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

Which governance arrangement is most consistent with best practice for an LTP framework?

Best practice places responsibility for setting and reviewing transfer prices with a central treasury function overseen by ALCO or senior management, with transparent methodology communicated to business units. This ensures consistency, reflects the bank's actual funding costs, and gives units clear incentives.

  1. AA central treasury or ALCO-governed function sets and regularly reviews transfer prices, with transparency to business unitsCorrect
  2. BEach business unit independently negotiates its own transfer rate with external banks
  3. CTransfer prices are set annually by the front office to maximize reported profit
  4. DTransfer prices are kept confidential from business units to prevent gaming

Explanation

Centralized, transparent governance ensures consistency, reflects market funding costs and lets business units respond to price signals. Front-office control or secrecy undermines incentives and objectivity.

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