?
3. Could the position actually be exited?
4. Is there sufficient market activity to support the valuation?

Together, these questions help firms build a defendable view of the market. In markets where transparency is not always guaranteed, confidence comes not only from the valuation itself, but from the ability to support, challenge and defend that valuation using credible market evidence.

Parameta Solutions provides broker-sourced trade, order and pricing data across global OTC markets, helping valuation teams compare internal marks and consensus levels with observable market activity.

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