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

A bank's treasury is designing its liquidity transfer pricing (LTP) framework. Which feature best describes the matched-maturity approach to assigning a funds transfer price to a new fixed-rate five-year loan?

Under matched-maturity transfer pricing, the loan is charged a funding rate read from the curve at its own five-year tenor or cash flow profile. This ties the cost of funding to the asset's liquidity term, whereas overnight or pooled average rates ignore tenor and distort business unit incentives.

  1. ACharge the business unit the bank's overnight funding rate, regardless of loan tenor
  2. BCharge the business unit a rate from the funding curve at the five-year point, reflecting the loan's expected cash flow profileCorrect
  3. CCharge the business unit the average cost of all liabilities on the balance sheet
  4. DCharge the business unit the loan's contractual coupon rate

Explanation

Matched-maturity transfer pricing assigns each asset a funding rate taken from the curve at the tenor (or cash flow profile) of the asset, so the business unit bears credit risk and margin but not the liquidity term risk. A single overnight rate or pooled average cost ignores the loan's tenor, and the coupon is the revenue, not the cost.

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