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Increasing market volatility, inflation, cost of funding, and market illiquidity have placed banking CFOs and their treasurers under growing pressure to reassess the effectiveness of their FTP mechanisms, and the accuracy with which they are evaluating, managing, and charging the various business units.

Compounding this challenge are also several emerging factors impacting FTP base rates, such as the transition from Interbank Offered Rates (IBOR) to alternative risk-free rates (RFRs) that do not reflect term structures, as well as inherent uncertainties surrounding the maturity timelines and volume development of non-maturing deposits (NMDs), which are growing in importance as a cost-efficient source of funding for many banks.

While there are no one-size-fits-all FTP approaches, a best-in-class framework is one that is fundamentally commensurate with the bank’s activities and size, in terms of its complexity, methodology, and processes.
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Three design themes for a best-in-class FTP framework

All things considered, we believe that a best-in-class FTP framework should broadly adhere to three design themes:
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Strategic alignment

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Consistency and feasibility

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Technical soundness and feasibility

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Five dimensions of a comprehensive FTP mechanism

Leveraging our extensive experience supporting banking CFOs and their treasurers in evolving their FTP mechanisms, we have developed a granular maturity model to facilitate structured benchmarking discussions on FTP capabilities along five dimensions.
Mature, best-in-class FTP governance frameworks should possess at least two key characteristics in common. Firstly, they clearly define the policies, as well as roles and responsibilities, at the bank’s group, regional, and divisional levels along the three lines of defence (3-LoD).

Secondly, these FTP governance frameworks should also have received the endorsement and buy-in of senior stakeholders. This is necessary to ensure the alignment of responsibilities, risk appetite, and mandates at all levels of the organisation, given that risk-adjusted returns on capital (RAROC) performance measurement and management are fundamental components of a bank’s governance framework and the way in which it considers risk in its strategic decision-making.
Mature FTP frameworks and asset and liability (ALM) mandates should be supported by robust processes and a comprehensive set of internal controls that are effective, efficient, and fully documented along the 3-LoD.

It must be emphasised that it is also critical that FTP processes are seamlessly integrated into the bank’s key business decision-making capabilities, and that stakeholders possess a sound understanding not only of the impacts that the FTP framework will have on these capabilities, but also the impacts that material decisions taken within these capabilities will have on the FTP framework.
Mature FTP models should be able to withstand the necessary stress-testing and scenario modelling as mandated by business and regulatory requirements. The model strategy must also be fully documented, and be subject to comprehensive controls and validation to ensure that there is a clear delineation between LoD 1 and LoD 2.

In addition, many banks are increasingly taking into consideration several emerging factors impacting FTP base rates, such as the transition from IBOR to alternative RFRs.
In a mature setup, a comprehensive architecture of IT systems should be in place to support the mandate of FTP functions. These should, in turn, be accompanied by robust data quality controls and service-level agreements covering data flow and system functionality aspects.

Typically, best-in-class systems are characterised by the use of a consistent data taxonomy, centralised management of IT systems, as well as continual strategic IT renewal and recurring review of service-level agreements with internal and external providers by the ALM function with oversight by the CFO and CIO/COO/CTO.
FTP frameworks are intrinsically linked to the way in which a bank manages its funding risks, including its interest rate and liquidity risks.

It therefore follows that given the importance of interest rate and liquidity risk metrics in both regulatory reporting and management information, the MIS should incorporate key funding risk metrics, which include but are not limited to cashflow reporting, interest rate risk, and foreign exchange risk, as well as stress/scenario/sensitivity analyses and exposures against approved risk appetites.
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