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

A bank's treasury wants a funds transfer pricing (FTP) framework in which business units are charged for the liquidity risk of the assets they originate. Which feature is most consistent with sound liquidity transfer pricing practice?

Transfer rates should reflect each asset's term and liquidity characteristics and the bank's own marginal cost of funds. Flat overnight or policy rates ignore maturity and the bank's funding spread, and letting units choose rates destroys consistency and the incentives the framework is meant to create.

  1. ACharging all assets a single overnight rate regardless of their maturity or liquidity profile
  2. BSetting transfer rates by reference to the term and liquidity characteristics of each asset, using the bank's own marginal cost of fundsCorrect
  3. CUsing the central bank policy rate as the transfer rate for all products to keep the framework simple
  4. DAllowing each business unit to choose the transfer rate that best reflects its own funding needs

Explanation

Good practice links transfer rates to the term and liquidity profile of each product and to the bank's own cost of raising matched funds. A single overnight rate or the policy rate ignores term and the bank's own credit spread, and unit-chosen rates undermine consistency and central control.

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