• Explores why FTP is gaining renewed focus in a shifting rate and liquidity environment
• Examines how interest rate and liquidity transfer pricing support risk-based pricing
• Highlights the regulatory importance of linking FTP to LCR, NSFR, and internal liquidity metrics
• Discusses intraday liquidity and granular cost attribution challenges
• Positions FTP as a strategic steering tool for profitability, funding mix, and balance sheet optimisation

Ahead of Treasury & ALM USA, we spoke with Jin Li about the evolving role of funds transfer pricing in today’s dynamic rate and liquidity environment. As institutions navigate rate cuts, behavioural modelling challenges, and increasing regulatory scrutiny, FTP is emerging as a critical bridge between treasury, risk, and business strategy - shaping pricing, funding decisions, and long-term balance sheet optimisation. 

FTP has gained renewed attention across the industry. From your perspective, what are the biggest benefits banks can unlock by investing more time, resources, and senior focus into their FTP frameworks?

FTP is receiving fresh focus because the interestrate and liquidity environment has always been changing. Even institutions with mature frameworks are finding value in reevaluating their methodology to ensure it keeps pace with evolving conditions.

As we are in the middle of a ratecut cycle, questions naturally arise about its timing, magnitude, and impact on curve shape. These dynamics directly affect interest rate transfer pricing, structural hedging strategy, and behavioral modelling assumptions, particularly for deposits and portfolios with embedded optionality. Reassessing FTP under new rate conditions helps banks protect margin and avoid outdated signals.

Beyond rates, liquidity regulation and supervisory expectations continue to evolve, increasing the importance of FTP as a tool that integrates liquidity cost, buffer usage, and stability considerations into business decisions.

When institutions invest in FTP today, they unlock several strategic benefits:

• A shift from compliance to strategic partnership. FTP becomes a forwardlooking advisory mechanism that enhances riskbased pricing rather than a backend reporting exercise.
• Sharper alignment of business decisions with risk appetite. With better transfer pricing for interest rate and liquidity risks, businesses receive clearer messages about the true economic cost of their activities.
• Better decisioning enabled by technology and AI. Emerging tools allow more efficient curve construction, scenario analysis, behavioral modelling, and attribution - reducing manual effort and improving both accuracy and transparency.

In short, continued investment ensures FTP would benefit the firm economically as the world never stops changing.

Many institutions struggle to move FTP beyond a compliance or reporting exercise. What practical strategies have you seen work best for using FTP to improve risk management and profitability analysis?

Institutions that use FTP effectively treat it as a riskbased pricing and steering tool, not a just a regulatory requirement. Several practical strategies stand out:

A. Strengthen riskbased pricing through both ITP and LTP.

Interest Rate Transfer Pricing (ITP).
FTP can help institutions incorporate market dynamics into its product pricing and hedging strategies. This is particularly important for:

• NMDs requiring behavioral modelling
• Products where optionality or duration risk is significant.
• A wellcalibrated ITP ensures the hedge horizon and pricing assumptions reflect economic behavior rather than contract terms.

Liquidity Transfer Pricing (LTP).
Liquidity FTP should appropriately reflect the benefit or cost of each product’s liquidity characteristics. Good LTP supports:

• Better customer pricing decisions,
• More informed funding strategies, and
• Feedback loops to liquidity management teams.

This creates a virtuous cycle: the FTP framework helps to improve liquidity risk management, such as providing needs for better segmentation and behavioral modelling, which in turn enhances business pricing and funding mix which ultimately improves ROE.

B. Provide strategic direction for both business and finance.

FTP becomes a strategic advisory tool when it provides actionable insights, such as:

• Marginal cost of funds for pricing,
• Deallevel profitability including liquidity cost or benefit,
• Forwardlooking signals when markets shift, and
• Clearer return metrics that incorporate risk transfer.

Institutions that embed these insights into planning, pricing, and resource allocation naturally move beyond compliance.

Regulatory expectations continue to shape how FTP is implemented. How does a welldesigned FTP framework help strengthen confidence in meeting regulatory requirements?

Regulators today are placing more emphasis on internal audit, and in turn, internal audit teams are applying more scrutiny to FTP processes. Strong audit communication and welldocumented methodologies make a substantial difference.

Liquidity and capital remain areas of heightened regulatory concern, and FTP directly affects both. A robust framework helps strengthen regulatory confidence through:

• Direct linkage to liquidity metrics. When FTP is connected to the bank’s most constraining liquidity requirements, such as LCR, NSFR, intraday buffers, or internal stress metrics, the framework becomes a tool that embeds regulatory priorities into business incentives.
• Proactive feedback on profitability and risk. A welldesigned FTP framework provides forwardlooking insight into how liquidity or funding constraints affect business returns, capital efficiency, and balancesheet risk. This enhances the bank’s ability to demonstrate strong governance.
• Clear alignment with supervisory themes, backed by strong modeling discipline, documentation, and crossfunctional accountability.

A framework that integrates liquidity and profitability considerations while providing strategic foresight naturally strengthens regulatory confidence.

Looking ahead, how do you see FTP evolving as banks place greater emphasis on intraday liquidity usage and more granular cost attribution?

As industry attention shifts to intraday liquidity and granular cost attribution, FTP will need to evolve in two ways:

A. Prevent “miss counting” or double counting liquidity costs.

Intraday liquidity metrics introduce new dimensions of buffer usage and peak funding exposure. It is essential that FTP:

• Accurately reflects these costs,
• Avoids overlapping charges with existing liquidity premiums, and
• Clearly delineates what cost each metric represents.

Proper alignment preserves model integrity and ensures the bank sends the right incentives.

B. Manage the “push and pull” between cost attribution and FTP.

Granular cost attribution can complement or complicate FTP depending on design.  The key is to have clear drivers reflected in the granularity.  As granularity increases, the importance of coherent design, and the avoidance of over complicating, or fragmented messages becomes paramount.

As balancesheet management becomes more dynamic and data-driven, what role do you expect FTP to play in shaping business decisions over the next few years?

The heart of FTP remains risk profiling, understanding interestrate risk, liquidity risk, and behavioral characteristics of every product, segment, and balancesheet change. As banks introduce new products or shift balancesheet strategy, this profiling becomes even more critical.

FTP will increasingly act as the translator among business strategy, risk perspectives, return metrics, and profitability outcomes. In this way, it plays several key roles:

• Transforms complex balancesheet risks into clear business signals.
• Provides forwardlooking insight to help steer deposit strategy, asset growth, and funding mix.
• Supports dynamic pricing as markets shift and constraints evolve.
• Links strategic planning with resource optimization, making tradeoffs between profitability, liquidity, and capital transparent.

Ultimately, FTP becomes an important tool for balancesheet optimization, integrating risk, return, and strategic objectives into a unified economic framework.