The document describes the implementation of an integrated funds transfer pricing (FTP) framework at a bank. It uses a simple bank balance sheet to illustrate how an FTP process can achieve objectives like risk-adjusted performance measurement, prospective pricing guidance, and risk transfer. It shows how liquidity and interest rate risk can be isolated and managed through term funding and swaps. Finally, it demonstrates how an FTP center fully integrates these components to provide consistent pricing, risk management, and attribution of results across business units.

1. Integrated Risk Management and Funds Transfer
Pricing Framework – A Case Study
PRMIA
Integrated Balance Sheet Management Conference
May 9th, 2013
S

2. 2
Objective
Risk based pricing, risk management and funds transfer pricing (FTP) need to be consistent to
drive optimal investment decisions
However, holistic and consistent funds transfer pricing frameworks do not evolve naturally
These frameworks need to be well thought out and require immense amount of coordination to
perform effectively and efficiently

3. 3
We illustrate the component funds flows of an FTP process, and the resulting
management reporting, and how these achieve the key objectives of price guidance,
risk management and transfer, and risk-adjusted performance measurement.
• We use a very simple bank balance sheet to illustrate this concept:
• We walk through a series of funding processes and discuss their benefits and shortcomings. The final illustration depicts
a fully functioning FTP process that fulfills all the desired objectives.
o We start with a simple “accounting” view with no funds transfers: Pre-1980’s banking where deposits were a “cost
of doing business”.
o A money market desk is added to demonstrate the simplest of funds flows: also representative of early 80’s
banking.
o We then examine the liquidity risk and interest rate risk inherent in these simple processes, and separately
demonstrate the funding flows needed to address liquidity risk and the swaps needed to address interest rate risk.
o Finally, we integrate the multiple components into an FTP process and the resulting management reporting.
Note:
While this very simple example effectively demonstrates the components of an FTP process, it is important to
remember that in practice, numerous complexities exist within an actual FTP process:
• Capital
• Optionality (prepayments, etc)
• Indefinite maturity deposits and assets
• Multiple currencies
• Multiple domiciles with varying tax and regulatory issues
Simple Bank Balance Sheet
1m1.2%1m BA400Money Market Funds
1yr
5yr
Term
1%
Prime +2%
(5% at today’s rates)
Interest Rate
Fixed600Deposit
Variable rate1000Loan
BenchmarkBalance ($M)

4. 4
We start with a basic “accounting view” of our simple bank balance
sheet, which does not satisfy any of the key FTP objectives.
Customer
Loan
Customer
Deposit
Money
Markets
Personal
Loan
Business
Deposits
Business
Money
Market
Desk
1,000M
Prime +2%
5%
600M
1% Fixed
400M
1m BA
1.2%
Example:
A 5 yr variable rate $1000M loan priced at Prime+2%. A 1 yr fixed rate $600M deposit priced at 1%. The funding
shortfall of $400 M is filled by 1mo money market funding priced at 1.2%.
• This simple approach is how banks viewed their financials pre
1980’s
o Loans earned revenues
o Deposits were a “cost”
• The management information and financial reporting did not
support any of the key FTP objectives
o No price guidance was available
o Risk was neither measured nor managed
o Performance reporting showed loans as highly valuable
and deposits as a cost (like salaries or premises)
(A*C)DCBA
(4.8)1m(1.2%)1m BA400
Money Market
Funds
39.2Total
Accounting View
1yr
5yr
Term
(6)
50
NII ($M)
(1%)
5%
Interest
Rate
Fixed600Deposit
P+2%1000Loan
Benchmark
Balance
($M)
Funds Coupon
FTP Scorecard
Retrospective Performance Measurement
Risk Transfer
Prospective Pricing
ScoreObjectives

5. 5
In the “early 80’s”, funding shortfalls (excesses) were managed by the
money market desk. This simple process did not allow for the
measurement or management of liquidity or interest rate risk.
• A money market funding process effectively ensures that
cash is managed, and that the balance sheet is fully funded.
• However, the information provided by this process does not
offer useful price guidance. Nor does it identify interest or
liquidity risk, and allow for risk-adjusted performance
measurement.
A*DD = B+CCBA
00
BA 1m
1.2%
(BA 1m)
(1.2%)
400MM Funds
39.2Total
Money Market View
0.2%
3.8%
Spread
1.2
38
NII ($M)
BA 1m
1.2%
(BA 1m)
(1.2%)
Funding Cost
/ Benefit
(1%)600Deposit
P+2%
5%
1000Loan
Coupon
Balance
($M)
Customer
Loan
Customer
Deposit
Personal
Loan
Business
Deposits
Business
1,000M
Prime +2% =
5%
600M
1% Fixed
Money
Market
Desk
Money
Market
600M
1m
BA
1.2%
1m BA
1.2%
1m
BA1.2%
1,000M
400M
FTP Scorecard
Retrospective Performance Measurement
Risk Transfer
Prospective Pricing
ScoreObjectives
InternalExternal
Non risk-adjusted

6. 6
Our simple balance sheet has liquidity risk and interest rate risk
embedded within it.
• Our simple balance sheet has a $400M shortfall in long term
funding.
o The loan must be “fully funded”. It matures in 5 yrs, and
cannot be liquidated in a time of stress.
o The deposit is a “relationship” insured deposit and can be
expected, with reasonable certainty, to rollover and provide
stable long term funding.
o The money market funding is short term, and does not
provide stable longer term funding.
CBA
6001Y(600)Deposit
01M(400)MM Funds
(1000)5Y1000Loan
(400)0Total
LT Funding
Provided/(required)
TermBalance ($M)
Liquidity Risk
E - G
G =
(A*F)
F
E =
(A*D)
D =
(B+C)
CBA
00000
BA 1m
1.2%
(BA 1m)
(1.2%)
400
MM
Funds
(6)33.239.2Total
StressStatic
(4.8)
38
NII
($M)
(0.8%)
3.8%
1%
(Spread)
0.2%
3.8%
Spread
1.2
38
NII
($M)
BA 1m
1.2%
(BA 1m)
(1.2%)
Funding
Cost /
Benefit
Interest Rate Risk
(6)(1%)600Deposit
0
P+2%
5%
1000Loan
Risk
($M)
Coupon
Balance
($M)
$400M
$600M
$1,000M
1yr
$
Term to
Maturity
$400M
MM Funds Deposit
Loan
$1,000M
$600M
$400M
30 Days
$
Repricing
Frequency
1yr
$600M
MM Funds Deposit
Loan
• The liquidity mismatch demonstrates a $400M shortfall in long term
funding.
• The interest rate mismatch demonstrates a “gap” between 30 days and 1
year. This risk will lead to a $6M decline in earnings if rates rise by 100bps.
Liquidity Risk Interest Rate Risk
• In a down 100bps shock scenario, the net interest income drops
by $6M.

7. 7
We now return to our funding flow schematic, and add Term Funding
Required to address the funding shortfall.
Funding Curve
(Unsecured funding relative to 1m BA)
0
10
20
30
40
50
60
1M 1Y 2Y 3Y 4Y 5Y
Spreadto1MBA
(a)
(b)
A*DD=(B+C)CBA
(2)(0.5%)
(BA 1m + 50bps)
(1.7%)
BA 1m
1.2%
400
Term
Funding
Desk
37.2Total
Term Funding View
0.2%
3.8%
Spread
1.2
38
NII ($M)
BA 1m
1.2%
(BA 1m)
(1.2%)
Funding Cost /
Benefit
(1%)600Deposit
P+2%
5%
1000Loan
Coupon
Balance
($M)
Customer
Loan
Customer
Deposit
Personal
Loan
Business
Deposits
Business
1,000M
Prime +2% =
5%
600M
1% Fixed
Money
Market
Desk
Term
Funding
Desk
600M
1m
BA
1.2%
1m BA
1.2% (a)
1m
BA1.2%
1,000M
400M
Capital
Markets
400M
1m BA
1.2%
+50bps (b)
Term Funding desk raises 5Y
funds. Term funding gap closed.
• Term funding is raised via 5 year unsecured funds. The
cost of this funding is 50bps over the cost of the money
market funding.
• This transaction “closes” the liquidity risk position by
moving the term and cost of wholesale funding from point
(a) to point (b) in the figure below.
InternalExternal
The term funding desk raises funds in the unsecured debt market to immunize liquidity risk.
FTP Scorecard
Retrospective
Performance
Measurement
Risk Transfer
Prospective Pricing
ScoreObjectives
Liquidity risk is managed, but not
transferred.
The actual cost of term funding has been
Isolated. It may be allocated back to
businesses through a “top- down”
process, but it will not be an attributive
process and may result in undesired
behaviour.

8. 8
Swap Curve
1
1.2
1.4
1.6
1.8
2
2.2
2.4
1M 1Y 2Y 3Y 4Y 5Y
1MBA
(b)
(a)
We now enter into interest rate swaps to immunize our simple bank from
interest rate risk.
The swap desk transacts in the IR swap market to immunize interest rate risk.
StressStatic
Swap Market View
1.2%
0
(0.8%)
3.8%
F
1%
(Spread)
40.4
7.2
0
(4.8)
38
G =
A*F
NII
($M)
40.4
1.2
0
1.2
38
A*D
NII
($M)
0
6
0
(6)
0
E - G
Risk
($M)
D=B+
C
CBA
0.2%
(BA 1m)
(1.2%)
1.4%600
Swap
Desk
Total
0%
BA 1m
1.2%
(BA 1m)
(1.2%)
400
MM
Desk
0.2%
3.8%
Spread
BA 1m
1.2%
(BA 1m)
(1.2%)
Funding
Cost /
Benefit
(1%)600Deposit
P+2%
5%
1000Loan
Coupon
Balance
($M)
Customer
Loan
Customer
Deposit
Personal
Loan
Business
Deposits
Business
1,000M
Prime +2% =
5%
600M
1% Fixed
Money
Market
Desk
Money
Market
600M
1m
BA
1.2%
1m BA
1.2%
1m
BA1.2%
1,000M
400M
Swap
Desk
Swap
Market
1yr Fixed
$600M (b)
1m BA
$600M (a)
• A 1 year fixed receive interest rate swap is transacted.
• Receive fixed leg is at point (b) and pay float leg is at point
(a) for a cost of 20 bps.
• This transaction “closes” the interest rate risk position.
InternalExternal
FTP Scorecard
Retrospective
Performance
Measurement
Risk Transfer
Prospective Pricing
ScoreObjectives
Interest risk is managed, but not
transferred.
The P&L impact of the IRR hedge
been captured and may be allocated
to businesses through a “top-down”
mechanism but this will not be an
attributive process and could result in
Undesirable behaviour.

9. 9
An FTP process is needed to achieve our desired objectives.
• We have seen that the liquidity risk and the interest rate risk within the balance sheet can be managed by measuring
these risks, and entering in the necessary funding and hedging transactions.
• However, this does not achieve our key objectives.
• We require an FTP process. This process will attribute to each product and transaction, a market-based and risk-
adjusted cost/value of funds; allowing for
o Prospective price guidance,
o The isolation and transfer of liquidity and interest rate risk, and the management of these risks; and
o Transparent risk-adjusted performance measurement, congruent with pricing and risk management.
• This process requires and results in the creation of FTP centres.
o These FTP centres isolate and measure the P&L of the liquidity risk and interest rate risk FTP rates.
o The FTP centers should also house the P&L impact of transactions undertaken to manage these risks.
o The “residuals” contain the difference between the FTP debits/credits and the actual funding and hedging costs.
These residuals are specifically isolated and available for allocation as per policy.
Accounting View
FTP
2Interest Rate Risk
FTP Scorecard
Performance Measurement
1Term Funding
Money Market
Risk TransferPricing
1) Liquidity risk managed
2) Interest rate risk managed

10. 10
FTP requires input and cooperation amongst many parties, and results
in a consistent approach to pricing, risk management and performance
measurement.
Business
Product
Management
Finance
Management
Reporting
Technology
Source
Systems
Product
Attributes
Pricing
Guidance
(FTP Rates)
Transactional
Data
FTP
Rates
Performance
Management
Risk
Transfer
& Mgmt
Pricing
Consistency is required between
pricing, risk measurement, risk
management, market transactions, and
performance measurement.
• Funding Curves
• Product Attributes
• Assumptions
• Attributive
• Market-based
• Risk-adjusted/product-specific
• Isolation of risk-based P&L
• Alignment with risk mgmt
• Transparent
• Transaction-level granularity
• Congruence between pricing and
actual FTP rates
FTP Scorecard Analysis
Retrospective
Performance
Measurement
Risk Transfer
Prospective
Pricing
CommentsScoreObjectives
$400M
$600M
$1,000M
1yr
$
Term to
Maturity
$400M
MM Funds Deposit
Loan
$1,000M
$600M
$400M
30 Days
$
Repricing
Frequency
1yr
$600M
MM Funds Deposit
Loan
Funding Curve
(Unsecured funding relative to 1m BA)
0
10
20
30
40
50
60
1M 1Y 2Y 3Y 4Y 5Y
Spreadto1MBA
(a)
(b)
Swap Curve
1
1.2
1.4
1.6
1.8
2
2.2
2.4
1M 1Y 2Y 3Y 4Y 5Y
1MBA
(b)
(a)

11. 11
FTP brings together each of the elements discussed, and integrates
them with an FTP Centre.
LR
Mismatch
Central
FTP
Unit
IRR
Mismatch
Customer
Loan
Customer
Deposit
Personal
Loan
Business
Deposits
Business
1,000M
Prime +2% =
5%
600M
1% Fixed
Term
Funding
Desk
600M
1m
BA
1.2%
1m
BA1.2%
1,000M
Swap
Desk
Swap
Market
1yr Fixed
$600M
1m BA
$600M
Capital
Markets
Funding
Desk
1m BA 1.2%
+ 50bps
400M
400M
1m BA
1.2%
InternalExternal
• Business units receive prospective price guidance, risk is
transferred and business unit results are insulated from IRR
and Liquidity.
FTP Scorecard
Retrospective Performance Measurement
Risk Transfer
Prospective Pricing
ScoreObjectives
400M
1m BA 1.2%
1yr Fixed$600M
1m BA
$600M

12. 12
With the implementation of FTP and the creation of the FTP Center,
management reporting effectively segregates the NIM into risk-adjusted
business results and liquidity and interest rate risk mismatch centres.
Total
Subtotal
Subtotal
Total Bank View
NII ($)NIM (%)
FTP
Charge
/ Credit
Client
Rate($)(%)($)(%)($)(%)
Income
Client
Rate
Amount
$M
TotalIRRLiquidity
(1%)
5%
B
0.65%
3.3%
K=B-J
0
1.2
(1.2)
(4.8)
3.6
(8.4)
12
G=A*F
0.2%
(1.2%)
(1.4%)
1.2%
F
1.5
(2)
3.5
3.5
(1.5)
5
E=A*D
(0.5%)
(0.25%)
0.5%
D
FTP Centre
(1.65%)
1.7%
J=H
Business Results
0.2%
(0.5%)
(1.2%)
1.65%
1.7%
H=D+F
38.4
1.2
(2)
39.2
(4.8)
44
(6)
50
C=A*B
1.5
1.2
(2)
2.3
(4.8)
7.1
(9.9)
17
I=E+G
+0.2%600Swap
(0.5%)400Term Funding
36.9
(1.2%)400
Money Market
Deposit
36.9
L=A*KBA
3.9
33
(1%)
5%
600Deposit
1,000Loan
Assumptions:
1M BA = 1.2%
1 yr swap = 1.4%
5 yr liquidity premium = 50 bps
1 yr liquidity premium = 25 bps
• At a total bank level, income is $39.2M prior to risk management transactions, and is $38.4M
after term funding and swaps.
• This total income is segregated effectively between the businesses and the FTP Centre
• Business unit income is $36.9M, and is insulated from risk.
• The FTP centre consists of:
o Liquidity Mismatch Centre: FTP credits/debits less term funding costs, with a residual of
$1.5M
o Interest Rate Risk Mismatch Centre; FTP credits/debits adjusted for the swap, with a
residual of $0M