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FRM Part II · FRM Exam Part II · Liquidity Transfer Pricing: A Guide to Better Practice

A bank's business units complain that the internal funding rates charged to them change unpredictably and are set by individual negotiation with the treasury desk. Which governance weakness in the liquidity transfer pricing (LTP) framework is MOST directly illustrated?

The weakness is the absence of a transparent, consistently applied methodology with clear ownership of rates. Good LTP governance requires rules-based, understandable pricing so business units can anticipate charges. Negotiated, unpredictable rates weaken credibility and distort incentives, whereas matched-maturity curves and contingent liquidity costs are good practice.

  1. ALack of a transparent, consistently applied methodology with clear ownership of the ratesCorrect
  2. BExcessive centralisation of funding in a single treasury function
  3. CUse of matched-maturity funding curves for long-term assets
  4. DInclusion of contingent liquidity costs in the charge to business units

Explanation

Good practice requires a transparent, consistently applied LTP methodology with clear governance and ownership, so that business units can predict and understand charges. Ad hoc negotiated rates undermine that. The other options describe features that are generally consistent with good practice.

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