Funds transfer pricing is under increasingly sharp focus. Financial institutions need to respond to Basel III, as well the Dodd-Frank Act in order to change the way their liquidity is managed and regulated. The efficiency, with which banks adapt their business strategy and their FTP model, will be a deciding factor in the future profitability of core product lines.

Christian Pichlmeier, CFA, Senior Vice President, Corporate Treasury, Institutional Clients Group at Citi answered a series of questions written by GFMI before the forthcoming 2nd Annual Funds Transfer Pricing and Balance Sheet Management Conference, May 15-17, 2013 in New York, NY. All responses represent the views of Mr. Pichlmeier and not necessarily those of Citi.

How do you feel regulation is impacting the use of FTP?

Christian Pichlmeier: The main focus of regulators during the last couple of years was clearly on Liquidity Coverage Ratio and how to define it. I think with this topic under control, regulators will turn their attention to other areas. Transfer pricing seems to be very high on the priority list.

While the FSA in the UK has already published several documents on Transfer Pricing, the topic is less developed in the US. I expect that regulators will require financial institutions to demonstrate that they have developed a Transfer Pricing Framework; which is applied globally for all their business lines and allocates liquidity costs down to the individual decision maker.

How can FTP be integrated into the banks business model?

CP: It is going to be critical to distinguish between business segments which use up a higher share of unsecured funding, and those which have predominantly liquid assets and access to cheaper funding. At the end of the day, it only makes sense to engage in a business segment if it is able to cover all its costs. Liquidity costs play a major role here. Management will have maximum transparency if all cost components are allocated such the economics of businesses become clear.

The major tasks will be to develop a liquidity cost curve which takes into account the funding costs a particular institution faces based on their own credit rating and accessibility of the capital markets. This curve is going to be used to price businesses and products adequately across the firm.

At the conference you are focusing on secured vs. unsecured funding. What do you feel are the issues with modelling these two products?

CP: These segments are very different from a transfer pricing standpoint. Secured funding is mainly a question of accessing functioning repo markets. The critical point is in determining haircuts for a variety of different collateral classes. Unsecured funding is dependent on the credit standing of the individual institution and at which price investors are willing to lend money to an institution.

It is important to stress though, that there are interrelations between the two markets. The best example is the difference in haircuts between assets and liabilities. If an institution is faced with higher haircuts on the liability side, the resulting difference has to be funded unsecured. There are very few institutions today which factor these costs into their transfer pricing framework.

What do you feel will be gained on attending the conference?

CP: Attending the conference will be a great way to interact with financial professionals who are faced with the exact same task for their individual institution: developing a model to allocate liquidity costs. There is a lot to learn in terms of best practice models. At the same time, requirements can be very specific to the individual institution which opens up different views and expands the individual horizon.

Attendants will gain a much deeper understanding of the importance of transfer pricing and I am convinced that a lot of the concepts will be very practical and can be applied to day to day business.

Christian Pichlmeier, CFA, is a Senior Vice President for Corporate Treasury at Citi. Through his work he is exposed to the management of liquidity for Citi's broker/dealer operations, in particular global liquidity transfer pricing and analytics for secured financing activities. Previously, he was Treasurer of the New York branch for HSH Nordbank AG.

For more information please contact Michele Westergaard, Senior Marketing Manager, Media & PR, marcus evans at 312-540-3000 ext. 6625 or

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