PeopleSoft Funds Transfer Pricing Overview

In today's world of deregulation and increased complexity of products, the financial services industry depends on its funds transfer pricing (FTP) system to maintain competitive pricing and healthy profit margins. PeopleSoft Funds Transfer Pricing calculates your internal cost of funds, or transfer prices. These transfer prices are factored into pricing decisions, and netted against profit margins when measuring the profitability of a product, activity, customer, and the assets and liabilities on your balance sheet.

Funds Transfer Pricing enables you to:

• Separate interest rate risk management from operational or business management.

  It allows the business units' performance to be measured by factors within their control, for example, credit quality, pricing, and product strategy. By centralizing interest rate risk within the treasury (the bank's unit best suited to manage this type of risk), the value of funds (transfer price) is the rate risk neutral value. This neutral value allows the business units to focus on those factors directly within their control without regard for changing interest rates.

• Properly recognize providers and users of funds.

  By deriving a cost for all assets and a value for all liabilities, the profitability of each can be determined independently. Product performance is separated from the funding strategy; that is, asset decisions are separated from liability decisions. This permits business units to evaluate, for example, the cost of funds used to finance loans, while recognizing the value of funds provided by deposit gatherers. Overall, this enhances the bank's ability to measure profit contributions at the product, organizational, and customer levels.

• Use marginal cost and marginal return concepts in product pricing.

  Using a matched marginal rate transfer price that reflects incremental funding opportunities currently available to the bank shows whether new volumes have a positive spread, eliminating the potential for inadvertent unprofitable growth. A matched marginal funds transfer price approach also ensures that the bank's performance measurement system is consistent, fair, and credible.

• Collaborate with the Asset and Liability Committee (ALCO).

  Funds transfer pricing is the critical link to integrating bank strategies and treasury activities. A funds transfer pricing process should support ALCO initiatives by providing valuable input to pricing decisions and aligning managerial decisions and behavior with current market conditions and ALCO objectives.