Pricing Hierarchy

A pricing hierarchy is a key part of a fund’s valuation policy. For each asset class it specifies the primary price source, such as an exchange closing price or a designated vendor, then fallbacks in order, such as a secondary vendor, broker quotes, and finally a model or valuation committee determination. It also defines price type (bid, mid, last) and the valuation time.

The hierarchy drives consistent and auditable NAV calculations. It allows the fund administrator and manager to apply the same rules and makes overrides visible. It is distinct from, but related to, the accounting fair value hierarchy, which classifies inputs into Levels 1 to 3.

Pitfalls include undocumented price overrides, stale prices that are not flagged, broker quotes from a single source used without challenge, and hierarchies that are not updated when the fund enters new asset classes. Price tolerance checks and stale-price reports are standard controls.

Example

For a corporate bond, a hierarchy might be: (1) primary pricing vendor mid-price at 4:00 p.m. New York; (2) secondary vendor; (3) average of at least two broker quotes; (4) valuation committee price with documented rationale.