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This setting is used to bypass the filter during certain pool cleanups and chemical treatments when you don't want the water contaminating the sand. Water enters the valve through the "PUMP" port and exits back to the pool through the "RETURN" port.
If the valves are older than 10 years you may want to replace the whole thing versus replacing just handles. Multiport valve manufacturers build their units to be rebuilt, and as long as the main internal parts are okay, the wear out o-rings and gaskets can be replaced