Regulatory capital by its definition should take the long view when it comes to valuation; day-to-day fluctuations shouldn't matter. Assets should be kept on the books at the price they were obtained, as long as the assets haven't actually been impaired.
Mark-to-market accounting does just the opposite. When times are good, it artificially boosts banks' capital, thereby encouraging more investing and lending. In a downturn it sets off a devastating deflation.
If the president really takes Roosevelt's legacy seriously, he should suspend mark-to-market accounting rules, restore the uptick rule, and enforce the prohibition against naked short selling.
Sunday, March 8, 2009
Mark to market should be scrapped
Whether or not to keep in place the rule that banks should mark their assets to market is a major issue these days. I've seen lots of arguments pro and con. I would recommend this article by Steve Forbes, who I think has proved to be a consistently excellent thinker and all-round economist over the years. Mark to market accounting is a tragic legacy from the Bush administration that Obama should dump posthaste. Doing so should go a long way to fixing our current banking crisis. Some excerpts:
This makes so much sense to me. And where are our top economists and bankers on matters like this? Is there no consensus? One thing I know is that I never want to hear about secret organizations "which really run things" ever again. It seems like the whole of our financial system is confused and sitting in paralysis waiting for Timothy Geitner to get a staff confirmed and save us all.
ReplyDeleteI would recommend Brian Wesbury's analysis at http://www.ftportfolios.com/retail/research/economicresearch.aspx
ReplyDeleteand also the symposium that The American Spectator had in its February issues featuring Wesbury, William Isaac (former FDIC chairman), Edward Yingling (CEO of the American Bankers Association and Bob McTeer (former president of the Dallas Fed), among others.
Wesbury has made the point repeatedly that if we had these same accounting rules during the Latin American debt and S&L
crises in the 80s and 90s, every major financial institution in the country would have gone under. Take a look at the 3/2/09 postings from Mark Perry at Carpe Diem on bank problems and delinquencies then and now. Situation was much more dire then in terms of problem banks, problem bank assets and delinquencies, and yet the spillover effects into the market and the economy were almost an order of magnitude less severe than they are today. What do we have now that we did not have then? Mark-to-market accounting, which became truly "effective" in the fall of 2007. Coincedence, or causation? Congress is finally holding hearings on the issue on the 12th, and I believe Isaac is going to testify. This is one Bush era legacy that the Obama admistration should jettison asap.
Forbes shines a light on key issues that point to a way out. Finally, somebody gets it.
ReplyDeleteMy argument on the marking issue, though, is that we need a clear, reasonable, consistently enforced definition of marking, not a wholesale scrapping. Maybe the improved definition is net realizable value, maybe its something else appropriate to an asset's type and condition. But a "scrapped" scenario, where banks, hedge funds, pension funds, et al, are free to set whatever asset values are most convenient for their purposes internally, will not restore the confidence of investors (or regulators, and rating agencies). And confidence, I think, is the basis for establishing a bottom in asset values, and an eventual recovery.
It's so amusing that those who lobbied so hard for mark to market on the way up are now lobbying for the end to it, on the way down.
ReplyDeleteMark: I honestly don't know any conservative or libertarian who lobbied hard for mark to market. I think you're setting up a straw man.
ReplyDeleteIf the administration does not change Mark To Market rules soon I will become convinced they really do not want to 'waste a crisis'. They will allow the crisis to persist only to advance their agenda to nationalize health care, banks, energy, and education. It just makes no sense not to try a change in Mark To Market; it costs nothing and has very little down side. I don't like where we seem to be headed.
ReplyDeleteThe mark to market argument is a strawman. FASB 157 does not require an asset to be classified Level 1 if its markets are disorderly. FASB 157 has always permitted banks to mark regulated capital to a model. On September 30, 2008, the SEC and FASB issued a clarification of this very point.
ReplyDeleteBanks and their auditors chose mark to market pricing because it gave them cover in a Sarbanes-Oxley world. In the aftermath of Enron, Worldcom, Parmalat and the destruction of Arthur Andersen by DOJ criminal prosecution, corporate executives did not want to sign their financials under oath if those numbers contained any accounting judgment that would subject them to Sarbox criminal sanctions. Auditors saw what happened to Arthur Andersen and chose not to advise any judgment that could be questioned by a regulator. Market pricing was the safest because the numbers are established by unrelated third parties.
There has been an ongoing discussion on the subscriber based Gilder Technology Forum regarding the Mark to market rules and their impact on current conditions. Rick Neaton, RAN on the Gilder Forum, has consistently challenged the general prevailing notions of cause and effect. With his permission, and since Scott will not be as active while personally propping up the economy, I'm going to copy/paste a couple of Rick's posts here:
ReplyDeleteRAN
Joined: 15 Jan 2007
Posts: 2675
PostPosted: Sat Mar 07, 2009 7:02 am Post subject: Reply with quote
Mark to market and FASB 157 are not as draconian as John Mauldin, Steve Forbes, Larry Kudlow and others claim. When markets are impaired or distressed, companies, banks included, are not required to mark their assets to the market price. Future cash flows and other models are permissible if, in the judgment of the company, those numbers are more accurate.
Here is the SEC press release that clarified these rules 6 months ago.
Quote:
Washington, D.C., Sept. 30, 2008 — The current environment has made questions surrounding the determination of fair value particularly challenging for preparers, auditors, and users of financial information. The SEC's Office of the Chief Accountant and the staff of the FASB have been engaged in extensive consultations with participants in the capital markets, including investors, preparers, and auditors, on the application of fair value measurements in the current market environment.
There are a number of practice issues where there is a need for immediate additional guidance. The SEC's Office of the Chief Accountant recognizes and supports the productive efforts of the FASB and the IASB on these issues, including the IASB Expert Advisory Panel's Sept. 16, 2008 draft document, the work of the FASB's Valuation Resource Group, and the IASB's upcoming meeting on the credit crisis. To provide additional guidance on these and other issues surrounding fair value measurements, the FASB is preparing to propose additional interpretative guidance on fair value measurement under U.S. GAAP later this week.
While the FASB is preparing to provide additional interpretative guidance, SEC staff and FASB staff are seeking to assist preparers and auditors by providing immediate clarifications. The clarifications SEC staff and FASB staff are jointly providing today, based on the fair value measurement guidance in FASB Statement No. 157, Fair Value Measurements (Statement 157), are intended to help preparers, auditors, and investors address fair value measurement questions that have been cited as most urgent in the current environment.
* * *
Can management's internal assumptions (e.g., expected cash flows) be used to measure fair value when relevant market evidence does not exist?
Yes. When an active market for a security does not exist, the use of management estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, is acceptable. Statement 157 discusses a range of information and valuation techniques that a reasonable preparer might use to estimate fair value when relevant market data may be unavailable, which may be the case during this period of market uncertainty. This can, in appropriate circumstances, include expected cash flows from an asset. Further, in some cases using unobservable inputs (level 3) might be more appropriate than using observable inputs (level 2); for example, when significant adjustments are required to available observable inputs it may be appropriate to utilize an estimate based primarily on unobservable inputs. The determination of fair value often requires significant judgment. In some cases, multiple inputs from different sources may collectively provide the best evidence of fair value. In these cases expected cash flows would be considered alongside other relevant information. The weighting of the inputs in the fair value estimate will depend on the extent to which they provide information about the value of an asset or liability and are relevant in developing a reasonable estimate.
How should the use of "market" quotes (e.g., broker quotes or information from a pricing service) be considered when assessing the mix of information available to measure fair value?
Broker quotes may be an input when measuring fair value, but are not necessarily determinative if an active market does not exist for the security. In a liquid market, a broker quote should reflect market information from actual transactions. However, when markets are less active, brokers may rely more on models with inputs based on the information available only to the broker. In weighing a broker quote as an input to fair value, an entity should place less reliance on quotes that do not reflect the result of market transactions. Further, the nature of the quote (e.g. whether the quote is an indicative price or a binding offer) should be considered when weighing the available evidence.
Are transactions that are determined to be disorderly representative of fair value? When is a distressed (disorderly) sale indicative of fair value?
The results of disorderly transactions are not determinative when measuring fair value. The concept of a fair value measurement assumes an orderly transaction between market participants. An orderly transaction is one that involves market participants that are willing to transact and allows for adequate exposure to the market. Distressed or forced liquidation sales are not orderly transactions, and thus the fact that a transaction is distressed or forced should be considered when weighing the available evidence. Determining whether a particular transaction is forced or disorderly requires judgment.
Can transactions in an inactive market affect fair value measurements?
Yes. A quoted market price in an active market for the identical asset is most representative of fair value and thus is required to be used (generally without adjustment). Transactions in inactive markets may be inputs when measuring fair value, but would likely not be determinative. If they are orderly, transactions should be considered in management's estimate of fair value. However, if prices in an inactive market do not reflect current prices for the same or similar assets, adjustments may be necessary to arrive at fair value.
A significant increase in the spread between the amount sellers are "asking" and the price that buyers are "bidding," or the presence of a relatively small number of "bidding" parties, are indicators that should be considered in determining whether a market is inactive. The determination of whether a market is active or not requires judgment.
What factors should be considered in determining whether an investment is other-than-temporarily impaired?
In general, the greater the decline in value, the greater the period of time until anticipated recovery, and the longer the period of time that a decline has existed, the greater the level of evidence necessary to reach a conclusion that an other-than-temporary decline has not occurred.
Determining whether impairment is other-than-temporary is a matter that often requires the exercise of reasonable judgment based upon the specific facts and circumstances of each investment. This includes an assessment of the nature of the underlying investment (for example, whether the security is debt, equity or a hybrid) which may have an impact on a holder's ability to assess the probability of recovery.
Existing U.S. GAAP does not provide "bright lines" or "safe harbors" in making a judgment about other-than-temporary impairments. However, "rules of thumb" that consider the nature of the underlying investment can be useful tools for management and auditors in identifying securities that warrant a higher level of evaluation.
To assist in making this judgment, SAB Topic 5M1 provides a number of factors that should be considered. These factors are not all inclusive of the potential factors that may be considered individually, or in combination with other factors, when considering whether an other-than-temporary impairment exists. Factors to consider include the following:
The length of the time and the extent to which the market value has been less than cost;
The financial condition and near-term prospects of the issuer, including any specific events, which may influence the operations of the issuer such as changes in technology that impair the earnings potential of the investment or the discontinuation of a segment of the business that may affect the future earnings potential; or
The intent and ability of the holder to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value.
All available information should be considered in estimating the anticipated recovery period.
* * *
Finally, because fair value measurements and the assessment of impairment may require significant judgments, clear and transparent disclosures are critical to providing investors with an understanding of the judgments made by management. In addition to the disclosures required under existing U.S. GAAP, including Statement 157, the SEC's Division of Corporation Finance recently issued letters in March and September that are available on the SEC's Web site to provide real-time guidance for issuers to consider in enhancing the transparency of fair value measurements to investors. Additionally, the SEC staff and the FASB staff will continue to consult with capital market participants on issues encountered in the application of fair value measurements.
http://www.sec.gov/news/press/2008/2008-234.htm
FASB 157 does NOT require the carnage that has been inserted into the financial statements of many banks and brokers. If those companies have marked these assets down to impaired levels, then they are saying that those assets are likely permanently impaired. If any bank or other financial institution believes that the current market values of any assets are not representative of the asset's fair value, then they should act like EZCH did last year when neil6 got all concerned about permanent asset writedowns. EZCH did not mark down the assets, but it disclosed a temporary market impairment in its quarterly report and reduced shareholder equity by the temporary impairment.
I am not defending the wisdom of FASB 157. But the term "mark to market" is misleading. Since the end of last September, publicly traded corporations, including financial institutions and their auditors, presumably have read the press release above and have attended seminars on FASB 157. If these corporations continue to mark their RMBS and other debt derivatives lower, it is because they believe there exists a permanent impairment to the value of these assets.
The bottom line is this: if these assets will likely be worth 82% of their face value at maturity or prepayment, then mark them down 18% - not 78% based upon Merrill Lynch's one distressed sale last June.
_________________
-- RAN
RAN
Joined: 15 Jan 2007
Posts: 2675
PostPosted: Sat Mar 07, 2009 9:43 pm Post subject: Reply with quote
pmcw said:
Quote:
The rule change happened in September. Therefore, it was not an option for Merrill Lynch.
No. The rules did not change last September. The SEC and FASB published that clarification because both concluded that most corporations and their auditors were applying FASB 157 too conservatively. FASB 157 became effective 15 November 2007.
I cited the Merrill sale not because it mattered to Merrill, but because in the frozen credit markets of 2008, that sale became the benchmark against which most other financial institutions calculated their marks. Merrill sold those assets in a distressed sale in a disorderly market. Because other financial institutions had no other market data, their auditors advised them to err on the side of caution and mark towards the Merrill sales price. They were wrong!
Quote:
Mark to market has always been a valuation option; it only became a requirement though in November 2007.
No. Mark to market did not become a requirement in November 2007. Fair value accounting became the standard. That standard assumed orderly markets and prices set by normal arms'-length transactions by parties on even footing. Forced sale liquidations were never required to be the standard. Likewise, bids set in disorderly or broken markets were never required.
Judgment has always been an integral part of accounting and auditing. FASB 157 did not take the power to use judgment away from management and their auditors. All FASB 157 said is that if management decides not to use market prices, it must clearly say so in its financial statements. Also, it must clearly disclose the valuation method that it chose, the reasons why it chose an alternative valuation method, and disclose the disregarded market valuations in a note in its financial statements. Just like EZCH did last year.
Quote:
My understanding is the situation for banks is considerably different. The value of a bank's stock is very much influenced by the quality of its balance sheet. However, the big deal is the balance sheet is used as collateral to give the bank leverage. If the bank writes down the value of this collateral, even temporarily like EZCH, the value of its collateral may fall below loan covenants and that starts a nasty negative spiral.
First, EZCH did not writedown any of its short term investments. It did disclose in its notes, the amount of the short term impairment. It also stated clearly that it judged the impairment to be temporary - not permanent. Thus, it did not take a writedown, but it did warn that it may have had to take a writedown in the future if its judgment changed.
Second, if deposit banks, investment banks and securities brokers that held these credit derivatives as assets also judged the exisitng market impairment to be temporary or judged the credit markets to be disorderly, they did not have to mark down their assets on their balance sheets! Let me repeat. Banks, brokers and investment banks have never been required to mark down any asset to any market price that they judge not to be fair value. If the discounted future cash flow of the asset justified a much higher price than the market price, they did not have to mark it down. If they judged the credit markets to be permanently altered, frozen or disorderly, they did not have to mark their assets down to those prices. They did not have to mark their assets down to Merrill's distressed sale price.
Quote:
Following this, in November 2007 FASB 157 FORCED everyone to mark to market all these contrived short term cash equivalent assets that no longer traded.
No. No. No! That's the convenient excuse of the companies that marked them down and their auditors that advised the marks.
As I have explained in other posts, in a Sarbanes-Oxley world, in the aftermath of the criminal prosecution and destruction of Arthur Andersen, and in the aftermath of multimillion dollar litigation settlements by the big accounting firms for such oversights as Enron and Worldcom, the accounting firms advised their clients to exercise extreme caution in their financial statements. Remember that WCOM and ENE had used aggressive accounting judgment in capitalizing certain line lease expenses and in establishing confusing and opaque OBE's.
In this environment, the executives and auditors decided not to risk their rear ends by asserting any values that could not be supported by market prices. The executives had to sign their financial statements under oath. The auditors did not want to become the next Arthur Andersen.
They punted!
And, when their decisions turned out to have opened the flood gates of asset destruction, they blamed someone other than themselves by creating this myth that FASB 157 forced them to mark to the market. This is just another variation on a child's excuse that the dog ate his homework assignment. And the accounting firms certainly cannot acknowledge that they really weren't all that up to speed on the rule. Such an admission would open all of those firms up to malpractice liability.
IMO, a perfect storm enveloped financial institutions. Shortly after the effective date of a new accounting rule, the credit markets became dysfunctional. This was an unfortunate event because executives and accountants were already gun shy due to Sarbanes-Oxley and the fall-out from the Enron and Worldcom audit failures. They elected only to use mark to market as their safe harbor from future liability. That was their choice - not their requirement. Now, they blame the rule for their choice. In truth, they should admit their mistake and explain the reason why they chose this path. Their rationale was not all that unreasonable given the recent history of Arthur Andersen, Enron and Worldcom.
_________________
-- RAN
RAN
Joined: 15 Jan 2007
Posts: 2675
PostPosted: Sun Mar 08, 2009 7:29 am Post subject: Reply with quote
You could use market value before FASB 157.
Quote:
FAS 157 Could Cause Huge Write-offs
Banks may be on the hook for untold billions because the new rule makes it harder to avoid mark-to-market pricing of securities.
Stephen Taub, CFO.com | US
November 7, 2007
If you think banks are writing off large amounts of assets now, wait until new accounting rules take effect this month.
The Royal Bank of Scotland Group estimates that U.S. banks and brokers, already under massive losses caused by the collapse in the subprime credit market, potentially face hundreds of billions of dollars in write-offs because of what are called Level 3 accounting rules, according to Bloomberg.
The U.S. Financial Accounting Standards Board Rule 157, which is effective for fiscal years that begin after November 15, 2007, will make it harder for companies to avoid putting market prices on securities considered hardest to value, known as Level 3 assets, the wire service reported.
''The heat is on and it is inevitable that more players will have to revalue at least a decent portion'' of assets they currently value using ''mark-to-make believe,'' Bob Janjuah, Royal Bank's chief credit strategist, reportedly wrote in a note published Wednesday.
Janjuah noted that, for example, Morgan Stanley has the equivalent of 251 percent of its equity in Level 3 assets, Goldman Sachs has 185 percent, Lehman Brothers has 159 percent and Citigroup has 105 percent, according to Bloomberg.
On the other hand, Merrill Lynch has Level 3 assets equal to 38 percent of its equity. As a result, Janjuah believes Merrill ''may well come out of all of this in the best health.''
In the fair value hierarchy, Level 1 is simple mark-to-market, whereby an asset’s value is based on an actual price. Level 2, known as mark-to-model and used when there aren't any quoted prices available, is an estimate based on observable inputs, Bloomberg explains.
Level 3 consists of unobservable inputs, such as those that reflect the reporting entity’s own assumptions about what market participants would use to price the asset or liability (including risk), developed using the best information available without undue cost and effort, according to FASB. There is no verification requirement if the assumptions are in line with those of market participants.
FAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair-value measurements, FASB explains.
FASB notes that until now, there have been different definitions of fair value and limited guidance for applying those definitions in GAAP. Also, that guidance was dispersed among the many accounting pronouncements that require fair-value measurements.
Differences in that guidance created inconsistencies that added to the complexity in applying GAAP. In developing FAS 157, FASB said it considered the need for increased consistency and comparability in fair-value measurements and for expanded disclosures about such measurements.
© CFO Publishing Corporation 2008. All rights reserved.
FASB 157 was published in September 2006. Everyone knew that it was coming. In fact, if you go back to the October 2007 earnings season, you will see that banks began to writedown their assets before the beginning of their next fiscal year even though FASB 157 applied propsectively and required the marks only beginning in the next fiscal year.
The problem was not market-based pricing. The problem was that the credit markets became disorderly just before FASB 157 took effect. However, financial institutions and their auditors continued to treat most debt securities as Level 1 assets. As long as they continued to judge those assets as Level 1, they were making the determination that market prices represented each asset's fair value.
They were always permitted to judge an asset as Level 2 or Level 3 and mark to a model or mark to some other method of fair value. The original explanatory material for FASB 157 recognized that many financial assets would fall into Level 3. Apparently, many companies thought that Level 3 assets carried some sort of stigma.
The main problem was the assets themselves - not FASB 157. Perhaps FASB 157 was the catalyst because it forced the nature of these derivatives out into the open. However, Paul, as you point out, the credit markets began to spasm before the effective date of FASB 157. And they began to become disorderly because the derivatives were not transparent to buyers. They could not determine the quality of the underlying debt in a tranche.
If Steve Forbes et al are correct and FASB 157 is stupid as applied to financial institutions, did they or their accountants comment to FASB before the rule was implemented?
More importantly, if people who continually assert the benefits of the market now seek to obscure financial statements from certain messages sent by the markets, how credible are their political and philosophical pronouncements? Are Forbes, Kudlow and others hypocrites? Maybe so on this issue.
When the real estate markets began to wobble, the credit markets began to broadcast warnings in the form of huge spreads between bids and asks. The costs of CDS derivatives began to rise significantly. Demand for derivative mortgage securities dried up. FASB 157 did not cause this problem. An oversupply of housing caused this problem. As Paul notes, excessive leverage caused this problem. A decline in housing prices caused this problem.
Mark to market is a strawman.
_________________
-- RAN
RAN
Joined: 15 Jan 2007
Posts: 2675
PostPosted: Sun Mar 08, 2009 8:38 pm Post subject: Reply with quote
flop said -
Quote:
If you put a $mill investment in a tranche that you plan to hold full term, it should be marked diff that if you plan short term holding.....and it can be done easily....if you don't stay the long term, then you get penalized like they do on CD's etc.........not rocket science here....
FASB 157 in its current form permits such a valuation if you classify the tranche as a Level 2 asset and value it according to a model that you disclose in your financial statements. Or you could classify it as a Level 3 asset and use other inputs that you disclose publicly.
hmoffsuite and HenryOG - my point has been that the current accounting rule does not require banks to mark all assets to their market prices. They can value a mortgage loan, RMBS or other security by a different method as long as the method is disclosed. I am simply reacting to the inaccuracy of the repeated claims of many that these assets must be valued at market prices.
_________________
-- RAN
there is nothing wrong w/ mark to market or the accounting today.
ReplyDelete- banks are free to disclose additional information to justify the long term value of the cash flows in their loan portfolios. average fico scores, default rates, loan type, LTV ratio, etc. used in model prices of a portfolio.
- the fed can change reserve requirements with a counter cyclical approach.
the companies with attractive portfolios will continue to see investor interest and can raise new capital.
don't confuse asset deflation with accounting issues.
Rick: An authority I trust who happens to be skiing with me this week disagrees with you. I can't promise however that he will have time to respond. But this controversy is alive and well I think.
ReplyDeleteGreat discussion. Both FAS 157 and SarSox seem to be major factors in the capital/credit problem.
ReplyDeleteI believe FAS 157's detrimental effect lies not in what accountants can do now when they value assets but in what they can no longer do (since 11/07): ignore consideration of what value could be realized in the sale of a level 3 asset. Thus, even if a CMO has positive cash flow, which I'm guessing is the case for most of them -- since more than 90% of mortgages are performing, FAS 157 requires the valuation analysis to consider what an open market sale would bring. In the CMO market that's a distressed-sale price right now.
So FAS 157 requires a more conservative approach to valuation than before, pushing valuations downward, but this doesn't explain the fire-sale asset valuations we're seeing. SarSox seems to be the rest of the story. CPAs are limiting their liability more than ever and CEOs don't want to argue when jail is on the line.
But the unintended consequences are more related to Sarbanes-Oxley than literal Mark to market.
ReplyDeleteAnd then Bernanke comes out this morning and says he is not in favor of suspending M to M. Go figue?
ReplyDeleteAt least take a look at it and how SarBox might have an influence in these economically bad times.
Or did I miss something?
Bob
My "authority" had some time last night to explain this to me. He is Treasurer of an S&P 500 company and he deals with these issues every day. As I see it, everyone seems to be missing the most important thing here, which is FAS 115. FAS 157 calls for using mark-to-market for valuing securities held by the corporation. FAS 115 says that if a security that has been marked to market is also judged to be "other than temporarily impaired," then the corporation must record the loss of value in its income statement. In the case of banks, that can quickly wipe out regulatory capital. A security that has been market to market at less than its original value does not impact capital unless the security is also judged to be "other than temporarily impaired." That means there is a lot of judgment required no matter what. Here's what he had to say:
ReplyDelete"FAS157 provides guidance on how to measure fair value, not when assets should be recorded at fair value. The real controversy is found in FAS 115 which requires substantial judgment in determining if a below-cost security is other-than-temporarily-impaired (OTTI) and should be marked down to fair value. It can place a difficult burden on executives to make those judgments, and auditors cannot objectively evaluate them. Marked-to-market fair value accounting does not provide cover to banks, auditors or executives. On the contrary, banks and executives are required to certify financial statements based on subjective assessments with respect to the fair value pricing of securities. Impairment decisions are particularly controversial in times of economic downturns and market stress, much like the current environment.
The September 30, 2008 SEC letter on fair value accounting reinforced this point:
"The determination of fair value often requires significant judgment."
"Determining whether a particular transaction is forced or disorderly requires judgment."
"The determination of whether a market is active or not requires judgment."