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

Which situation best illustrates a conflict of interest that LTP governance should be designed to prevent?

A business line head whose bonus depends on profit setting the liquidity charge for their own unit is the conflict. They could understate the charge to boost reported profit, so governance should assign rate setting to an independent function such as treasury under oversight.

  1. AThe ALCO reviewing LTP rates quarterly
  2. BTreasury publishing its methodology to all business lines
  3. CThe risk function validating the behavioral assumptions used in LTP
  4. DA business line head whose bonus depends on profit setting the liquidity charge applied to their own unitCorrect

Explanation

Allowing a profit-compensated manager to set their own liquidity charge lets them lower the charge to inflate results. Independent rate setting, publication and validation or review by ALCO are controls, not conflicts.

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