Definition
FTP (funds transfer pricing) is the rate at which each commercial transaction is matched internally with treasury or ALM. A loan is funded at the FTP rate; a deposit is remunerated at the FTP rate. The mechanism transfers interest rate and liquidity risk from the business lines to ALM and allows income to be broken down:
- commercial margin = client rate − FTP rate, allocated to the business line;
- transformation margin, borne by ALM.
Calculation method
FTP is built from a reference yield curve, plus a liquidity premium by maturity and, where relevant, the cost of options granted to the client.
- Pool method: one rate per broad category of balances, simple but imprecise.
- Matched-maturity method: each transaction receives a rate matching its run-off profile.
- Contract-level FTP: the rate is computed contract by contract on the projected contractual or behavioural run-off, giving the commercial margin per contract.
Regulatory requirement
The Basel Committee Principles for Sound Liquidity Risk Management (2008) require liquidity costs, benefits and risks to be incorporated into internal pricing. The EBA guidelines on loan origination and monitoring (EBA/GL/2020/06) expect loan pricing to reflect, among other things, the cost of funding. Supervisors review the FTP framework in the ILAAP.
Practical challenges
- Non-maturity products, such as sight deposits, whose FTP depends entirely on the chosen behavioural model.
- The cost of prepayment options and how it is charged back.
- Governance: the curve, premiums and rules must be stable, explained and accepted by the business lines.
In RIALTO
This concept is covered by the Flow Insight Core module. The use case 'Preparing the ALM committee with a custom report' shows it in practice.