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

Which governance arrangement best supports an effective LTP framework?

An effective LTP framework has its methodology set and reviewed centrally by treasury or ALCO, independent of the business units, with transparent rates and regular updates. This avoids conflicts of interest and stale pricing, and lets business units respond to the incentives the charges are meant to create.

  1. AMethodology set and reviewed by treasury or ALCO independently of business units, with transparent rates and regular reviewCorrect
  2. BEach business unit sets its own internal liquidity charges to reflect its own view of risk
  3. CRates are set once at inception and never changed to avoid disputes
  4. DLiquidity charges are kept confidential from business units so they cannot game them

Explanation

Independent central ownership with transparency and periodic review prevents gaming and keeps rates consistent with market conditions. Self-set rates create conflicts, static rates become stale, and hidden charges defeat the incentive purpose.

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