An FTP (Funds Transfer Pricing) framework is a system used by banks and financial institutions to allocate the cost of funds and the revenue generated by different business units within the organization. The main necessity for an FTP framework is to provide a consistent and transparent method for measuring the profitability of different business lines and products. Some of the key reasons for the necessity of an FTP framework are:
1. Accurate Pricing of Products and Services: An FTP framework helps financial institutions to accurately price their products and services by assigning a cost of funds to each business unit. This ensures that the pricing reflects the true cost of funds and provides an accurate measure of the profitability of each business unit.
2. Incentivize Profitable Business Lines: An FTP framework can be used to incentivize profitable business lines by allocating a higher share of the overall funding cost to those business units that generate higher returns. This can encourage business units to focus on profitability and help the overall organization to achieve its financial objectives.
3. Transparency in Profitability: An FTP framework provides transparency in the profitability of each business unit and product. This can help to identify areas where the organization is generating high profits and areas where improvements can be made.
4. Better Management of Liquidity: An FTP framework can help financial institutions to better manage their liquidity by assigning a funding cost to each business unit. This can help to ensure that each business unit is using funding efficiently and can reduce the overall funding costs for the organization.
Overall, an FTP framework is necessary for financial institutions to accurately measure the profitability of different business units and products, incentivize profitable business lines, and manage liquidity effectively.