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In any bank, the Treasury Department acts as “the bank’s bank”: Deposits taken by the commercial departments are transferred to Treasury, who in turn make the money available either to lend out to the bank’s customers, or to invest in other financial instruments such as Treasury Bills. If there is a shortfall in cash, the Treasury department has to fund this shortfall; if there is an excess (surplus) of cash, Treasury must invest it.

The capital associated with a bank’s interest bearing products (both assets and liabilities) have a cost associated with them: The costs associated with these activities are called “Funds Transfer Pricing” (MFTP), as it reflects how funds are transferred to and from the Treasury department to the various business units. The costs are reflected in the FTP rates associated with the products offered by the bank.

These rates are of relevance internally to the organisation and are different to the rates earned/charged from the external dealings in the products. From the principal amounts and MFTP rates, “MFTP interest” is calculated. This makes it possible for the bank to separate a product’s MFTP interest from its commercial interest (which is based on the products’ external interest rates). Another way to rephrase this is that MFTP looks at what the bank’s commercial cost of funds are (i.e. getting their funding from deposits), vs what the cost would be if those funds were raised and invested in the market.




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