Funds Transfer Pricing did exist all these days. As a loosely put together function, an after thought after all the important Treasury functions such as Debt Equity management, and Asset and Liability management. But with increase in size of the liquidity coverage buffer, driven by acute stress scenario analysis and regulatory necessity, it is becoming a key tool in accurately pricing business units and assets at the point of trade.
Example:
Desk A has $ 1000 of treasury bonds and Desk B has $ 1000 of MBS
For Treasury Bonds, haircuts range from 2% in a normal market to 5% in a stressed scenario, which implies an unsecured funding requirement of $ 20 and a liquidity coverage reserve of $30 i.e. $ 50
Whereas an MBS, haircuts range from 8% to 65% implying an unsecured usage of $ 80 + $580 = $ 650
Does this increased use in Balance Sheet reflect in the prices at the point of trade?
Only a well thought out Transfer Pricing mechanism will ensure that it does. This needs to be the corner stone of any good liquidity management framework.
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