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Funds Transfer Pricing Review

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Published: 18th December 2012 by William Webster

How do you work out your cost of money? Is your FTP proportionate? Does it capture all relevant costs? Do you pass these on to products? Do staff understand why you do it? Is it fair to treasury and the rest of the business? Is there sufficient Board debate?

The Background

FTP completes the circle in liquidity management. It’s about working out the cost of money, identifying what creates liquidity risk and adjusting prices to reflect that risk. It’s also a regulatory requirement and it sounds straight forward. If only real life was so simple! Designing and implementing FTP needs to be proportionate but that doesn’t let smaller firms off the hook.

The Risk

Poor implementation of FTP can lead to a number of problems. Not least it signals to the regulator that management leaves a lot to be desired. This can have direct implications on liquidity buffers and the cost of doing business. It doesn’t end there.  A badly thought through policy can lead to writing business at the wrong price which is an undesirable place to be unless it’s a conscious business decision.

This was Barbican Consulting's solution:

The Proposal

The client had developed its own methodology and now needed an expert evaluation. Why? An independent opinion can draw reference from a wider perspective and in so doing suggest appropriate improvements. It also gives the board comfort that the challenge process is rigorous. It was agreed with the client that in this case a desk top review was the appropriate course of action.

The Outcome

A detailed report including executive summary, the role of FTP, the cost of liquidity, the effect on treasury of FTP methodology, product pricing, margins, effect on business units, new products, board MI and IT integration was prepared. This included recommendations graded by their priority and the recommended implementation period. The flexibility of the approach meant the client saved money on the original development work and only paid for the independent advice required with the report being delivered within a relatively short deadline pending a board review.

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