Skip to content

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

A mid-sized bank's treasury department sets a liquidity transfer pricing (LTP) framework. Business-line heads complain that the internal charges are arbitrary and they cannot predict them. Which governance feature would best address this while keeping the framework effective?

A documented, transparent methodology with clear roles and independent oversight of rate setting best addresses complaints of arbitrariness. It gives business lines predictability while preserving consistent incentives. Negotiated, secret or single arbitrary rates undermine consistency and encourage gaming.

  1. ALet each business line negotiate its own liquidity charge every month with treasury
  2. BPublish a clear, documented methodology with defined roles, with an independent body overseeing rate setting and reviewCorrect
  3. CReplace the matched-maturity approach with a single pooled rate set annually by the CEO
  4. DKeep the methodology confidential to treasury so business lines cannot game it

Explanation

Good LTP practice calls for transparency, clear governance, and oversight over how liquidity costs and benefits are set and reviewed. Negotiated charges create inconsistency and gaming, and secrecy or a single arbitrary pooled rate worsens predictability and weakens incentives.

Did you get it right without looking?

One question tells you little. A timed set on Liquidity Transfer Pricing: A Guide to Better Practice shows your real accuracy, how long you take and where you lose marks.

Practise Liquidity Transfer Pricing: A Guide to Better PracticeFree diagnostic mock

More Liquidity Transfer Pricing: A Guide to Better Practice questions