The design and implementation of an effective Funds Transfer Pricing (FTP) framework is one of the most critical challenges for modern bank treasuries. This process not only acts as the primary mechanism for risk transfer within the entity but is also the definitive tool for measuring risk-adjusted profitability for each business line.

This document provides an in-depth technical analysis of how to structure a robust FTP model that aligns business incentives with the institution's risk appetite.

Key insights from the FTP technical report 

The document presents a structured analysis of the factors that define an efficient value transfer model, with a specific focus on Asset & Liability Management (ALM) and interest rate risk.

Key topics covered include:

• The 10 Pillars of FTP: A set of guiding principles that define FTP as a "bank within the bank," centralizing liquidity and interest rate risks in the central treasury.

• Breakdown of the Cost Framework: Detailed analysis of the components of the All-In Rate, including the Base Rate (BR), Liquidity Premia (LP), Contingent Liquidity Charges (CLC), and instruments to mitigate optionality and convexity.

• Behavioural Modeling: Methodologies for characterizing products without a contractual maturity, such as non-maturity deposits (NMDs) and credit card balances, based on their actual stability and runoff profiles.

• Interaction with Regulation: How LCR and NSFR requirements are integrated into the calculation of liquidity costs, establishing floors and specific charges by product type.

• Functional and Operational Architecture: An end-to-end (E2E) view of data integration from Sources of Record (SoRs) to rate stamping processes and final reporting for the ALCO.

If you would like to explore the methodologies for curve construction and advanced management of liquidity and interest rate risks in greater detail, we invite you to download the full document.