PeopleSoft Funds Transfer Pricing

You can price the following types of funds transfers:

• Ledger balances

  You can use funds transfer pricing for balance sheet accounts where the ledger account is the lowest level of detail or where a single transfer price per ledger account is sufficient. For example, you can calculate the funds transfer price and assign it at the ledger-balance level for fixed assets (such as building and equipment), general accounts (such as cash accounts and prepaid expenses), equity accounts, and indeterminate maturity liability accounts (such as deposit and savings accounts).

• Product balances

  You can use funds transfer pricing when transfer price calculations are based on an individual instrument's financial characteristics, such as repricing period, current balances, remaining term to maturity, payment schedules, rate change schedules, projected cash flows, and behavioral (rate sensitivity) models. PeopleSoft Funds Transfer Pricing analyzes these variables to determine the expected tenor (or term) of the instrument. The funds transfer price is then calculated by matching the tenor of the instrument to the yield curve (market rate) of the same maturity.

• Treasury position balances

  You can use funds transfer pricing for summary-level net positions for foreign exchange or other trading-room positions.

• Forecasted pools

  The forecasting process can create forecasted pools for which you can calculate funds transfer pricing charges and credits.

Regardless of the data source that you use to calculate the funds transfer rates and amounts, you may want to ensure that all accounts on the balance sheet are transfer-priced. To this end, PeopleSoft Funds Transfer Pricing includes a reconciliation function that enables you to reconcile instrument balances and treasury position balances to ledger balances in PeopleSoft Financial Management Solutions.

The funds transfer rate is based on a cost-of-funds curve, which is derived from market rates (yield curves) for products with similar financial characteristics.

The cost of funds curve that you define for a bank or operating unit should be representative of the opportunity cost of funds. Such as, how much the institution would pay for the required funding or how much the institution would receive from excess invested funding at the margin. You may want to set up a cost-of-funds curve that is currency-specific, because interest rate curves vary across currencies.

Typically, the funding center is an asset and liability management unit or treasury department that funds the asset or invests the proceeds of the liability.

The funds transfer price is a standard for the buying and selling of funds among business units. You can also use it to measure the profit contribution of each asset and liability or business unit. The funds transfer price is an interest rate representing the value of funds to an institution. It is typically based on current market interest rates adjusted for risk and cost variables that are specific to the institution.

By assigning a transfer price to each component on the balance sheet, you can compare the earnings that result from the use of each asset with alternative uses. In addition, you can compare the cost of each source of funds to alternative sources, and you can measure the profit contribution of each asset or liability.

For example, suppose that you want to measure the monthly profit margin on a mortgage loan with a balance of 100,000.00 USD and an interest rate of 8.5 percent. Here are the amounts: