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

Under better-practice LTP, how should a committed but undrawn credit line to a corporate client be treated?

An undrawn committed line should carry a liquidity charge based on the expected drawdown in stress, because it creates a contingent outflow that Treasury must cover with buffers. Ignoring it until drawn lets business units originate commitments without bearing their liquidity cost.

  1. APriced with a charge reflecting the expected liquidity drawdown under stress, even though no funds are currently lentCorrect
  2. BIgnored until the client draws, since no balance sheet asset exists
  3. CCharged at the full drawn-loan rate from inception
  4. DCredited as a liquidity source because the commitment generates fee income

Explanation

Contingent commitments create potential liquidity outflows, particularly in stress, so the business writing them should bear a charge tied to expected stressed drawdown and the liquid buffer required. Ignoring them lets units write commitments for free. Charging full drawn cost overstates the expected usage, and a credit confuses fee income with liquidity provision.

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