It is critical for any financial institution to understand the
rewards earned for given levels of risk taken. It is also critical to understand the relative
contribution made by each business unit, by each product and by each customer relationship.
Funds transfer pricing (FTP) allows a cost of funds (assets) or value of funds (liabilities)
to be assigned to every transaction making up the balance sheet. It decomposes the interest
margin into a credit spread, a funding spread and a rate risk spread.
From a profitability/performance measurement perspective, Fiserv
provides
sophisticated solutions that determine the cost and value of funds on an
economic basis, reflecting market rates, liquidity premiums, credit ratings, prepayment behaviour
and the underlying cash flow characteristics of a transaction.
From an A/LM or risk management perspective, simulating the components of future margins under
different economic and rate scenarios helps the funding centre(s) determine hedging strategies
and the business units / product managers to remove the movement of market rates from their
income forecasts.
Fiserv provides two FTP solutions:
Funds Transfer Pricing (FTP)
FTP can be used as a stand-alone historical margin analysis solution or integrated
with Asset/Liability Manager to forecast margin components through time. FTP allows you to identify
spread contributions from assets, liabilities and interest-rate risk through a variety of user-defined
methods and yield curves. It also provides comprehensive allocation techniques to assess
the contribution of individual transactions based on true economic characteristics.
Fiserv KRM
Fiserv KRM provides full option-adjusted transfer pricing with arbitrary degrees of
consumer ‘rationality’ on a multi-currency basis. Fiserv KRM supports multiple transfer
pricing centres and both ‘ALCO’ and ‘irrationality’ books for the part of the organisation
that takes the risk of consumer option exercise. It also allows for a ‘credit risk’ book that
is fully consistent with the default probabilities and credit-adjusted valuations generated
by Fiserv KRM’s credit risk module. |
