On March 1, 2016, the US Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the Board of Governors of the Federal Reserve System issued interagency guidance on funds transfer pricing (FTP) practices related to funding risk and contingent liquidity risk for large financial institutions (i.e., domestic institutions with $250 billion or more in assets and foreign institutions with $250 billion or more in US assets). The interagency guidance describes four overarching principles that banks should use to develop, implement and maintain an effective FTP framework: (i) allocate FTP costs and benefits on funding risk and contingent liquidity risk; (ii) have a consistent and transparent FTP framework for identifying and allocating FTP costs and benefits on a timely basis and at a sufficiently granular level, commensurate with the firm’s size, complexity, business activities and overall risk profile; (iii) have a robust FTP governance structure including the production of a report on FTP and oversight from a senior management group and central management function; and (iv) align business incentives with risk management and strategic objectives by incorporating FTP costs and benefits into product pricing, business metrics and new product approval. The guidance notes that an institution’s FTP framework should be adequately tailored to its size, complexity, business activities and overall risk profile.

The interagency guidance is available at: https://www.fdic.gov/news/news/financial/2016/fil16012a.pdf