Other Valuation Adjustments

Embedded within the funding management, every firm also has its liquidity management. Liquidity management serves two purposes. First of all, the firm has to ensure it has enough liquid assets to cover its operations, such as purchases, interest payments, payrolls and collateral posting. These are critically important to the firm’s operations. When the firm fails to fulfill any of the obligations, it essentially declares bankruptcy. Secondly it has to fulfill regulatory requirements, which ensure the firm remains viable under fluctuating market conditions. For example, the Basel III liquidity risk measurement and standards, introduced in December 2010, provides a framework that financial institutions need to adopt along with the capital rules. These rules require the firms to put aside additional liquid assets as a precaution against uncertain market liquidity stress situations, such as the events of December 2008.