Matched Fund Transfer Pricing and its relevance in current volatile market
Guest post by
Ankush Agrawal, Associate Consultant - Banking and Capital Markets, Oracle Practice, Enterprise Solutions, Infosys Technologies Ltd.
In current world, where there is high volatility in terms of funding requirement and Interest rate, only Matched Fund Transfer Pricing approach can assess the actual risk and help to measure profitability and performance accurately for a financial institution in comparison to traditional approaches.
In earlier days fund transfer pricing (the interest payments charged when one unit lends funds to another) was done in traditional ways where banks create pools of assets and liabilities based on various parameters like maturity, repricing etc and transfer rate is decided for that pool. It faces a lot of drawbacks in terms of accurate measurement of profitability and performance and it does not separate credit risk form interest rate risk. Whereas Matched Fund Transfer Pricing is linked to Asset liability management as a way to centralize the bank's overall funding mismatch in a business unit specifically assigned the responsibility of monitoring and managing interest rate and liquidity risks. In simple terms we can say that in matched FTP the entire fund passes through a central desk of the bank i.e. treasury. The unit that gives fund (takes deposit from customers) to the treasury charges interest rate from treasury which is normally higher than what it pays to customer, and all the units that takes fund (gives loan to customers) from treasury pays interest to treasury normally lower than what it charges to customer. This helps to keep all the units at par when it comes to measurement of profitability and performance.
Oracle in its newer version of Oracle Financial Services Analytical Applications 5.XX (OFSAA) has further enhanced it's matched fund transfer pricing thus helping banks in centralizing the Interest Rate Risk so that the different channels can focus on other Marketing and Market development strategies and the interest rate risk is centralized to the central branch or Treasury. OFSAA provides a lot of Flexibility in terms of assigning transfer rates to individual customer relationships, client can choose from 12 possible methodologies, incorporate instrument characteristics by customizing prepayment expectations and behavior pattern for each individual account. It also allows us to use our own defined Yield curves and we can use any of the yield curve for any instrument. OFSAA also has the capabilities to support rich reporting and analysis, with built-in reporting support from Oracle Business Intelligence. In short within enhanced functionalities, OFSAA Matched fund transfer pricing is an important tool in current volatile market for financial services.
I will discuss more on matched fund transfer pricing in my subsequent blogs. Keep watching this space for more.
