Board of Governors of the Federal Reserve System

Federal Deposit Insurance Corporation

Office of the Comptroller of the Currency

Interagency Guidance on Funds Transfer Pricing

Related to Funding and Contingent Liquidity Risks

March 1, 2016

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The Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance 

Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) are issuing this 

guidance on funds transfer pricing (FTP) practices related to funding risk (including interest rate 

and liquidity components) and contingent liquidity risk at large financial institutions (hereafter

referred to as “firms”) to address weaknesses observed in some firms’ FTP practices. [Fotne1

- For purposes of this guidance, large financial institutions includes: national banks, federal savings associations and 

state-chartered banks with consolidated assets of $250 billion or more, domestic bank and savings and loan holding 

companies with consolidated assets of $250 billion or more or foreign exposure of $10 billion or more, and foreign 

banking organizations with combined U.S. assets of $250 billion or more. EndofFte 1.]

The

guidance builds on the principles of sound liquidity risk management described in the

“Interagency Policy Statement on Funding and Liquidity Risk Management,” [Fotne2

- Refer to: FRB’s SR letter 10-6, “Interagency Policy Statement on Funding and Liquidity Risk Management”; 

FDIC’s FIL-13-2010, “Funding and Liquidity Risk Management Interagency Guidance”; and OCC Bulletin 2010­

13, “Final Policy Statement: Interagency Policy Statement on Funding and Liquidity Management.” EndofFte 2.]

and incorporates

elements of the international statement issued by the Basel Committee on Banking Supervision 

titled “Principles for Sound Liquidity Risk Management and Supervision.” [Fotne3

- The Basel Committee on Banking Supervision statement on “Principles for Sound Liquidity Risk Management and 

Supervision” (September 2008) is available at http://www.bis.org/publ/bcbs144.htm. EndofFte 3.]

Background

For purposes of this guidance, FTP refers to a process performed by a firm’s central management 

function that allocates costs and benefits associated with funding and contingent liquidity risks 

(FTP costs and benefits), as measured at transaction or trade inception, to a firm’s business lines, 

products, and activities. While this guidance specifically addresses FTP practices related to 

funding and contingent liquidity risks, firms may incorporate other risks in their overall FTP 

frameworks.

FTP is an important tool for managing a firm’s balance sheet structure and measuring riskadjusted profitability. By allocating funding and contingent liquidity risks to business lines, 

products, and activities within a firm, FTP influences the volume and terms of new business and 

ongoing portfolio composition. This process helps align a firm’s funding and contingent 

liquidity risk profile and risk appetite and complements, but does not replace, broader liquidity 

and interest rate risk management programs (for example, stress testing) that a firm uses to 

capture certain risks (for example, basis risk). If done effectively, FTP promotes more resilient, 

sustainable business models. FTP is also an important tool for centralizing the management of
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funding and contingent liquidity risks for all exposures. Through FTP, a firm can transfer these 

risks to a central management function that can take advantage of natural offsets, centralized 

hedging activities, and a broader view of the firm.

Failure to consistently and effectively apply FTP can misalign the risk-taking incentives of 

individual business lines with the firm’s risk appetite, resulting in a misallocation of financial 

resources. This misallocation can arise in new business and ongoing portfolio composition 

where the business metrics do not reflect risks taken, thereby undermining the business model. 

Examples include entering into excessive off-balance sheet commitments and on-balance sheet 

asset growth because of mispriced funding and contingent liquidity risks.

The 2008 financial crisis exposed weak risk management practices for allocating liquidity costs 

and benefits across business lines. Several firms “acknowledged that if robust FTP practices had 

been in place earlier, and if the systems had charged not just for funding but for liquidity risks, 

they would not have carried the significant levels of illiquid assets and the significant risks that 

were held off-balance sheet that ultimately led to sizable losses.” [Fotne4

- Senior Supervisors Group report on “Risk Management Lessons from the Global Financial Crisis of 2008” 

(October 21, 2009) is available at

https://www.newyorkfed.org/medialibrarv/media/newsevents/news/banking/2009/SSG report.pdf. EndofFte 4.]

Funds Transfer Pricing Principles

A firm should have an FTP framework to support its broader risk management and governance 

processes that incorporates the general principles described in this section and is commensurate 

with its size, complexity, business activities, and overall risk profile. The framework should 

incorporate FTP costs and benefits into product pricing, business metrics, and new product 

approval for all material business lines, products, and activities to align risk-taking incentives 

with the firm’s risk appetite.

Principle 1: A firm should allocate FTP costs and benefits based on funding risk and contingent

liquidity risk.

A firm should have an FTP framework that allocates costs and benefits based on the following 

risks.

• Funding risk, measured as the cost or benefit (including liquidity and interest rate

components) of raising funds to finance ongoing business operations, should be allocated 

based on the characteristics of the business lines, products, and activities that give rise to 

those costs or benefits (for example, higher costs allocated to assets that will be held over a 

longer time horizon and greater benefits allocated to stable sources of funding).

• Contingent liquidity risk, measured as the cost of holding standby liquidity composed of 

unencumbered, highly liquid assets, should be allocated to the business lines, products, and 

activities that pose risk of contingent funding needs during a stress event (for example, 

draws on credit commitments, collateral calls, deposit run-off, and increasing haircuts on 

secured funding).
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Principle 2: A firm should 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.

FTP costs and benefits should be allocated based on methodologies that are set forth by a firm’s 

FTP framework. The methodologies should be transparent, repeatable, and sufficiently granular 

such that they align business decisions with the firm’s desired funding and contingent liquidity 

risk appetite. To the extent a firm applies FTP at an aggregated level to similar products and

activities, the firm should include the aggregating criteria in the report on FTP. [Fotne5

- See Principle 3 for a discussion of the report on FTP. EndofFte 5.]

Additionally,

the senior management group that oversees FTP should review the basis for the FTP 

methodologies. The attachment to this guidance describes illustrative FTP methodologies that a 

firm may consider when implementing its FTP framework. [Fotne6

- The FRB, the FDIC, and the OCC will monitor evolving FTP practices in the market and may update or add to the 

illustrative methodologies in the attachment. EndofFte 6.]

A firm should allocate FTP costs and benefits, as measured at transaction or trade inception, to 

the appropriate business line, product, or activity. If a firm retains any FTP costs or benefits in a 

centrally managed pool pursuant to its FTP framework, it should analyze the implications of 

such decisions on business line incentives and the firm’s overall risk profile. The firm 

customarily would include its findings in the report on FTP.

The FTP framework should be implemented consistently across the firm to appropriately align 

risk-taking incentives. While it is possible to apply different FTP methodologies within a firm 

due to, among other things, legal entity type or specific jurisdictional circumstances, a firm 

should generally implement the FTP framework in a consistent manner across its corporate 

structure to reduce the likelihood of misaligned incentives. If there are implementation 

differences across the firm, management should analyze the implications of such differences on 

business line incentives and the firm’s overall funding and contingent liquidity risk profile. The 

firm customarily would include its findings in the report on FTP.

A firm should allocate, report, and update data on FTP costs and benefits at a frequency that is 

appropriate for the business line, product, or activity. Allocating, reporting, and updating of data 

should occur more frequently for trading exposures (for example, on a daily basis). Infrequent 

allocation, reporting, or updating of data for trading exposures (for example, based on month-end 

positions) may not fully capture a firm’s day-to-day funding and contingent liquidity risks. For 

example, a firm should monitor the age of its trading exposures, and those held longer than 

originally intended should be reassessed and FTP costs and benefits should be reallocated based 

on the modified holding period.

A firm’s FTP framework should address derivative activities commensurate with the size and 

complexity of those activities. The FTP framework may consider the fair value of current 

positions, the rights of rehypothecation for collateral received, and contingent outflows that may 

occur during a stress event.
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To avoid a misalignment of risk-taking incentives, a firm should adjust its FTP costs and benefits 

as appropriate based on both market-wide and idiosyncratic conditions, such as trapped liquidity, 

reserve requirements, regulatory requirements, illiquid currencies, and settlement or clearing 

costs. These idiosyncratic conditions should be contemplated in the FTP framework, and the 

firm customarily would include a discussion of the implications in the report on FTP.

Principle 3: A firm should have a robust governance structure for FTP, including the

production o f a report on FTP and oversight from a senior management group and central

management function.

A firm should have a senior management group that oversees FTP, which should include a broad 

range of stakeholders, such as representatives from the firm’s asset-liability committee (if 

separate from the senior management group), the treasury function, and business line and risk 

management functions. This group should develop the policy underlying the FTP framework, 

which should identify assumptions, responsibilities, procedures, and authorities for FTP. The 

policy should be reviewed and updated on a regular basis or when the firm’s asset-liability 

structure or scope of activities undergoes a material change. Further, senior management with 

oversight responsibility for FTP should periodically, but no less frequently than quarterly, review 

the report on FTP to ensure that the established FTP framework is being properly implemented.

A firm should also establish a central management function tasked with implementing the FTP 

framework. The central management function should have visibility over the entire firm’s onand off-balance sheet exposures. Among its responsibilities, the central management function 

should regularly produce and analyze a report on FTP generated from accurate and reliable 

management information systems. The report on FTP should be at a sufficiently granular level 

to enable the senior management group and central management function to effectively monitor 

the FTP framework (for example, at the business line, product, or activity level, as appropriate). 

Among other items, all material approvals, such as those related to any exception to the FTP 

framework, including the reason for the exception, would customarily be documented in the 

report on FTP. The report on FTP may be standalone or included within a broader risk 

management report.

Independent risk and control functions and internal audit should provide oversight of the FTP 

process and assess the report on FTP, which should be reviewed as appropriate to reflect 

changing business and financial market conditions and to maintain the appropriate alignment of 

incentives. Lastly, consistent with existing supervisory guidance on model risk management, [Fotne7

- Refer to: FRB’s SR letter 11-7, “Guidance on Model Risk Management”; OCC Bulletin 2011-12, “Supervisory 

Guidance on Model Risk Management.” EndofFte 7.]

models used in FTP implementation should be independently validated and regularly reviewed to 

ensure that the models continue to perform as expected, that all assumptions remain appropriate, 

and that limitations are understood and appropriately mitigated.

Principle 4: A firm should align business incentives with risk management and strategic

objectives by incorporating FTP costs and benefits into product pricing, business metrics, and

new product approval.
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Through its FTP framework, a firm should incorporate FTP costs and benefits into product 

pricing, business metrics, and new product approval for all material business lines, products, and 

activities (both on- and off-balance sheet). The framework, the report on FTP, and any 

associated management information systems should be designed to provide decision makers 

sufficient and timely information about FTP costs and benefits so that risk-taking incentives 

align with the firm’s strategic objectives.

The information may be either at the transaction level or, if the transactions have homogenous 

funding and contingent liquidity risk characteristics, at an aggregated level. In deciding whether 

to allocate FTP costs and benefits at the transaction or aggregated level, firms should consider 

advantages and disadvantages of both approaches when developing the FTP framework.

Although transaction-level FTP allocations may add complexity and involve higher 

implementation and maintenance costs, such allocations may provide a more accurate measure of 

risk-adjusted profitability. A firm assigning FTP allocations at an aggregated level should have 

aggregation criteria based on funding and contingent liquidity risk characteristics that are 

transparent.

There should be ongoing dialogue between the business lines and the central function 

responsible for allocating FTP costs and benefits to ensure that funding and contingent liquidity 

risks are being captured and are well-understood for product pricing, business metrics, and new 

product approval. The business lines should understand the rationale for the FTP costs and 

benefits, and the central function should understand the funding and contingent liquidity risks 

implicated by the business lines’ transactions. Decisions by senior management to incentivize 

certain behaviors through FTP costs and benefits customarily would be documented and included 

in the report on FTP.

Conclusion

A firm should use the principles laid out in this guidance to develop, implement, and maintain an 

effective FTP framework. In doing so, a firm’s risk-taking incentives should better align with its 

risk management and strategic objectives. The framework should be adequately tailored to a 

firm’s size, complexity, business activities, and overall risk profile.
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Attachment

Illustrative Funds Transfer Pricing Methodologies

March 1, 2016

The Funds Transfer Pricing (FTP) methodologies described below are intended for illustrative 

purposes only and provide examples for addressing principles set forth in the guidance. A firm’s 

FTP framework should be commensurate with its size, complexity, business activities, and 

overall risk profile. In designing its FTP framework, a firm may utilize other methodologies that 

are consistent with the principles set forth in the guidance. Therefore, these illustrative 

methodologies should not be interpreted as directives for implementing any particular FTP 

methodology.

Non-Trading Exposures

For non-trading exposures, a firm’s FTP methodology may vary based on its business activities 

and specific exposures. For example, certain firms may have higher concentrations of exposures 

that have less predictable time horizons, such as non-maturity loans and non-maturity deposits.

Matched-Maturity Marginal Cost of Funding

Matched-maturity marginal cost of funding is a commonly used methodology for non-trading 

exposures. Under this methodology, FTP costs and benefits are based on a firm’s market cost of 

funds across the term structure (for example, wholesale long-term debt curve adjusted based on 

the composition of the firm’s alternate sources of funding such as Federal Home Loan Bank 

advances and customer deposits). This methodology incentivizes business lines to generate 

stable funding (for example, core deposits) by crediting them the benefit or premium associated 

with such funding. It also ensures that business lines are appropriately charged the cost of 

funding for the life of longer-dated assets (for example, a five-year commercial loan). Given that 

funding costs can change over time, the market cost of funds across the term structure should be 

derived from reliable and readily available data sources and be well understood by FTP users.

FTP rates should, as closely as possible, match the characteristics of the transaction or the 

aggregated transactions to which they are applied. In determining the appropriate point on the 

derived FTP curve for a transaction or pool of transactions, a firm could consider a variety of 

characteristics, including the holding period, cash flow, re-pricing, prepayments, and expected 

life of the transaction or pool. For example, for a five-year commercial loan that has a rate that 

resets every three months and will be held to maturity, the interest rate component of the funding 

risk could be based on a three-month horizon for determining the FTP cost, and the liquidity 

component of the funding risk could be based on a five-year horizon for determining the FTP 

cost. Thus, the total FTP cost for holding the five-year commercial loan would be the 

combination of these two components.
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A firm may calculate the FTP cost related to non-trading exposure contingent liquidity risk using 

models based on behavioral assumptions. For example, charges for contingent commitments 

could be based on their modeled likelihood of drawdown, considering customer drawdown 

history, credit quality, and other factors; whereas, credits applied to deposits could be based on 

volatility and modeled behavioral maturity. A firm should document and include all modeling 

analyses and assumptions in the report on FTP. If behavioral assumptions used in a firm’s FTP 

framework do not align with behavioral assumptions used in its internal stress test for similar 

types of non-trading exposures, the firm should document and include in the report on FTP these 

inconsistencies.

Trading Exposures

For trading exposures, a firm could consider a variety of factors, including the type of funding 

source (for example, secured or unsecured), the market liquidity of the exposure (for example, 

the size of the haircut relative to the overall exposure), the holding period of the position, the 

prevailing market conditions, and any potential impact the chosen approach could have on firm 

incentives and overall risk profile. If a firm’s trading activities are not material, its FTP 

framework may require a less complex methodology for trading exposures. The following FTP 

methodologies have been observed for allocating FTP costs for trading exposures.

Weighted Average Cost of Debt (WACD)

WACD is the weighted average cost of outstanding firm debt, usually expressed as a spread over 

an index. Some firms’ practices apply this rate to the amount of an asset expected to be funded 

unsecured (repurchase agreement market haircuts may be used to delineate between the amount 

being funded secured and the amount being funded unsecured). A firm using WACD should 

analyze whether the methodology misaligns risk-taking incentives and document such analyses 

in the report on FTP.

Marginal Cost o f Funding

Marginal cost of funding sets the FTP costs at the appropriate incremental borrowing rate of a 

firm. Some firms’ practices apply a marginal secured borrowing rate to the amount of an asset 

expected to be funded secured and a marginal unsecured borrowing rate to the amount of an asset 

expected to be funded unsecured (repurchase agreement market haircuts may be used to 

delineate between the amount being funded secured and the amount being funded unsecured). A 

firm using marginal cost of funding should analyze whether the methodology misaligns risktaking incentives, considering current market rates compared to historical rates, and document 

such analyses in the report on FTP.

Contingent Liquidity Risk

A firm may calculate the FTP costs related to contingent liquidity risk from trading exposures by 

considering the unencumbered liquid assets that are held to cover the potential for widening

Contingent Liquidity Risk
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haircuts of trading exposures that are funded secured. If haircuts used in a firm’s FTP 

framework do not align with haircuts used in its internal stress test for similar types of trading 

exposures, the firm should document and include in the report on FTP these inconsistencies. 

Haircuts should be updated at a frequency that is appropriate for a firm’s trading activities and 

market conditions.

A firm may also include the FTP costs related to contingent liquidity risk from potential 

derivative outflows in stressed market conditions, which may be due to, for example, credit 

rating downgrades, additional termination rights, or market shocks and volatility.