FTP – Exploring a ‘Best Practice’ Approach

Funds Transfer Pricing used in banks and building societies has evolved significantly since the banking crisis and particularly with the introduction of the strengthening liquidity standard and new CRD IV & BASEL III standards

Our FTP White Paper is now in its second publication and is aimed to help our clients implement their own individual approach to Funds Transfer Pricing (“FTP”).

This paper is based on the views and experiences of both our own expert consultants and also from detailed consultation with our bank and building society clients who use our ALMIS software and also industry experts.

Our aim is to provide some guidance as to the structure and what needs to be considered when client Firms are developing their FTP policies, methodologies and models. It is particularly aimed at the needs small and medium sized institutions that do not access the international capital markets for their funding.

In this paper, we give some background, explain the definition and objectives of FTP and then provide a technical road map for calculating pricing, taking account of the main components as identified. It will be particularly of relevance to banking institutions that are predominantly funded from retail / SME sources.

The following links give valuable insight on this evolving subject – published by global, European, US and UK regulatory bodies.

The Bank for International Settlements published a paper written by Australian regulator Joel Grant.  This paper was a reaction to the lack of liquidity pricing post-crash and looks at liquidity pricing in some detail.

http://www.bis.org/fsi/fsipapers10.pdf

The EBA published a very high level paper on guidance over liquidity pricing in October 2010

https://www.eba.europa.eu/documents/10180/16094/cebs18_Guidelines.pdf

The FSA send a dear treasurer letter to all banks following a thematic review of 10 UK banks and highlighting general weaknesses in FTP

http://www.fsa.gov.uk/pubs/international/ftp_treasurer_letter.pdf

Following the thematic review the Bank of England publish a very informative paper on approaches and techniques for FTP on banks written by Fabrizio Cadamagnani of the Banking and Insurance Analysis Division, Rashmi Harimohan of the Bank’s Monetary Assessment and Strategy Division and Kumar Tangri of the Risk Infrastructure, Liquidity and Capital Division.

http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2015/q204.pdf

In March 2016 the Federal Reserve System published Interagency Guidance on Funds Transfer Pricing Related to Funding and Contingent Liquidity Risks.

https://www.federalreserve.gov/bankinfore.g./srletters/sr1603.htm

As part of Building Society regulation, the Bank of England include for the first time FTP in the building society source book and specific guidance included in consultation paper CP1216.

http://www.bankofengland.co.uk/pra/Documents/publications/cp/2016/cp1216.pdf