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What considerations need to be made when incorporating the liquidity and capital regulations into FTP?

You need to have a clear purpose for your FTP regime and ensure that it is aligned to your firm’s strategy. Too often FTP is seen merely as a way to allocate capital, liquidity and funding costs, rather than as a tool to manage a firm’s balance sheet structure. A well designed FTP framework will help you develop a more resilient and stable business model, so it is important to spend time on the design. Firstly, you need to consider what drives your requirements for capital, liquidity buffer and stable funding, to help you design the right framework for your institution. Regulatory requirements may not be the binding constraint, as it may be your internal economic models that are more binding, so you need to understand the specific constraints of your institution and ensure the costs are accurately reflected. You want to make sure that true costs are transparent to end users.

It is therefore critical that you incorporate all aspects of the business that drives your liquidity requirements, for example contingent liabilities are sometimes overlooked, but clearly has liquidity risks and regulatory buffer requirements. In order to do this, you need to have the data and reporting to enable you to clearly see which businesses are using capital, liquidity and funding, and which are generating funding.

Why is it important to incorporate the right balance of regulatory and commercial needs into your FTP?

It is critical that a funds transfer pricing framework incorporates regulatory requirements driving capital and liquidity needs, especially if they are your binding constraint, but clearly you will also need to include the true economic costs whether captured by regulations or not. For example, LCR does not capture intraday requirements, but most institution would carry liquidity against it (and some regulators impose add-ons for such risks), so would need to be included to ensure that you are reflecting the true costs to the business. You may also have trapped capital or liquidity at certain legal entities or internal risk appetites which require you to hold more capital and liquidity than regulatory minima. You need to consider to what extent to include all these drivers. If you look to reflect actual usage and costs to the business, when so many factors may be impacting your capital and liquidity requirements, there is a real risk that the framework becomes too complex. If the FTP framework makes it impossible for traders to understand the capital and liquidity costs of a trade they may become unable to effectively price it on a timely basis. Therefore there needs to be a balance between capturing all factors that drive the requirements and costs, and the framework being simple and transparent enough to be of commercial use. Another consideration is to ensure that capital levels and liquidity buffers are set at a commercial level; having large excesses to regulatory and economic requirements will lead to high costs for the institution making it less competitive.

What are the key practical considerations when designing and implementing a new FTP framework?

There are many practical aspects to consider when you come to implement your new framework, with some of them listed below (although this is far from an exhaustive list):

a. Do you have the MI available to calculate and report on FTP as designed.

b. The granularity of your allocation – at what level will you allocate costs (trader, desk or division). Do you want to allocate costs at a currency level?

c. How do you incorporate any interest rate risk management and hedging you do, not just for your liabilities but also for assets in the banking book. How do you deal with the pre-payment risk of assets like mortgages; do you charge for the option risk?

d. Whether to use average or marginal cost of funding and how will you determine your cost of capital. Do you set different costs for different divisions and legal entities, or do you use just one rate for the whole institution.

e. For many institutions there will be diversification benefits, for example due to use of long assets held by one desk being used to cover shorts elsewhere in the organization – do you allow the desks the diversification benefits or do you view them on a stand-alone basis.

f. Will you use actual balances or future planned balances – or perhaps a combination of planned and actual balances? If the latter, how do you link in with the planning process of your institution?

g. How will the process be governed and monitored, including how often will you reset the cost of the capital and funding.

What would you like to achieve by attending the 6th Annual Funds Transfer Pricing and Balance Sheet Management?

I am looking forward to hearing the latest ideas on how to effectively design and implement a funds transfer pricing framework, in particular what challenges they face to ensure that their FTP framework accurately reflects the cost of capital and liquidity.

Ahead of the 6th Annual Funds Transfer Pricing and Balance Sheet Management conference, we spoke with Mrs Lena Young, Head of Audit Liquidity and Funding at Credit Suisse about the considerations needed when incorporating the liquidity and capital regulations into FTP.

Practical Insights From:

Mike Gregory, Global Head of FTP
Standard Chartered Bank
Edwin Luppert, Head of Internal Funds Transfer Pricing
Nordea
Johan Von Solms, Head of FTP
Barclays
Chris de Stigter, Head of FTP Team
ABN Amro
Polina Bardaeva, Head of Group FTP
Sberbank
Philippe Jeanne, Head of ALM
Natixis
Ali Salekfard, Head of ALM
Aldemore

About the conference:

This marcus evans event will provide banks with a platform to learn from practical examples of how others are already incorporating the liquidity and capital regulations into their FTP models as well as insight into future developments. Furthermore, we will build on previous years by providing expert speakers to demonstrate how to adapt FTP methodologies to suit negative interest rates and forthcoming interest rate risk regulations as well as best practices. The 6th Annual Funds Transfer Pricing and Balance Sheet Management conference will take place from the 14th to 16th September 2016 in London, United Kingdom.

Previous Attendees Include

Mashreq Bank
Bank Leumi Isreal, Mediobanca
ABN Amro
Africa Finance Corporation
Lloyds
Ciaxa Central De Credito
Agricola Mutuo
Natixis
Intesa Sanpaolo
European Investment Bank
Mediobanca
KBC Bank
Investec
ABN Amro
Quantitative Risk Management
PricewaterhouseCoopers
National Bank of Kuwait

About the speaker:

Lena is Head of Audit Liquidity and Funding, based in the London Internal Audit department. She joined Credit Suisse in June 2015, from Barclays where she was Global Head of Liquidity Reporting and Analytics in Group Treasury, responsible for all liquidity regulatory reporting to the PRA and global MI reporting, as well as external disclosures for liquidity and funding. Prior to Barclays, she was European Head of Treasury Capital Markets at Morgan Stanley. Whilst at Morgan Stanley Treasury, she held a number of roles across Treasury. In several of her roles, she has had extensive experience of leading large scale change management programmes from a business perspective. Lena holds a degree in Economics from Stockholm School of Economics, majoring in Financial Economics and Econometrics.

For more information, contact:
Melini Hadjitheori
melinih@marcusveanscy.com

Lena Young, Head of Audit Liquidity & Funding at Credit Suisse

An interview with Credit Suisse

Incorporating the liquidity and capital regulations into FTP