Funds Transfer Pricing
A gateway to enhanced business performance
While FTP systems have been designed and in place at many financial institutions for a while, the increased scrutiny of supervisory bodies regarding risk, liquidity and performance management in banks that followed the 2007-2008 financial turmoil have shed further light on these mechanisms and their weaknesses.
To address identified loopholes and ensure the implementation of appropriate risk transfer mechanisms, the European authorities issued a set of guidelines that was later transposed into local circulars (e.g. CSSF Circular 12/552, as amended, in Luxembourg). The notion of risk transfer pricing emerged in this context, and goes beyond the traditional FTP concept, which used to be largely
focused on transferring the liquidity cost and ALM risks to fund users. Risk transfer pricing is a mechanism that,
in its most mature state, is established to price all risks to which the various departments of the organisation
are exposed, influencing the volumes and terms upon which business lines trade in the market, and promotes
more resilient, sustainable business models. In this article and for the sake of simplicity, we will refer to the notion of FTP as a general mechanism established to price all the risk taken on by a financial institution.
In this article, we review the fundamental principles encompassing an FTP mechanism, the various forms it can take, and how it interacts with recent regulatory changes.
Inside magazine issue 7, February 2015
Inside is Deloitte’s quarterly magazine offering an exclusive insight into best practices, trends and opportunities faced by our clients across all industries.
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