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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 good practice for a bank's LTP framework?

Good practice has treasury or ALM apply transfer prices under a senior-management-approved policy, with transparency to business units and independent review. Prices should be updated regularly. Allowing units to set their own prices or keeping them static or opaque would distort incentives and weaken liquidity risk control.

  1. ATreasury or ALM sets and applies transfer prices under a policy approved by senior management, with transparency to business units and independent reviewCorrect
  2. BEach business unit sets its own transfer prices to reflect local conditions
  3. CTransfer prices are set once a decade and kept confidential from business units
  4. DTransfer prices are determined solely by the front-office desk with the largest balance sheet

Explanation

Good practice centralizes the LTP process in treasury or ALM under a senior-management-approved policy, communicates it transparently so businesses understand the incentives, and subjects it to independent review and regular updates. Unit-set, static or opaque prices undermine incentives.

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