Surya Software Systems

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BFTPBank Funds Transfer Pricing

• Surya Software Systems

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Objectives

• Provide data to manage Interest Rate Risk
  Centrally
• Remove Interest Rate Risk from Business Units
  Earnings
• Measure profitability of business units and
  off-set center (Managed by Treasury)

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Matched Maturity Method

• Every transaction should be matched with a
  corresponding hypothetical internal funds
  transfer
• Ability to decompose net interest margin into
  three components
• Lending/Investment spread
• Funding spread
• Rate risk spread

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Example Marginal Components
There is a contractual rate of 8 on a two year
zero coupon loan and contractual rate of 3 on
Certificate Deposit. Transfer pricing system
assigns 5 market rate for two years money and 4
for one year funds

• Line Unit Assets Liabilities Real Spread
  Real Rate 8 3 5 Transfer Rate 5 4
  Matched Spread 3 1
• Treasury Funding Center Total Matched Spread
  Transfer Pricing Income 5 5 Transfer
  Pricing Expenses 4 Treasury Spread (Rate
  Risk) 1

Funding Spread
Lending/ Investment Spread
Rate Risk Spread
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List of Functions

• Viewing FTP Rate
• Choosing FTP Curve
• Treatment of Non-Maturity Contract
• FTP Book Report
• FTP Report By Business Unit
• Profitability Report
• Profitability Report by Business unit
• Off-set Center Spread and Profit Report
• Graph, FTP Rate, Contracted Rate Vs Term
• Funding, Investment and Rate Risk Spread between
  Two Transaction Dates
• Graph, Current Market Rate, FTP Rate Vs Term
• Sensitivity Analysis

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Viewing FTP Rate
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Choosing FTP Curve

• Treasury rates
• Marginal funds pool
• Bank Cost of Funds
• Target borrowing rate
• Proxy curves for cost of funds
• Interest rates swap curve
• Wholesale CD rates
• LIBOR

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Treatment of Non-Maturity Contracts

• Divide non-term products balances as core portion
  and volatile portion
• Assign long term rate to core portion
• e.g 10 years market rate
• Assign Short term rate to volatile portion
• e.g 1 year market rate

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Thank you