or an average thereof may be used for comparative purposes, and asset-class-specific thresholds are set to define tolerable deviation. (See Figure 18.1.) These cross checks are performed after the fact as a means of confirming that the valuation process is working. There can be significant differences between matrix-pricing vendors, especially in the areas of less liquid bonds. This type of control would have avoided the Heartland High Yield Muni Bond and Heartland Short Duration High Yield Muni fund pricing misfortune in October 2000, where the funds' NAVs tumbled 70 percent and 44 percent respectively in a single day when the funds slashed the values of certain bonds in the portfolios. The valuations for the bonds were provided by an external pricing service. Price Comparisons against Independent Model Prices If independent broker quotes are not available, another source of an independent price for validation may be derived from an internal pricing model. For products like interest rate swaps, cross-currency swaps, options, and variance swaps, independent models can be used to capture the terms, and fair valuation can be derived based on independent market data input (such as interest rate curves, volatilities, foreign exchange rates, etc.). A prerequisite to using models for price comparisons is the testing of the model itself. Ideally, all such models should be independently validated by a third-party source such as an audit firm or a model oversight group. Further controls should be established to ensure that changes to such model's assumptions are authorized. 1X31 u... L,.:,u.... ■■■■■i.i...:.i.u l*SH r J i! i < i - E Fl i r IF U -IE i-r F a h 7 i \ <, ti i a j m 11 1.. 11 ii 1 ib 17 ib u i i w 'i 'i ;i t ?' n 'i n 1 i> i 1 i ■" ji_ m m mi 75 71 en si bj S3 fit m M a? an an in qi n; m at <v, o,, 17 <s ta wi im in? ia? im in1; is& "i7 his nan 116 hi U FIGURE 18.1 Price Verification Application (PVA)