This chapter provides an introduction to Oracle Financial Services Funds Transfer Pricing and discusses its place in the Oracle Financial Services Analytical (OFSAA) group of applications.
Topics:
· Overview of Oracle Financial Services Funds Transfer Pricing
· Oracle Funds Transfer Pricing and Other Oracle Financial Services Applications
· Oracle Funds Transfer Pricing Integrations
Oracle Funds Transfer Pricing is the industry-standard software application for implementing a matched rate transfer pricing system. Recognizing the value of matched rate transfer pricing, financial institutions are increasingly incorporating it into their performance measurement systems.
Matched rate transfer pricing overcomes the shortcomings of traditional transfer pricing approaches, such as unprofitable growth, repricing risk, and rate risk trap, by using multiple transfer rates instead of the single rate that traditional approaches advocate. Under the multiple rate approach, assets and liabilities are given transfer rates that reflect their specific maturity and repricing characteristics.
Oracle Funds Transfer Pricing calculates transfer rates at the lowest possible level of detail in your institution's balance sheet, the instrument record level. You can generate accurate charges and credits for all sources and uses of funds for your institution and measure net interest margin contribution at the instrument record level.
Oracle Funds Transfer Pricing Key Benefits
· To ensure accurate results, Oracle Funds Transfer Pricing combines advanced methodologies with a flexible and easy-to-interpret reporting approach. Oracle Funds Transfer Pricing allows you to:
· Determine the account level spread earned on assets and liabilities, and the spread earned or lost as a result of interest rate risk exposure.
· Apply multiple TP add-on rate assignments to incrementally price for liquidity risk or basis risk or incorporate pricing incentives.
· Quantify and manage the implicit rate bet that results from your balance sheet management practices.
· Hold business units accountable for what they can control: pricing and profitability.
· Use account-level match funded spreads to produce account, customer, product, and business unit performance measures.
Oracle Funds Transfer Pricing operates on top of a common infrastructure, Oracle Financial Services Analytical Applications Infrastructure (OFSAAI). OFSAA applications form a comprehensive decision support solution that significantly enhances enterprise risk and performance management functions across a financial institution.
Oracle Financial Services Enterprise Performance Management
More than ever, financial institutions, their regulators as well as their shareholders are focused on the need to measure and meet risk-adjusted performance objectives, price products to reflect their true risk, and better understand how their institution is impacted by threats to liquidity, capital adequacy, and exposure to market rate volatility.
OFSAA Data Model
OFSAA Data Model (OFSAADM) is shipped with optimized data structures and prepackaged data elements developed specifically for the financial services industry. OFSAADM is the foundation for the OFS applications. It provides the database structures necessary to support the individual business applications.
OFSAA Infrastructure
OFSAA Infrastructure is the foundation for OFSAA. It provides support for User Administration, Metadata Management, a Processing Framework, a Forms Framework and additional capabilities necessary to support the individual business applications.
Oracle Funds Transfer Pricing
Oracle Financial Services Funds Transfer Pricing is the industry's first and leading matched maturity funds transfer pricing application, enabling financial institutions to determine the spread earned on assets, from funding sources, and the spread earned as a result of interest rate exposure for each and every customer relationship. This enables accurate assessment of profitability along product, channel, and business lines, as well as the centralization of interest rate risk so it can be effectively managed. Oracle Financial Services Funds Transfer Pricing is fully integrated with Oracle's Financial Services Analytical Applications and shares a common customer account level data model.
The transfer pricing process isolates the four major sources of a bank's margin:
· The spread earned on assets
· The spread earned on liabilities
· The spread earned or lost as a result of interest rate exposure
· The spread earned or lost as a result of embedded options such as prepayments
Measuring and managing interest margin offers tremendous profit opportunities. By separating the components of net interest income, Oracle Funds Transfer Pricing isolates rate risk into your funding center where it can be centrally managed. In turn, business units are held accountable for what they can control: pricing and profitability. Armed with this highly accurate information, companies make solid, supportable decisions that lead to increased success in the marketplace.
Oracle Financial Services Profitability Management
Oracle Financial Services Profitability Management enables financial services institutions to calculate profitability by products, channels, segments, and even individual customers. These profitability calculations are adjusted for risk, and they drive Risk-Adjusted Performance Management (RAPM), an imperative for financial services institutions operating in this rapidly evolving and complex industry.
Isolating and analyzing business unit profitability is only the first step in building effective profitability management. To hold operational managers truly accountable for profitability, senior management must give them the power to identify the products that are profitable in each market segment, for each customer.
Together with OFSAA Transfer Pricing, OFSAA Profitability Management is the tool that delivers this power. Profitability Management links general ledger, account-level, and statistical data together to produce detailed financial statements for individual business units, products, and customers. Combining powerful modeling and disciplined accounting, OFSAA Profitability Management delivers complete, accurate, and inclusive profiles of profitability.
Oracle Financial Services Asset/Liability Management
Volatile market conditions and increasing regulatory pressures are placing greater demands on the risk management function. These stresses are driving financial institutions to review their current risk modeling and measurement capabilities. Yet, these circumstances also provide institutions with the opportunity to update technology solutions to systems fully integrated across the risk and performance spectrum. Departmental, one-off solutions are no longer viable alternatives in an environment where all systems need to work together.
Oracle Financial Services Asset Liability Management (ALM) helps financial services institutions measure and manage interest rate risk and liquidity risk, perform balance sheet valuations, and forecast both net interest income and net income. The Oracle Financial Services ALM solution measures and models every loan, deposit, investment, and off-balance sheet instrument individually, using both deterministic and stochastic methods. This helps institutions gain a better understanding of the risks they have assumed and their sensitivity to changes in economic conditions.
Oracle Financial Services Balance Sheet Planning
Oracle Financial Services Balance Sheet Planning is designed to help financial services institutions budget for a full balance sheet and the associated profit and loss statement.
Banks have a number of very unique needs when looking ahead. They must be sensitive to economic conditions, and create plans that not only forecast future performance, but also the forward risks they are assuming. Most importantly, they require tools that accurately forecast net interest margin. By accurately modeling the detailed and complex events on a bank's balance sheet, for both the current book of business and forecasted new volumes, Oracle Financial Services Balance Sheet Planning enables the delivery of accurate margin forecast and comprehensive, meaningful budgets.
Oracle Financial Services Business Intelligence Applications
OFSAA Business Intelligence (BI) Applications are complete, pre-built BI solutions that deliver intuitive, role-based intelligence for everyone in an organization—from front line employees to senior management—that enable better decisions, actions, and business processes.
Oracle Funds Transfer Pricing integrates with the following modules:
· Oracle Financial Services Profitability Management
· Oracle Financial Services Balance Sheet Planning
· Oracle Financial Services Asset | Liability Management
· Oracle Financial Services Price Creation and Discovery
A transfer-priced balance sheet is merely the beginning. You can combine Oracle Funds Transfer Pricing results with non interest income and expense information populated at the account level with Oracle Financial Services Profitability Management to measure total profitability based on a user-definable combination of dimensions. You can generate FTP and full risk based pricing information in real time with Oracle Financial Services Price Creation and Discovery. You can also integrate FTP results into Oracle Financial Services Balance Sheet Planning or Oracle Financial Services Asset | Liability Management to project transfer pricing results into your forecasting and planning processes.