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

Which practice BEST helps ensure that an LTP framework remains effective and credible over time?

Regular independent review of methodology and rates, supported by senior management or ALCO oversight and transparent reporting to business units, keeps an LTP framework credible. It allows adaptation to changing market conditions and prevents gaming, unlike fixed rates, self-selected curves or treasury-only scope.

  1. ARegular independent review of the methodology and rates, with senior management and ALCO oversight and transparent reporting to business unitsCorrect
  2. BFixing the rates annually and prohibiting any change during the year
  3. CAllowing each business unit to choose its preferred funding curve
  4. DLimiting the framework to treasury's own books

Explanation

Good practice calls for periodic review, senior oversight, and transparency so the framework adapts to market and balance sheet changes. Fixed rates become stale in stress, unit-chosen curves invite gaming, and limiting scope to treasury defeats the purpose of allocating costs to businesses.

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