Setting Up Funds Transfer Pricing Rules

This chapter provides an overview of funds transfer pricing rules and discusses how to:

• Set up funds transfer pricing rules.

• Use the Interest Rate Modeler.

• Set up break funding rules.

• Calculate break fund economic loss.

• Set up match funding.

Understanding Funds Transfer Pricing Rules

This section discusses:

• Processing rates.

• Repricing events.

• Stratification rules for rate processing.

• Calculating the base rate.

• Tenor algorithms.

• Strip funding.

• Specifying adjustments.

• Renewed or extended instruments.

The funds transfer pricing rules process specifies the methodologies and calculations used to derive the funds transfer rates and amounts. You set up the funds transfer rules for ledger account balances (for example, cash, prepaid expenses, and fixed assets), product (instrument) principal balances, product (instrument) other balances, or treasury position balances. Define as many funds transfer pricing rules as are necessary for the different methodologies and balance types you use. Funds transfer pricing rules are designed to be reusable—that is, you can attach them to one or more products, ledger accounts, or treasury positions.

Note. Credit amounts should be entered as a negative amount. In the ledger, revenues are negative values, expenses are positive values.

Processing Rates

The FTP Rate application engine does the following:

• Identifies instruments to process based on the run control parameters and FTP business rules.

  When processing for a reporting period, the FTP Rate application engine processes all active and open instruments whose commitment date or start date is less than or equal to the last day of the accounting period, and whose end date is after the first day of the accounting period.

• Identifies and assigns the funds transfer pricing rule and break funding rule to a new instrument, according to the definitions in the Product Portfolio Definition, Product Setup pages. The information on funds transfer pricing rules assigned to a given instrument is stored in FTP_RULE_TBL. The funds transfer pricing rate for each balance segment is stored in FTP_BSEQ_IN_F00. The information on break funding rules assigned to a given instrument is stored in FTP_BFND_TBL.

• Identifies any funds transfer pricing adjustments that should be calculated for a given instrument, as defined in the funds transfer pricing rules, and stores adjustment information in the FI_IFTPADJ_R00 table.

The FTP Rate application engine identifies instruments requiring an funds transfer pricing rate calculation. First the Cash Flow Generator application engine calculates the cash flows. Then the financial calculator application engine calculates duration measures (such as average life, or effective duration). The FTP Rate application engine then uses the duration measures, along with the specified cost of funds curve, and the start date or commitment date, to obtain the appropriate yields from the interest rate environment. The yield from the interest rate environment is used as the basis for the funds transfer pricing base rate calculation.

See Also

Setting Up Financial Instruments

Setting Up Financial Services Industry Products

Defining Financial Calculation Rules

Repricing Events

There are several types of events in an instrument’s life cycle that can initiate repricing:

• When an instrument is new to the system—that is, there is no funds transfer pricing rate record in the FI_IFTPRATE_R00 table for the instrument.

  For many fixed rate types of instruments, the funds transfer pricing rate is set only once, when the instrument is new. The same rate is then applied each processing period.

• For products that have the Reset FTP Rate Each Period option selected on the Financial Calculation Rules page.

  The funds transfer pricing rate is recalculated during every processing period.

• For variable rate products, whose tenor you may want to base on the instrument’s repricing frequency.

  When you choose the repricing frequency funds transfer pricing tenor setting (in the Financial Product Definition pages), the funds transfer pricing rate program calculates and stores the next funds transfer pricing reprice date based on the instrument’s repricing schedule. The funds transfer pricing rate is automatically recalculated at the repricing anniversary.

• When there is a funds transfer pricing reset event.

  In some cases, you may want to have an external system trigger a funds transfer pricing repricing event.

  You can do this by having the source system and extract-transform-load process generate a funds transfer pricing reset event in the FI_ITRNHST_R00 table for the instrument. The FTP Rate process automatically scans the FI_ITRNHST_R00 table looking for funds transfer pricing reset events with a transaction code of 060, and resets the funds transfer pricing base and adjustment rates for all those instruments.

Stratification Rules for Rate Processing

When processing instruments, the FTP Rate application engine can use the same general stratification rule as the monthly Financial Performance Measurement program (FPM) or a stratification rule specific to funds transfer pricing. The FPM stratification rule usually pools instruments on a monthly basis for cash flow processing. On the other hand, the stratification rule specific to funds transfer pricing allows discrete pooling based on start date or commitment date, yielding a more accurate funds transfer pricing rate for instruments whose rate changes significantly during the month.

Because of the large volumes of data processed by the FPM program, it may be desirable to stratify the instruments into as small a number of pools as possible, to improve processing time. However, for funds transfer pricing rate setting purposes, it may be desirable to run the stratification process so that the pools created are more tightly stratified and stratified on more attributes than are needed for the FPM process. For example, you may pool the instruments based on monthly start date and end date strata, for an FPM run. However, for a funds transfer pricing rate setting, it may be critical to maintain discrete start dates so that the funds transfer pricing rate reflects the rates in effect on the specific start date for each instrument. Because the FTP Rate process only processes new or repricing instruments, the volume of data that it needs to process is much less than the FPM process, and you can typically afford to define much tighter stratification rules for the FTP process than you use for the FPM process.

Calculating the Base Rate

You define the rules for calculating the base rate using balance segments. Balance segments are a way of calculating the base rate by using a combination of methodologies, yield curves, or terms, for a specific portion of the balance.

Balance segmentation is commonly used for pricing indeterminate maturity products such as demand deposits, savings, NOW, and money market accounts. Historical trends of deposit patterns suggest that balances in these types of accounts consist of both core (stable) and non-core (volatile) funds. Core funds refer to the minimum balances that tend to be retained by the customer on a long-term basis. At the macro level, these funds can be used as a relatively reliable source of medium to long-term funding for the bank. Non-core or volatile funds refer to the remaining balance, which fluctuates over a short time horizon, and should not be priced as a long-term source of funds. When pricing these types of accounts, you may want to calculate the funds transfer pricing rate by assigning a medium to long-term rate for the core segment of funds and a much shorter term rate for the volatile or non-core percentage of balances. You can easily set up a funds transfer pricing rule that enables this type of rate calculation by using the balance segmentation.

Note. You can set up balance segmentation by percentage of the balance or by absolute dolloar amount.

Percent of Balance Segmentation

When you define balance segments as a percentage of the balance, the calculation is very straightforward: the base funds transfer pricing rate is calculated as the sum of all of the balance percentages for each segment multiplied by the funds transfer pricing rate for that segment. The following is an example of an funds transfer pricing rule with two balance segments, both defined as a percentage of the balance:

Balance Segment #1: 50% of balance using a fixed funds transfer pricing rate of 8%.

Balance Segment #2: 50% of balance using a fixed funds transfer pricing rate of 2%.

Base funds transfer pricing rate = (.50 * .08) + (.50 * .02) = 5%

You can specify as many balance segments per funds transfer pricing rule as you need, however, the total for all balance segments must equal 100 percent.

Absolute Amount Segmentation

When you define one or more balance segments and use an absolute balance amount, the calculation becomes complex. The base funds transfer pricing rate calculation depends on the total amount of balances being processed at one time by that funds transfer pricing rule. The sequence in which the balance segment rules is specified on the funds transfer pricing rule is significant. Each balance segment rule is applied against the remaining balance. For each segment, the remaining balance is the starting balance less any balance amounts processed by prior balance segments. The following examples illustrate how the same funds transfer pricing rule that uses absolute balance segment amounts, can arrive at two different base funds transfer pricing rates, when all factors remain constant except the total amount of balances being processed. Assume the following funds transfer pricing rule with two balance segments where the first balance segment uses an absolute balance amount:

Balance Segment #1: 200,000,000 USD using a fixed funds transfer pricing rate of 8%.

Balance Segment #2: 100% of remaining balance using a fixed funds transfer pricing rate of 2%.

Example 1:

Total balances processed: 500,000,000 USD

Base funds transfer pricing rate = (200,000,000 USD * .08) + (300,000,000 USD * .02) / 500,000,000 USD = 4.4%

Example 2:

Total balances processed: 150,000,000 USD

Base funds transfer pricing rate = (200,000,000 USD * .08) + (0 USD * .02) / 200,000,000 USD = 8%

There are several considerations when using absolute amounts:

• The funds transfer pricing balance segments are taken into account when calculating the base funds transfer pricing rate for a given set of ledger accounts, treasury positions, or financial instruments.

  For ledger accounts, treasury positions, and for some financial products, the funds transfer pricing rate is recalculated every processing period. In these situations, you can use absolute amount balance segments with predictable results. However, the funds transfer pricing rate for many types of financial products is typically calculated only once, when the instrument is booked or occasionally, when it reprices. In these situations, the total amount of instrument balances (for which you are calculating an funds transfer pricing rate) fluctuate each time that you run the FTP Rate process , resulting in different base funds transfer pricing rates. You should use absolute amounts for balance segments when transfer pricing ledger accounts, treasury positions, or financial products whose funds transfer pricing rate is reset each processing period.

• The final base funds transfer pricing rate calculation may be influenced by the total balances being processed.

  For ledger accounts and treasury positions, the balance sheet rules control the base funds transfer pricing rate calculation; therefore, the total amount of balances being processed in a given iteration is the sum of balances grouped by the balance sheet rule and the transaction currency code. For financial products, the financial calculation rules control the base funds transfer pricing rate calculation; therefore, the total amount of balances being processed in a given iteration is the sum of the balances grouped by the financial calculation funds transfer pricing rule and currency code. If the total amount of balances processed is less than the amount specified on the balance segment, then balance segments are applied in the order that they are specified on the funds transfer pricing rule, and each balance segment is applied to the remaining balance after the previous balance segment rates have been processed.

• The balance segment amount is specified in terms of base currency units.

  For foreign currency balances, the base currency equivalent balance amounts are used when calculating the base funds transfer pricing rate.

Tenor Algorithms

One of the goals of an effective funds transfer pricing system is to calculate the funds transfer rate so that the rate is based on the current interest rate structure representing the marginal cost of funds of similar liquidity and maturity. Funds Transfer Pricing enables you to select one of several methods for calculating the appropriate maturity (or tenor) to use for an instrument. The tenor refers to the length of time that an instrument is available as either a source or use of funds.

Set the tenor algorithm when you specify the term calculation code in the FTP Base Rate page. The tenor can be set a number of ways. If the rule is for a ledger account or a position, you are prompted for the rate in which case tenor isn’t relevant or you are directly prompted for the tenor. The term, calculation code, is used for products that have a greater number of options for calculating the tenor.

If the tenor is based on the repricing period, there are two possible ways to set the repricing period and the tenor, depending on the characteristics of the instrument: The repricing period can be based on either a periodic schedule (for example, every six months or annually), or a rate change schedule (that is, set to specific dates). In all cases, the tenor is calculated by the difference between the next repricing date and the last repricing date.

If the funds transfer price is based on strip funding, then the projected cash flow for the instrument in each time period is matched with a specific cost of funds rate for that cash flow. The funds transfer pricing rate for the instrument is then calculated by weighting the cost of funds rate for the cash flow in each time period by the term of the cash flow.

Strip Funding

There are several methods to transfer price fixed rate products, including strip funding. Strip funding is the most accurate. Strip funding uses the weighted average cost of funds to calculate funds transfer prices. This involves:

1. Calculating the projected principal payments for the underlying instrument.

2. Using those payments to derive a series of matched maturity funding rates.

3. Calculating the overall base transfer price by weighting each of the derived funding rates by the principal payment amount and by the term of the payment.

This approach weighs the marginal cost of funds (funds transfer rate) in each time period by the size of the cash flow of that period (and by the time to recognize the length of time over which a transfer rate is applicable).

Specifying Adjustments

FTP Adjustments is an optional page that enables you to identify charges or credits that should be added to the base rate. For example, you may want to calculate funds transfer pricing charges or credits for geographic premiums, liquidity premiums, embedded options, or incentive programs; or you may want to add to a CD yield curve a premium for FDIC insurance. The adjustment rules are used to define either basis point or fixed amount adjustments for ledger accounts, positions or instrument balances; in practice, it is expected that these are used most often for instrument balances. By specifying different ledger event codes, the funds transfer pricing adjustment amounts can be stored in separate ledger accounts than the base rate.

Your choices for adjustment calculation methods set up in the Adjustments page are:

• Basis point adjustment

  Calculates the funds transfer pricing adjustment by applying the rate specified to the instrument or account balance. Adjustment amount is calculated as: basis points/10,000 * balance * number of days in period/number of days in year.

• Fixed amount

  Generates a fixed amount charge or credit.

• Commitment period rate lock

  This option is available for instruments only. It can be used for instruments with a rate lock option for a specific commitment period−that is, the customer has been given a commitment for a loan at the lowest posted rate during the commitment period. For example, on mortgage loans, the customer may be given an agreement on the commitment date that the rate on the loan is to be set when the loan is drawn or advanced (the start date of the loan) based on the lowest posted rate during the commitment period. If selected, the commitment period rate lock option calculates an funds transfer pricing adjustment that is to be used to transfer the risk of rising interest rates during the commitment period from the business unit to the treasury unit. The spread between the minimum posted rate available during the commitment period and the actual posted rate is applied as an funds transfer pricing adjustment. The historical posted rates are stored in the FI_IDX_RATE_F00 table. For example, a loan commitment might be made on January 1, 2000. If the actual start date of the loan turns out to be June 15, 2000, and the rate lock period is not filled in, then the rate lock adjustment is based on the lowest posted rate between January 1 and June 15, 2000. If, however, the rate lock period is set to 90 days, then the rate lock adjustment is based on the lowest posted rate between March 15 and June 15, 2000.

• Derived from yield curve

  This enables you to perform an adjustment based on a defined term and cost of funds curve. This is often desirable for generating term-based adjustments such as liquidity. Or you may want to pass through to your internal customers or analytical processes an explicit adjustment rate charge, rather than a single rate built from a composite curve comprising all aspects of the funds transfer pricing charge. By decomposing the rate into more granular components, you can encourage appropriate decision-making behavior.

• Lookup table adjustment

  This is an alternative that allows you to load base rate adjustments into an FTP Base Rate Adjustment lookup table. A single adjustment rule linked to this table can then be established to replace thousands of rules. The adjustment values can be in dollars or basis points.

Renewed or Extended Instruments

The Renewals/Extensions page of the Transfer Pricing Rules component is used to set up the funds transfer pricing rule for an instrument that is renewed or extended. For these instruments, the FTP Rate application engine calculates a new rate using a blend of the old funds transfer pricing rate and the current interest rates charged for these types of products.

For a renewed or extended instrument, the funds transfer pricing rate can be calculated by blending the new rate with the prior funds transfer pricing rate. A renewed or extended instrument is identified by on of the following transaction codes; 020, 025, 030, 040, and 050 on the FI_ITRNHST_R00 table. Two fields are provided on the instrument records to form the links between the multiple instrument records that can be involved for renewable types of products. On the FI_INSTR_F00 record itself, a field is available called FI_PREV_INSTR_ID that identifies the previous instrument ID for a renewed or extended contract.

In the case of a renewal or extension, the extract-transform-load process creates new instrument, balance, and status records that contain the information for the renewed instrument. When the new instrument is created, the FI_PREV_INSTR_ID field may be populated with the old instrument ID and may update the FI_NXT_INSTR_ID field on the old instrument’s FI_ISTATUS_R00 record to point to the new instrument ID. The FI_NXT_INSTR_ID field is optional and is provided so that reports and queries can be performed to track the new instrument from the old instrument ID. The FI_PREV_INSTR_ID can also be used to track the old instrument from the new instrument ID. The blended rate adjustment is as follows:

Funds transfer pricing blended rate adjustment = ((NEW funds transfer pricing base rate − REMAINING TERM funds transfer pricing base rate) * (previous remaining term) * (previous remaining balance)) / (current remaining term * current balance).

The FTP Rate process determines the renewal rate lock period as follows:

1. It calculates the earliest possible renewal rate period date, that is, the date that is n days prior to the start date on the new instrument record, where n = number of days specified by the Rate Lock Period field.

2. It sets the rate lock period to the period between the earliest renewal period date and the actual start date.

3. It finds the most recent range of dates for the minimum posted rate in effect during the rate lock period.

   The posted rates are the historical rates stored in the FI_IDX_RATE_F00 table according to the price index ID.

The FTP Rate process calculates the funds transfer pricing base rate for renewed or extended instruments using the minimum cost of funds rates in effect during the renewal rate lock period.

The FTP Rate process blends the current adjustment with the previous adjustment based on the following formula:

((previous adj.*(remaining term/remaining balance)) + (current adj.*(current term /current balance)) / (previous remaining term /previous remaining balance) + (current term /current balance)

A new funds transfer pricing rate is calculated for renewed or extended instruments, which are the same as new instruments. The FTP Rate process automatically scans the FI_ITRNHST_R00 table looking for funds transfer pricing reset events with the transaction codes of 020, 025, 030, 040, and 050 and resets the funds transfer pricing base and adjustment rates for all those instruments.

Setting Up Funds Transfer Pricing Rules

This section discusses how to:

• Define the funds transfer pricing rules.

• Define the base rate.

• Define adjustments.

• Set up renewals or extensions.

Pages Used to Set Up the Funds Transfer Pricing Rules

Defining the Funds Transfer Pricing Rules

Access the FTP Rule page.

Use this page to set up general information about the transfer pricing rule, including the funding center and ledger event code.

If your data source is Product Detail, determine whether you want to select the Set Rate on Commitment Date option. Then, specify any stratification rules. Select Override Cash Flow Rule to override the cash flow rule and select the particular rule in the Stratification Rule field.

Defining the Base Rate

Access the Base Rate page.

Specify a funds transfer pricing rate type to determine how PeopleSoft Funds Transfer Pricing derives the rate. Your choices are:

• Derived from Yield Curve (floating rate).

  Specify the currency cost of funds ID and the margin by which to adjust the interest rate derived from the yield curve in basis points. Then enter the maturity.

• User Specified (fixed rate).

  For this option, enter the funds transfer pricing rate in the Fixed Rate field.

Specify the tenor algorithms for this rate in the Term Calc Code(term calculation code) field by selecting from the available options.

Specify whether this funds transfer pricing rate applies to all or a portion of the balance. Select either Percent of Balance and enter the balance percentage, or select Fixed Amount and enter the balance amount. If you are segmenting balances for this funds transfer pricing rule, then insert as many rows as necessary, ensuring that the segments that you specify account for 100% of the balance. Otherwise, the system returns an error message.

Defining Adjustments

Access the Adjustments page.

Enter an adjustment type, calculation method, and constraint code. Different fields display, depending upon your prior selections:

For forecasted pools, indicate whether you want to Apply Adjustment and specify the Constraint Code to which the adjustment applies.

Setting Up Renewals or Extensions

Access the Renewals/Extensions page.

Calculation Method	Select a calculation method. Values are Maintain Spread or Recalculate Rate.
Renewal Rate Lock	Select to use Renewal Rate Lock.
Rate Lock Period	Enter the Rate Lock Period.
Blended Rate Adjustment	Select to use Blended Rate Adjustment. This is an option to blend new FTP rates with previous FTP rates for renewals and extensions.
Adjustment Type	Select an Adjustment Typecode.

Using the Interest Rate Modeler

You can use the Interest Rate Modeler to perform the following:

• Single path analysis for implied or market rates and deterministic shock rates, and deterministic drift rates (both user-defined and delivered).

• Historic and forecasting scenarios.

• Product, treasury, and ledger processing.

Funds Transfer Pricing depends extensively on interest rates. By using the Interest Rate Modeler, you can easily model rates for funds transfer pricing. Two primary engines—the FTP_RATE and FTP_FRATE application engines—use rates all the time. When you run these engines, they call the Interest Rate Modeler for funds transfer pricing rates. These engines also call the cash flow engine and the financial calculator.

In addition, Interest Rate Modeler supports discount factors. Discount factor calculations are needed primarily for net present value and duration analysis. The two engines performing these transactions are FTP_RATE and FTP_FRATE (the primary FTP engines). The Interest Rate Modeler derives discount factors and provides them to the calling applications.

For a detailed discussion on how to use the Interest Rate Modeler pages:

See Using the Interest Rate Modeler.

Setting Up Break Funding Rules

This section provides an overview of break funding and explains how to establish break funding rules.

Understanding Break Funding

Break funding charges are typically assessed for loans that are paid off before maturity and represent the cost of having to reinvest the funds at a lower return. The assumption is that the institution is raising term funds to match the term of the loan. Break fund charges are usually assessed on large loans, and their calculations are specific to the underlying instrument.

You can calculate break fund charges not only on payoffs, but on a cancelled drawdown as well. You can choose to accrue break fund charges over the remaining term of the instrument, or you can assess a one-time charge.

Break funding can be calculated:

• As a fixed amount.

• As a percentage or rate of the payoff or cancelled drawdown amount.

• By calculating the economic loss to the funding center, resulting from reinvestment of the funds under adverse interest rate conditions.

Treatment of Payoffs and Draw-Downs

The Instrument Transaction History table (FI_ITRNHST_R00) can be used to record payoffs received or the cancelled drawdown on financial assets that can trigger break funding events. These payoff events are used solely by PeopleSoft Funds Transfer Pricing for identifying and calculating break funding charges.

For instruments with a break funding rule, PeopleSoft Funds Transfer Pricing scans the Instrument Transaction History table (FI_ITRNHST_R00) for any payoff or cancelled drawdown event that occurred during the processing period. PeopleSoft Funds Transfer Pricing then calculates a break funding charge by using the amount of the payoff or cancelled drawdown as a starting balance, and projecting cash flows that would have resulted had the payoff not occurred, or had the drawdown occurred as originally planned.

The FTP_BFND process scans the FI_ITRNHST_R00 table for payoffs (on assets) or a cancelled drawdown event that has occurred during the processing period. When a break funding event has occurred, the program uses the break funding rule (that was assigned in the FTP Rate process) to calculate the appropriate charge.

Break funding events are stored in the FI_ITRNHST_R00 table that is populated as part of the migration process. Payoff events are identified with a transaction code of 090, while cancelled drawdowns have a transaction code of 080.

When an instrument is recalibrated.

A new funds transfer pricing rate is calculated for recalibrated instruments similar to new instrument calibration. The Break Fund Calculations (FTP_BFND) process automatically scans the FI_ITRNHST_R00 table looking for funds transfer pricing reset events with the transaction codes of 095 and resets the funds transfer pricing base and adjustment rates for all those instruments

The transaction codes listed above are as follows:

• 020: Renegotiation w/Blend & Extend

• 025: Renegotiation W/O Blend & Ext

• 030: Fixed Rate Renewal

• 040: Fixed Rate Add Loan

• 050: Fixed Rate Blend & Extend

FTP recalibration is a process where you assign current markets rates to additional funding for acquisition or surplus funding for redeployment as a result of changed product balance behavior forecast and blend with previously locked-in funding cost based on a previous forecast to produce a recalibrated FTP rate. This rate reflects the funding cost locked-in according to the current balance behavior forecast for the synthetic instrument it is assigned to and replaces the previously assigned FTP rate to calculate actual and forecasted interested expenses for that synthetic instrument.

Reforecasting of FTP rates can occur multiple times during the life of a synthetic instrument. Lines of Business (LOBs) product management and account management requires reevaluation of initial assumptions and a reforecast of the future balance behavior of existing accounts. As a result, the FTP rate is recalibrated so that the balance deviations from the previously forecasted balance behavior are funded at current market rates and the newly projected balances are used as a comparison point for future breakage calculations. When reforecast occurs, the new FTP rate and projected balances need to be available to determine breakage events for the following accounting periods. If at least one reforecast happens, the breakage charges\credits due to reforecast are calculated as an FTP recalibration breakage or as an one-time Net Present Value (NPV) charge\credit. These two methods are mutually exclusive. If FTP recalibration breakage is chosen to be posted, then the recalibrated FTP rate is applied to actual balances to calculate total interest expenses for the accounting period. The FTP recalibration breakage is posted as the difference between the total interest expense amount using the recalibrated FTP rate and the base interest expenses using a base line FTP rate. The base line FTP rate can be the original proforma pricing FTP rate for this synthetic instrument, the FTP rate from a budget, or some other user defined rate. If the one time NPV breakage is selected, then the calculated amount is posted to the current account period only. The breakage due to reforecast, whether it is the FTP recalibration breakage, or the one time NPV, is combined with the monthly one-off breakage and each total amount is posted separately to the “Breakage” line under “Total Interest Expenses” in the P&L.

Pages Used to Set Up Break Funding Rules

Establishing Break Funding Rules

Access the Break Funding page.

The fields in the page vary according to the selected option.

Set up general rule information, and then specify a calculation method.

The following fields will vary according to the option that you selected for the calculation method:

Break Funding Events

The events for which break funding occurs are set by default for prepayments and cancelled draw-downs. Deselect these fields if you do not want break funding to occur for these events.

Amortization Options

Set up your amortization options. Specify whether you want to amortize the break fund charges, and if so, over what period of time to amortize them.

Recalibration Method

Discount Rate

Calculating Break Fund Economic Loss

When calculating the economic loss to the funding center due to a payoff or a cancelled drawdown, funds transfer pricing applies the theoretical value of the interest rate differential (IRD) against the projected cash flow stream, based on the amount of the payoff or cancelled drawdown. For the remainder of this section, we will refer to both payoff and cancelled drawdown as payoff events.

To calculate the break funding economic loss:

1. Retrieve the current funds transfer pricing rate for the instrument.

   Create a new synthetic instrument based on all the payment characteristics of the original instrument but with the following fields set to values based on the payoff event:

   1. Commitment date and start date are set to the transaction date of the payoff event.

   2. The amortization term to maturity is calculated as the number of days between the amortization end date of the instrument and the payoff transaction date.

      The current and initial balance amounts are set equal to the amount of the payoff or cancelled drawdown.

2. Calculate a new funds transfer pricing rate for the synthetic instrument based on the same funds transfer pricing rule used for the original instrument.

3. Calculate the IRD as the delta rate between the newly calculated funds transfer pricing rate for the payoff event and the funds transfer pricing rate used for the original instrument.

4. Check to see whether the calculated IRD results in an economic loss to the funding center.

   For assets, if the IRD is positive, that is the underlying interest rates have gone up, then in theory the funding center can reinvest those funds at a higher rate, so no economic loss amount is calculated. For liabilities, if the IRD is negative, that is the underlying interest rates have gone down, then no economic gain amount is calculated. However, there is a minimum break funding charge value that can be set on the break funding rule, and if it is set, then a break funding charge is always assessed, regardless of the IRD.

5. Generate stream of projected cash flows for the synthetic instrument created based on the payoff event.

6. Calculate the lost or additional income stream to the funding center based on the projected cash flows and use the IRD as the interest rate used to calculate the projected interest payments.

7. Calculate the value of the IRD income stream by calculating the NPV of the income stream using the discount factor based on the yield curve.

   The yield curve is based on the Discount Factor table ID, defined on the financial calculation rules.

Setting Up Match Funding

This section discusses how to:

• Set up match funding rates.

• Set up break funding rules.

Pages Used to Set Up Match Funding

Setting Up Match Funding Rates

Access the Match Funding Rates page.

FTP Rate	Set up the base rate by entering an annual percentage rate.
Accrue as of Commitment Date	The funds transfer charges accrue as of the start date, if the commitment date is not selected.
FTP/RWC Balance Type	Select from the predefined values.
Ledger Event Code	Select the PF ledger (performance ledger) account to which the funding charge is to be posted.
Funding Center	Select the funding center that is to receive the offsetting funding charge for the instrument.
Adjustment Type	Select how you want the base funds transfer pricing rate to be adjusted.
Basis Point Adjustmentand Fixed Amount	Select the appropriate radio button.
Adjustment Rate (bps)	For a basis point adjustment, enter a rate as an annual percentage in basis points.
Adjustment Amount	Enter the amount for a fixed amount adjustment.
Ledger Event Code	Select the PF ledger account to which the funding charge is to be posted.
Funding Center	Select the funding center that is to receive the offsetting funding charge for the instrument.
Apply at Origination Only	Select to make a one-time adjustment at origination. If you select this check box, the entire adjustment is applied in the origination reporting period. If this check box is not selected, then the adjustment accrues across all reporting periods while the instrument or account is active.

Setting Up the Break Funding Rules

Access the Break Funding Rule page.

Specify a calculation method. Your choices are Amount, Econ Loss, Fixed Rate,or Recalc. Depending upon your selection, the following fields appear:

Next specify when you want to calculate a break fund charge. Your can choose between: payoff events or cancelled drawdown events.

Finally, specify whether you want to amortize the break fund charges, and if so, how to amortize them. Depending on your selection, the following fields appear: