11.6 Define and Execute a Transfer Pricing Process

Defining and executing a Transfer Pricing Process is one of the mandatory steps in Oracle Funds Transfer Pricing. The Transfer Pricing Process allows you to:

• Select Transfer Pricing, Prepayment, and Adjustment Assumptions, respectively, contained in the associated Transfer Pricing, Prepayment, and Adjustment rules, within the Transfer Pricing Process.
• Determine the data that you want to process in a particular Run.
• Define the calculation elements used in Transfer Rate, Option Cost, Economic Value, and Adjustment Calculations to migrate transfer pricing results to the Management Ledger table.
• Choose the calculation mode for generating transfer pricing results, such as the Remaining Term or Standard.
• Select which calculations, such as Transfer Rates, TP Rate Adjustments, or Option Costs to perform.
• Optionally select an Alternate Rate Output Mapping Rule. Alternate Rate Output Mapping rules can be used when you want to direct the FTP output to non-standard columns.

After a Transfer Pricing Process has been created, a user may select RUN from the summary page to execute it.

When a Transfer Pricing Process rule is executed, detailed records are processed and individual records are updated with the results of the transfer pricing process. These results are based on the calculation elements selected.

The following table displays the Instrument Table fields that may be updated as a result of transfer pricing processing when you select Account Tables as the data source.

Table 11-13 Instrument Table Fields Updated by Transfer Pricing Processing

Calculation Type	Calculation Mode	Account Table Field
Transfer Rates	Standard	TRANSFER_RATE and MATCHED_SPREAD_C
CHARGE_CREDIT_TRATE
Transfer Rates	Remaining Term	TRAN_RATE_REM_TERM
CHARGE_CREDIT_TRATE_REM_TERM	Standard	HISTORIC_STATIC_SPREAD and HISTORIC_OAS
Option Costs
Option Costs	Remaining Term	CUR_STATIC_SPREAD and CUR_OAS
Adjustments - Liquidity Adjustment	Any	LIQUIDITY_PREMIUM_RATE
LIQUIDITY_PREMIUM_AMT
LIQUIDITY_PREM_CHARGE_CREDIT
Adjustments - Basis Risk Cost	Any	BASIS_RISK_COST_RATE
BASIS_RISK_COST_AMT
BASIS_RISK_CHARGE_CREDIT
Adjustments - Pricing Incentives	Any	PRICING_INCENTIVE_RATE
PRICING_INCENTIVE_AMT
PRICING_INC_CHARGE_CREDIT
Adjustments - Other Adjustments	Any	OTHER_ADJUSTMENTS_RAT
OTHER_ADJUSTMENTS_AMT
OTHER_ADJ_CHARGE_CREDIT
Adjustments - Breakage Charges	Remaining Term	BREAK_FUNDING_RATE
BREAK_FUNDING_AMT
BREAK_FUNDING_MV
Economic Value- All In TP Rate	Any	EV_ALLIN_TP_RATE
Economic Value - TP Rate	Any	EV_TP_RATE
Economic Value - Liquidity Premium Rate	Any	EV_LIQ_PREM_RATE
Economic Value - Pricing Incentive Rate	Any	EV_PRIC_INC_RATE
Economic Value - Basis Risk Rate	Any	EV_BASIS_RISK_RATE
Economic Value - Other Adjustment Rate	Any	EV_OTH_ADJ_RATE
Economic Value - Other Adjustment Rate	Alt	EV_OTH_ADJ_RATE_ALT

Additionally, you may choose the Ledger table as the data source for the transfer pricing of certain products. If the Ledger table data source is selected, the following rows are created for each product:

• Financial Element 170, Average Transfer Rate
• Financial Element 450, Charge/Credit
• Financial Element 172, Average Remaining Term Transfer Rate
• Financial Element 452, Charge/Credit Remaining Term

Note:

For a given combination of Organizational Unit and Product dimensions, only one row should exist for transfer rate (170 or 172) and charge/credits (450 or 452).

Tip:

Depending on the Charge Credit Balance type selected in your Application Preferences, Either Average Balance, Financial Element 140, or Ending Balance, Financial Element 100, must exist in the Ledger Table to successfully transfer price ledger balances.

TP_EFFECTIVE_DATE and ADJUSTMENT_EFFECTIVE_DATE are used by the FTP Standard Process as an override date for determining the historical rate from the specified interest rate curve (IRC). TP_EFFECTIVE_DATE and ADJUSTMENT_EFFECTIVE_DATE are used in cases where the customer rate on the instrument record is set before the origination date and users wish to align the TP Rate lookup with the date that the customer rate was set.

The FTP process normally uses the ORIGINATION_DATE for fixed-rate instruments or LAST_REPRICE_DATE for adjustable-rate instruments to determine the historical rate effective date for the transfer rate or Adjustment Rate lookup. This input allows users to specify an alternate effective date.

If applicable, set the TP_EFFECTIVE_DATE = ISSUE_DATE or the date on which the customer rate was set.

• TP_EFFECTIVE_DATE should be NULL if not applicable. Do not default TP_EFFECTIVE_DATE (for example, 01-JAN-1900) to a valid date as the TP Engine will reference any valid date.
• TP_EFFECTIVE_DATE <> ORIGINATION_DATE
• TP_EFFECTIVE_DATE <> LAST_REPRICE_DATE

• Transfer Pricing Process and the Propagation Pattern
  Transfer Pricing theory suggests that a Transfer Rate on a fixed-rate instrument should apply throughout its entire life (for Fixed Rate Instruments) or Repricing Term (for Adjustable Rate Instruments). We apply this theory to Transfer Rate propagation.
• Transfer Pricing Process and Audit Options
  Transfer Pricing Processes provide you with three audit options: Detailed Cash Flow, Forward Rates, and 1 Month Rates. While the Detailed Cash Flow audit option applies to both Standard and Stochastic TP Processes, the Forward Rates and 1 Month Rates audit options are applicable only to Stochastic TP processing. From Release 8.1.1, FTP Audit will also capture the prepayment method used, IRC, Model along with other details like TP method, adjustment method, and so on.
• SQL Query Results
  The results of running a SQL query can be exported to an Excel file for validation.
• Data Verification
  You can export results from your SQL query into Excel format and use Excel to validate the results. If the cash flows do not behave as expected, examine instrument table data or your assumptions.
• Transfer Pricing Process Rule and Calculation Modes
  You can choose to transfer price of your product portfolio either in the Standard or in Remaining Term calculation mode.
• Transfer Pricing Process and Migration Options
  The purpose of the Ledger Migration process is to generate dollar charges or credits for funds provided or used for a combination of dimensions. The information necessary to generate these charges or credits (through transfer rates, adjustments, and option cost processing) originates from the Instrument Tables and the results are inserted into the Management Ledger table and are available for use in the calculation of profitability and risk measures. Within the Transfer Pricing Process definition screen, on the "Migration" block, users can select from two options for the charge/credit method:
• Transfer Pricing Process and Calculating Economic Value
  You can choose to calculate Economic Value as part of a Standard Transfer Pricing Process by selecting the Economic Value calculation element. This calculation option refers to the Economic Value assumptions defined within the Transfer Pricing Rule and is also eligible for Alternate Rate Output mapping. Additionally, there are seeded output columns available corresponding to each of the seeded interest type elements.
• Stochastic Transfer Pricing Process and Option Cost Parameters
  In addition to transfer rates (created by a Standard TP Process), the Stochastic Transfer Pricing Process allows you to calculate the cost of options that are associated with your instruments. If you want to calculate option costs, you need to define the parameters used in option costing within the Stochastic Transfer Pricing Process.
• Stochastic Transfer Pricing Process and Stochastic Rate Indexing Rules
  The Stochastic Rate Indexing rule is one of the assumption rules that you need to select within a Stochastic Transfer Pricing Process to calculate option costs.