# What Are the Regulatory Implications of Using Model-Based Pricing for Illiquid Assets? ▴ Question

**Published:** 2025-08-06
**Categories:** Question

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## Concept

The valuation of an illiquid asset is an exercise in navigating an information vacuum. Where liquid assets provide a constant stream of observable data points ▴ prices at which transactions occur ▴ [illiquid assets](https://prime.greeks.live/area/illiquid-assets/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) offer only silence. [Model-based pricing](https://prime.greeks.live/area/model-based-pricing/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) is the system designed to translate that silence into a defensible estimate of value. It is an architecture of assumptions, a framework for imposing order where none exists.

The regulatory implications are a direct consequence of this function. When a firm replaces observable market truth with an internal, model-driven estimation, it assumes the burden of proof. Regulators, through frameworks like [ASC 820](https://prime.greeks.live/area/asc-820/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) and [IFRS 13](https://prime.greeks.live/area/ifrs-13/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), are not merely setting rules for calculation; they are defining the protocols for demonstrating that this internal estimation process is robust, consistent, and free from bias.

At its core, the regulatory apparatus is built to manage the inherent subjectivity of this process. It mandates a common language for valuation through the [Fair Value Hierarchy](https://prime.greeks.live/area/fair-value-hierarchy/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), forcing firms to classify the inputs to their models. This hierarchy is the foundational layer of the regulatory operating system. Level 1 inputs are direct, observable market prices ▴ the gold standard.

Level 2 inputs are observable but require some interpretation, such as prices for similar assets. Level 3 inputs, the domain of most [illiquid asset](https://prime.greeks.live/area/illiquid-asset/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) models, are unobservable. They are the firm’s own assumptions about what market participants would use to price an asset if a market existed. The use of Level 3 inputs triggers the highest level of [regulatory scrutiny](https://prime.greeks.live/area/regulatory-scrutiny/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), demanding a comprehensive system of governance, validation, and disclosure. The regulations function as a blueprint for building trust in a number that is, by its nature, an estimate.

> Model-based pricing for illiquid assets is a necessary system for creating value estimates in the absence of market data, with regulations providing the essential framework for ensuring these estimates are verifiable and consistent.

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## What Is the Core Regulatory Challenge?

The primary regulatory challenge is the management of information asymmetry and potential for manipulation. When a firm values an asset using its own model, it possesses perfect knowledge of that model’s assumptions and weaknesses, while investors and regulators do not. This creates a risk that valuations could be managed to smooth earnings, inflate asset values, or conceal performance issues. The SEC has pursued litigation in cases where it perceived that firms used unreasonable assumptions to fraudulently inflate the value of Level 3 assets.

Consequently, the regulations are designed as a system of forced transparency. They compel firms to document their valuation policies, justify their model inputs, and disclose the sensitivity of their valuations to changes in key assumptions. This disclosure acts as a check on managerial discretion, providing external stakeholders with the tools to assess the quality and reliability of the firm’s valuation process.

Furthermore, the regulations establish a clear line of accountability. A firm must develop and adhere to a consistent valuation policy, often overseen by a dedicated [valuation committee](https://prime.greeks.live/area/valuation-committee/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). This procedural requirement transforms valuation from a purely quantitative exercise into a governed, auditable process.

The choice of models, the sourcing of data, and the application of professional judgment must all be documented and defensible. The regulatory framework forces the firm to build an internal system of checks and balances that can withstand external scrutiny from auditors and regulators alike.

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## Strategy

A robust strategy for model-based pricing under ASC 820 and IFRS 13 is an architecture of defensibility. It is built on three pillars ▴ a transparent governance structure, a rigorous model selection and validation protocol, and a proactive disclosure philosophy. The objective is to construct a valuation framework that not only complies with the letter of the regulations but also embodies their spirit, creating a system that is trusted by investors, auditors, and regulators. This requires moving beyond mere calculation to establish a comprehensive valuation ecosystem within the firm.

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## Establishing a Valuation Governance Framework

The first strategic imperative is the creation of a clear and effective governance structure. This is the control layer of the valuation system. Best practice involves the formation of a valuation committee, composed of individuals with the requisite expertise and independence to provide credible oversight.

This committee is responsible for approving the firm’s valuation policies, reviewing and challenging model assumptions, and signing off on the final valuations of all Level 3 assets. The use of an independent third-party valuation firm is another key strategic choice, providing an objective perspective and demonstrating to regulators a commitment to unbiased assessment.

The valuation policy itself is the central document of this framework. It must be a living document that outlines every stage of the process, including:

- **Model Selection Criteria** ▴ The principles guiding the choice of valuation techniques for different asset classes.

- **Data Sourcing and Integrity** ▴ The approved sources for both observable (Level 2) and unobservable (Level 3) inputs, and the procedures for verifying their integrity.

- **Validation and Back-Testing** ▴ The protocols for testing model accuracy, including sensitivity analysis and comparison against any available market data or subsequent transaction prices.

- **Escalation and Approval** ▴ The process for reviewing and approving valuations, including the specific roles and responsibilities of the valuation committee and senior management.

> A strategic approach to model-based pricing requires building a defensible system of governance, rigorous model validation, and transparent disclosure to satisfy regulatory expectations.

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## How Do Valuation Approaches Compare under Regulatory Scrutiny?

The choice of valuation approach is a critical strategic decision with direct regulatory consequences. While ASC 820 and IFRS 13 permit the use of the Market, Income, and Cost approaches, each carries a different burden of proof and is subject to varying levels of scrutiny, particularly for Level 3 assets. An effective strategy involves selecting the most appropriate and defensible approach for each specific asset class.

| Valuation Approach | Description | Regulatory Defensibility | Data Requirements | Common Use Cases for Illiquid Assets |
| --- | --- | --- | --- | --- |
| Market Approach | Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. | High, if comparable transactions are recent, relevant, and observable. Lower, if significant adjustments are needed to account for differences. | Requires observable data for comparable companies or assets (e.g. transaction multiples, trading prices of similar securities). | Private company equity (using public company multiples), minority stakes in pre-IPO companies. |
| Income Approach | Converts future amounts (e.g. cash flows or earnings) to a single current (i.e. discounted) amount. The fair value measurement is determined on the basis of the value indicated by current market expectations about those future amounts. | Moderate to High, but highly dependent on the justification for unobservable inputs (e.g. discount rates, growth rates, forecasts). Scrutiny is high. | Requires detailed financial projections, cash flow forecasts, and defensible assumptions for discount rates and terminal values. | Infrastructure projects, private credit instruments, intangible assets (e.g. patents, licenses), venture capital investments. |
| Cost Approach | Reflects the amount that would be required currently to replace the service capacity of an asset (often referred to as current replacement cost). | Generally lower for income-generating assets, as it may not reflect future economic benefits. More defensible for unique, non-income-generating assets. | Requires data on the cost to construct or acquire a substitute asset of comparable utility, including adjustments for physical, functional, and economic obsolescence. | Custom-built machinery, specialized real estate, certain types of infrastructure assets where income streams are not easily projected. |

The strategic selection process involves a trade-off between relevance and observability. The Income Approach may be the most theoretically sound method for valuing an income-producing asset, but it relies heavily on subjective, unobservable [Level 3 inputs](https://prime.greeks.live/area/level-3-inputs/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). The Market Approach is more grounded in observable data but may require significant adjustments that introduce their own subjectivity. A best-practice strategy often involves using multiple approaches to cross-check and corroborate the final valuation, creating a more defensible and robust conclusion.

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## Execution

The execution of a model-based pricing system is where regulatory theory meets operational reality. It demands a granular, procedural approach to ensure that every valuation is not only accurate but also auditable and defensible. This involves establishing a detailed operational playbook for the entire valuation lifecycle, from data ingestion and [model validation](https://prime.greeks.live/area/model-validation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) to reporting and disclosure. The focus is on creating a repeatable, transparent, and robust process that minimizes subjectivity and can withstand intense scrutiny from auditors and regulators like the SEC. 

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## The Operational Playbook for Model Validation

A cornerstone of execution is a systematic model validation process. This is the quality assurance layer of the valuation architecture. Before any model is used for official valuation, and on a periodic basis thereafter, it must be subjected to a rigorous validation protocol. This process must be documented meticulously, providing a clear audit trail of how the model was tested, what its limitations are, and why it was deemed appropriate for use.

- **Input Verification** ▴ All inputs to the model must be sourced and verified according to the firm’s valuation policy. For Level 3 inputs, the rationale for each assumption (e.g. discount rate, growth rate) must be documented, referencing any available market data or internal analysis used in its derivation.

- **Sensitivity Analysis** ▴ The model’s output must be tested for its sensitivity to changes in key [unobservable inputs](https://prime.greeks.live/area/unobservable-inputs/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). This analysis quantifies the valuation risk and is a required disclosure under IFRS 13. It demonstrates an understanding of the model’s key drivers and their potential impact on the final valuation.

- **Back-Testing** ▴ Whenever possible, model outputs should be back-tested against actual outcomes. For example, the valuation of a private equity investment can be compared to the price realized in a subsequent financing round or exit event. Deviations should be analyzed to refine and improve the model over time.

- **Independent Review** ▴ The model, its inputs, and its validation results must be reviewed by a party independent of the model’s development and use. This is typically a function of the valuation committee or an independent third-party firm. 

> Effective execution of model-based pricing hinges on a detailed operational playbook that governs model validation, documentation, and regulatory disclosure with procedural precision.

The following table provides a hypothetical example of a validation report for a private equity investment, illustrating the level of detail required in the execution phase.

| Validation Step | Procedure | Metric / Assumption | Result / Finding | Action / Sign-Off |
| --- | --- | --- | --- | --- |
| Input Verification | Verify WACC components against policy-approved sources. | Risk-Free Rate ▴ 5-Year Treasury (2.8%). Equity Risk Premium ▴ 6.5%. Beta ▴ 1.5 (based on public comps). | Inputs consistent with policy. Source data archived. | Analyst ▴ J. Doe. Approved ▴ V.P. Finance. |
| Financial Forecast Review | Compare management’s 5-year revenue forecast to independent industry growth estimates. | Forecast CAGR ▴ 15%. Industry Report CAGR ▴ 10-12%. | Management forecast is aggressive. Justification for outperformance (new contract wins) is documented. | Valuation Committee reviewed and accepted justification. |
| Sensitivity Analysis | Run valuation with +/- 100 bps change in WACC and +/- 200 bps change in terminal growth rate. | WACC Sensitivity ▴ +/- 8% change in valuation. Growth Rate Sensitivity ▴ +/- 12% change in valuation. | Valuation is highly sensitive to terminal growth rate assumption. This is a key area of uncertainty. | Disclosure team notified to include this in Level 3 sensitivity notes. |
| Back-Testing | Compare Q4 valuation to new Series C funding round price in Q1. | Q4 Model Valuation ▴ $150M. Q1 Transaction Valuation ▴ $165M. | Model valuation was conservative by ~9%. Difference attributed to milestone achievement post-Q4. | Model calibration reviewed; no changes deemed necessary at this time. |

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## What Are the Specific Disclosure Requirements?

The final stage of execution is disclosure. This is the process of translating the internal valuation work into a format that meets the explicit requirements of ASC 820 and IFRS 13. The goal is transparency.

Regulators and investors must be given sufficient information to understand how Level 3 assets are valued, what the key assumptions are, and how those assumptions impact the valuation. The disclosures are extensive and require a systematic approach to data gathering and presentation throughout the valuation cycle.

Key disclosures for recurring Level 3 [fair value](https://prime.greeks.live/area/fair-value/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) measurements include:

- **A roll-forward of activity** ▴ This table shows the opening balance, total gains or losses (recognized in profit or loss and other comprehensive income), purchases, sales, issues, and settlements, and the closing balance for the period.

- **Quantitative information about significant unobservable inputs** ▴ This includes the inputs themselves (e.g. discount rates, growth rates), their range of values, and a weighted average. 

- **A narrative description of the valuation process** ▴ This describes the valuation techniques used and the process for determining valuations.

- **A description of the sensitivity to changes in unobservable inputs** ▴ This explains how changes in key assumptions could significantly affect the [fair value measurement](https://prime.greeks.live/area/fair-value-measurement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite).

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## References

- KPMG. “Fair value measurement handbook 2024.” September 2024.

- Cohen, Joel E. et al. “Regulatory Challenges in Illiquid Asset Valuation Litigation.” Stout, 9 Jan. 2020.

- CPCON. “IFRS 13 ▴ How to Accurately Measure Fair Value and Strengthen Financial Reporting.” 24 July 2025.

- Christensen, Hans B. and Valeri V. Nikolaev. “Who Uses Fair-Value Accounting? A Review of the Research on ASC 820 and IFRS 13.” Foundations and Trends® in Accounting, vol. 14, no. 4, 2019, pp. 291-372.

- Magnan, Michel. “Fair Value Accounting and the Financial Crisis ▴ Messenger or Contributor?” Accounting Perspectives, vol. 8, no. 3, 2009, pp. 189-213.

- Laux, Christian, and Christian Leuz. “The crisis of fair-value accounting ▴ Making sense of the recent debate.” Accounting, organizations and society, vol. 34, no. 6-7, 2009, pp. 826-834.

- Zain, S. N. M. et al. “Implementation of IFRS 13 Fair Value Measurement ▴ Issues and Challenges faced by the Islamic Financial Institutions in Malaysia.” Jurnal Pengurusan, vol. 63, 2021.

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## Reflection

The architecture of valuation for illiquid assets is a system built on a foundation of professional judgment. The regulatory frameworks of ASC 820 and IFRS 13 provide the essential schematics, but the integrity of the final structure depends entirely on the quality of the materials and the skill of the builders. The processes of model validation, governance, and disclosure are the load-bearing walls. How does your own operational framework measure up?

Is it merely a facade, designed to meet the minimum code, or is it a deeply integrated system engineered for resilience and transparency? The answer to that question defines the boundary between mere compliance and true institutional credibility.

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## Glossary

<a href="https://prime.greeks.live/area/model-based-pricing/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Model-Based Pricing

Meaning ▴ Model-Based Pricing is a valuation methodology that uses mathematical or statistical models to determine the fair value or theoretical price of a financial instrument, rather than relying solely on observable market quotes. </a><a href="https://prime.greeks.live/area/illiquid-assets/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Illiquid Assets

Meaning ▴ Illiquid Assets are financial instruments or investments that cannot be readily converted into cash at their fair market value without significant price concession or undue delay, typically due to a limited number of willing buyers or an inefficient market structure. </a><a href="https://prime.greeks.live/area/asc-820/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Asc 820

Meaning ▴ ASC 820, or Accounting Standards Codification 820, establishes the authoritative guidance for measuring fair value within US Generally Accepted Accounting Principles (GAAP). </a><a href="https://prime.greeks.live/area/ifrs-13/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Ifrs 13

Meaning ▴ IFRS 13, or International Financial Reporting Standard 13, establishes a unified framework for measuring fair value when required or permitted by other IFRS standards. </a><a href="https://prime.greeks.live/area/fair-value-hierarchy/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Fair Value Hierarchy

Meaning ▴ The Fair Value Hierarchy is an accounting framework that categorizes inputs used to measure the fair value of assets and liabilities into three levels, reflecting their observability and reliability. </a><a href="https://prime.greeks.live/area/regulatory-scrutiny/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Regulatory Scrutiny

Meaning ▴ Regulatory Scrutiny refers to the intense and detailed examination, oversight, and enforcement actions undertaken by governmental bodies and financial regulators concerning market activities, products, and participants. </a><a href="https://prime.greeks.live/area/illiquid-asset/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Illiquid Asset

Meaning ▴ An Illiquid Asset, within the financial and crypto investing landscape, is characterized by its inherent difficulty and time-consuming nature to convert into cash or readily exchange for other assets without incurring a significant loss in value. </a><a href="https://prime.greeks.live/area/valuation-committee/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Valuation Committee

Meaning ▴ A Valuation Committee is a formal governance body within a financial institution responsible for establishing, reviewing, and overseeing the methodologies and processes used to determine the fair value of assets. </a><a href="https://prime.greeks.live/area/level-3-inputs/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Level 3 Inputs

Meaning ▴ Level 3 Inputs refer to unobservable inputs in financial valuation methodologies, representing an entity's own assumptions about market participant expectations for an asset when observable market data is unavailable. </a><a href="https://prime.greeks.live/area/model-validation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Model Validation

Meaning ▴ Model validation, within the architectural purview of institutional crypto finance, represents the critical, independent assessment of quantitative models deployed for pricing, risk management, and smart trading strategies across digital asset markets. </a><a href="https://prime.greeks.live/area/unobservable-inputs/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Unobservable Inputs

Meaning ▴ Unobservable Inputs are assumptions, estimates, or data points used in financial valuation models that are not directly derived from observable market data but originate from the reporting entity's own judgments. </a><a href="https://prime.greeks.live/area/fair-value/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
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## Fair Value

Meaning ▴ Fair value, in financial contexts, denotes the theoretical price at which an asset or liability would be exchanged between knowledgeable, willing parties in an arm's-length transaction, where neither party is under duress. </a><a href="https://prime.greeks.live/area/fair-value-measurement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Two intertwined, reflective, metallic structures with translucent teal elements at their core, converging on a central nexus against a dark background. This represents a sophisticated RFQ protocol facilitating price discovery within digital asset derivatives markets, denoting high-fidelity execution and institutional-grade systems optimizing capital efficiency via latent liquidity and smart order routing across dark pools](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-rfq-execution-system-architecture.jpg)

## Fair Value Measurement

Meaning ▴ Fair Value Measurement is an accounting principle and valuation technique that assesses the price at which an asset could be sold or a liability settled in an orderly transaction between market participants at the measurement date. </a>

**Tags:** [Illiquid Assets](https://options.greeks.live/area/illiquid-assets/), [Disclosure Requirements](https://options.greeks.live/area/disclosure-requirements/), [Model Validation](https://options.greeks.live/area/model-validation/), [Fair Value](https://options.greeks.live/area/fair-value/), [Regulatory Scrutiny](https://options.greeks.live/area/regulatory-scrutiny/), [Model-Based Pricing](https://options.greeks.live/area/model-based-pricing/)	

## Discover More

- 
### [What Are the Primary Challenges in Applying Traditional Tca to Illiquid Rfq Markets?](https://options.greeks.live/question/what-are-the-primary-challenges-in-applying-traditional-tca-to-illiquid-rfq-markets/)
![Engineered object with layered translucent discs and a clear dome encapsulating an opaque core. Symbolizing market microstructure for institutional digital asset derivatives, it represents a Principal's operational framework for high-fidelity execution via RFQ protocols, optimizing price discovery and capital efficiency within a Prime RFQ.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-rfq-protocol-execution-intelligence-engine.jpg)

The primary challenge is applying a continuous data framework (TCA) to a discrete, opaque market (RFQ), where the act of measurement creates the price.

- 
### [What Are the Key Differences in Evaluating a Provider for Liquid versus Illiquid Assets?](https://options.greeks.live/question/what-are-the-key-differences-in-evaluating-a-provider-for-liquid-versus-illiquid-assets/)
![Two distinct ovular components, beige and teal, slightly separated, reveal intricate internal gears. This visualizes an Institutional Digital Asset Derivatives engine, emphasizing automated RFQ execution, complex market microstructure, and high-fidelity execution within a Principal's Prime RFQ for optimal price discovery and block trade capital efficiency.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-automated-rfq-execution-microstructure-revealing-principal-prime-os-intelligence-layer-for-high-fidelity-execution-and-capital-efficiency.jpg)

Evaluating a provider for liquid assets is a test of transactional efficiency; for illiquid assets, it is an audit of long-term stewardship.

- 
### [How Does a Firm Evidence Best Execution for Illiquid Instruments under MiFID II?](https://options.greeks.live/question/how-does-a-firm-evidence-best-execution-for-illiquid-instruments-under-mifid-ii/)
![A transparent glass bar, representing high-fidelity execution and precise RFQ protocols, extends over a white sphere symbolizing a deep liquidity pool for institutional digital asset derivatives. A small glass bead signifies atomic settlement within the granular market microstructure, supported by robust Prime RFQ infrastructure ensuring optimal price discovery and minimal slippage.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-grade-digital-asset-derivatives-rfq-execution-prime-os-intelligence-layer-facilitating-optimal-price-discovery-and-best-execution.jpg)

Firms evidence best execution for illiquids by documenting a robust, data-driven process of price discovery and justification.

- 
### [What Are the Technological Prerequisites for Building a Robust Best Execution Framework for Illiquid Assets?](https://options.greeks.live/question/what-are-the-technological-prerequisites-for-building-a-robust-best-execution-framework-for-illiquid-assets/)
![A sleek blue and white mechanism with a focused lens symbolizes Pre-Trade Analytics for Digital Asset Derivatives. A glowing turquoise sphere represents a Block Trade within a Liquidity Pool, demonstrating High-Fidelity Execution via RFQ protocol for Price Discovery in Dark Pool Market Microstructure.](https://options.greeks.live/wp-content/uploads/2025/07/advanced-institutional-digital-asset-derivatives-rfq-execution-system-for-optimal-price-discovery-and-high-fidelity-execution.jpg)

A robust best execution framework for illiquids is a data-centric system that manufactures price discovery and quantifies process risk.

- 
### [How Does Regulatory Scrutiny Influence Model Validation Standards for OTC Derivatives?](https://options.greeks.live/question/how-does-regulatory-scrutiny-influence-model-validation-standards-for-otc-derivatives/)
![A centralized intelligence layer for institutional digital asset derivatives, visually connected by translucent RFQ protocols. This Prime RFQ facilitates high-fidelity execution and private quotation for block trades, optimizing liquidity aggregation and price discovery. It ensures capital efficiency and systemic resilience within complex market microstructure.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-grade-digital-asset-derivatives-rfq-protocol-engine.jpg)

Regulatory scrutiny elevates OTC model validation from an internal metric to a mandated, auditable proof of systemic resilience.

- 
### [In the Absence of Liquid Markets How Can a Determining Party Justify Its Valuation Methodology?](https://options.greeks.live/question/in-the-absence-of-liquid-markets-how-can-a-determining-party-justify-its-valuation-methodology/)
![A dark, transparent capsule, representing a principal's secure channel, is intersected by a sharp teal prism and an opaque beige plane. This illustrates institutional digital asset derivatives interacting with dynamic market microstructure and aggregated liquidity. It signifies precise RFQ block trade execution and high-fidelity within the Prime RFQ.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocols-market-microstructure.jpg)

A determining party justifies its valuation methodology by constructing a transparent, replicable, and documented system based on established frameworks like ASC 820.

- 
### [How Does Regulatory Scrutiny Shape Best Execution Policies for Illiquid Assets?](https://options.greeks.live/question/how-does-regulatory-scrutiny-shape-best-execution-policies-for-illiquid-assets/)
![A segmented rod traverses a multi-layered spherical structure, depicting a streamlined Institutional RFQ Protocol. This visual metaphor illustrates optimal Digital Asset Derivatives price discovery, high-fidelity execution, and robust liquidity pool integration, minimizing slippage and ensuring atomic settlement for multi-leg spreads within a Prime RFQ.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-execution-flow-1.jpg)

Regulatory scrutiny compels firms to architect a defensible system of record for demonstrating diligence in illiquid markets.

- 
### [What Are the Practical Difficulties of Applying the “Commercially Reasonable” Standard during a Market Crisis?](https://options.greeks.live/question/what-are-the-practical-difficulties-of-applying-the-commercially-reasonable-standard-during-a-market-crisis/)
![Abstract geometric structure with sharp angles and translucent planes, symbolizing institutional digital asset derivatives market microstructure. The central point signifies a core RFQ protocol engine, enabling precise price discovery and liquidity aggregation for multi-leg options strategies, crucial for high-fidelity execution and capital efficiency.](https://options.greeks.live/wp-content/uploads/2025/07/principals-operational-framework-optimizing-institutional-digital-asset-derivatives-rfq-protocol-execution-for-alpha-generation.jpg)

Applying the "commercially reasonable" standard in a crisis is a severe test of a firm's operational integrity under information collapse.

- 
### [What Is the Role of DVA in the Context of Bilateral Counterparty Risk Assessment?](https://options.greeks.live/question/what-is-the-role-of-dva-in-the-context-of-bilateral-counterparty-risk-assessment/)
![A pristine teal sphere, symbolizing an optimal RFQ block trade or specific digital asset derivative, rests within a sophisticated institutional execution framework. A black algorithmic routing interface divides this principal's position from a granular grey surface, representing dynamic market microstructure and latent liquidity, ensuring high-fidelity execution.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-rfq-protocol-precision-for-digital-asset-derivatives-execution.jpg)

DVA quantifies an institution's own credit risk within its derivative liabilities, ensuring a symmetric valuation of bilateral obligations.

---

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---

**Original URL:** https://options.greeks.live/question/what-are-the-regulatory-implications-of-using-model-based-pricing-for-illiquid-assets/
