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

In a well-designed LTP framework, a central treasury function typically acts as the counterparty to business units. Which arrangement best reflects good practice?

Good practice is for treasury to charge assets a transfer price, credit stable liabilities for the funding they provide, and manage the net liquidity position centrally. This applies consistent prices across units, rewards stable funding gathering and prevents units from setting inconsistent internal rates.

  1. ABusiness units fund themselves directly in the market and keep any liquidity premium they negotiate
  2. BTreasury charges assets a transfer price and credits stable liabilities, pooling and managing the resulting net liquidity position centrallyCorrect
  3. CTreasury charges only the loan book, while deposit gatherers receive no credit to avoid complexity
  4. DEach business unit sets its own internal funding rate based on its own judgement

Explanation

Good practice has the central treasury price liquidity consistently, charging users of funding and crediting providers, then managing the net position centrally. Charging only assets ignores the value of stable deposits, and letting units set their own rates produces inconsistency and arbitrage.

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