Capital One 2013 Annual Report Download - page 250

CAPITAL ONE FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The accounting guidance for fair value measurements requires that we maximize the use of observable inputs and
minimize the use of unobservable inputs in determining fair value. The accounting guidance provides for the
irrevocable option to elect, on a contract-by-contract basis, to measure certain financial assets and liabilities at
fair value at inception of the contract and record any subsequent changes in fair value into earnings. We have not
made any material fair value option elections as of and for the years ended December 31, 2013, 2012 and 2011.
Fair Value Governance and Control
We have a governance framework and a number of key controls that are intended to ensure that our fair value
measurements are appropriate and reliable. Our governance framework provides for independent oversight and
segregation of duties. Our control processes include review and approval of new transaction types, price
verification and review of valuation judgments, methods, models, process controls and results. Groups
independent from our trading and investing functions, including our Corporate Valuations Group (“CVG”), Fair
Value Committee and Model Validation Group, participate in the review and validation process. The fair
valuation governance process is set up in a manner that allows the Chairperson of the Fair Value Committee
(“FVC”) to escalate valuation disputes that cannot be resolved at the FVC to a more senior committee called the
Valuations Advisory Committee for resolution. The Valuations Advisory Committee (“VAC”) is chaired by the
Chief Financial Officer and includes other senior management. The VAC is only convened to review escalated
valuation disputes and did not meet during 2013.
The CVG performs periodic independent verification of fair value measurements to determine if assigned fair
values are reasonable. For example, in cases where we rely on third party pricing services to obtain fair value
measures, we analyze pricing variances among different pricing sources and validate the final price used by
comparing the information to additional sources, including dealer pricing indications in transaction results and
other internal sources, where necessary. Additional validation procedures performed by the CVG include
reviewing (either directly or indirectly through the reasonableness of assigned fair values) valuation inputs and
assumptions, and monitoring acceptable variances between recommended prices and validation prices. The CVG
and the Trade Analytics and Valuation team perform due diligence reviews of the third party pricing services by
comparing their prices with prices from other sources and reviewing other control documentation. Additionally,
when necessary, the CVG and Trade Analytics and Valuation Team (“TAV”) challenge prices from third party
vendors to ensure reasonableness of prices through a pricing challenge process. This may include a request for a
transparency of the assumptions used by the third party.
The FVC, which includes representation from business areas, our Risk Management division and our Finance
division, is a forum for discussing fair market valuations, inputs, assumptions, methodologies, variance
thresholds, valuation control environment and material risks or concerns related to fair market valuations.
Additionally, the FVC is empowered to resolve valuation disputes between the primary valuation providers and
the CVG. It provides guidance and oversight to ensure an appropriate valuation control environment. The FVC
regularly reviews and approves our valuation methodologies to ensure that our methodologies and practices are
consistent with industry standards and adhere to regulatory and accounting guidance. The Chief Financial Officer
determines when material issues or concerns regarding valuations shall be raised to the Audit Committee or other
delegated committee of the Board of Directors.
We have a model policy, established by an independent Model Risk Office, which governs the validation of
models and related supporting documentation to ensure the appropriate use of models for pricing. The Model
Validation Group is part of the Model Risk Office and validates all models and provides ongoing monitoring of
their performance, including the validation and monitoring of the performance of all valuation models.
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