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

A bank's treasury sets liquidity transfer prices (LTP) and business lines are charged for funding. A senior manager proposes that the Asset Liability Committee (ALCO) own the LTP framework and approve methodology changes, while treasury runs it daily. Which feature of this proposal best supports sound governance of an LTP framework?

Sound LTP governance needs senior management oversight, clearly assigned responsibilities, and a methodology approved independently of the business lines being charged. This avoids conflicts of interest and keeps the price signals consistent with the bank's liquidity risk appetite, unlike self-set rates, infrequent updates or secrecy.

  1. ABusiness line heads set their own transfer rates to reflect local market knowledge
  2. BSenior management oversight with clear responsibilities, and methodology approved independently of the business lines that are chargedCorrect
  3. CTransfer rates are changed only once a year so that business lines have stable expectations
  4. DTransfer prices are kept confidential from business lines to prevent gaming

Explanation

Good practice requires clear senior-level ownership and a methodology approved by a body independent of the units charged, so that incentives are not distorted by those affected. Letting business lines set rates creates a conflict of interest. Annual-only updates and secrecy undermine the price signals and transparency the framework needs.

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