CSSF Feedback Report - Thematic review - valuation framework for less liquid and illiquid assets

What Changed

• Based on the prior CSSF feedback on valuation and the indicated thematic focus, compliance teams should expect the following concrete expectations to apply specifically to less liquid and illiquid assets:
• Investment fund managers must maintain concise, centralised, and comprehensive valuation policies and procedures that explicitly cover all asset types, including less liquid and illiquid instruments, and clearly allocate roles and responsibilities in
• Valuation policies must define and justify the valuation methodologies and models used for less liquid and illiquid assets, including the hierarchy of methods, model selection criteria, and conditions under which models or inputs are changed.
• Firms must perform robust model governance for valuation models used on less liquid and illiquid assets, including independent model review (by staff not involved in model development), back‑testing, validation of assumptions and inputs, and document
• Valuation frameworks must explicitly address stressed market conditions for illiquid and thinly traded assets, including triggers for stress conditions, alternative valuation methodologies under stress, and fair value adjustments reflecting heightene
• Investment fund managers must avoid over‑reliance on external pricing providers and external valuers for less liquid and illiquid assets and must challenge, validate and regularly back‑test third‑party prices and valuation outputs.

Suggested Considerations

• Conduct a comprehensive gap analysis of existing valuation policies and procedures against the CSSF’s feedback on valuation, with specific attention to less liquid and illiquid assets, and document all identified weaknesses and remediation actions.
• Update and formally approve valuation policies and procedures to clearly define methodologies, model hierarchies, and data source selection for less liquid and illiquid assets, including explicit provisions for stressed market conditions.
• Implement or enhance a formal valuation model governance framework for illiquid asset models, including independent model validation, periodic back‑testing, documentation of assumptions, and at least annual model reviews.
• Review and, where necessary, redesign organisational arrangements to ensure the operational and hierarchical independence of the valuation function from portfolio management, and adjust remuneration policies to avoid performance‑linked incentives for valuation staff.
• Strengthen controls over external pricing providers and external valuers by documenting selection criteria, performing initial and ongoing due diligence, challenging methodologies, and periodically back‑testing third‑party valuations of illiquid assets.
• Integrate liquidity risk and stress‑testing outputs into the valuation framework by establishing procedures to consider liquidity stress test results when determining fair value and valuation adjustments for less liquid and illiquid positions.

Key Dates

Who is Affected