How to Build a Funds Transfer Pricing (FTP) Rate | Step by Step Banking Example
3 October 2026·24 min
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What actually goes into a Funds Transfer Pricing (FTP) rate, and how does a bank build one?
An FTP rate might be presented as a single number, but underneath it are several different economic components. Each represents a different funding cost, liquidity cost or balance sheet risk.
In Session 3 of our complete Funds Transfer Pricing course, we build an FTP rate from the ground up using a practical £1 million five year fixed rate mortgage example.
Starting from zero, we construct a 4.53% FTP rate component by component, then compare it with the 5.40% customer rate to understand what margin the mortgage business actually retains.
In this session:
• How to build an FTP rate step by step
• What an FTP rate actually contains
• How the base curve works
• Term liquidity premium explained
• How contingent liquidity is priced
• When basis costs should be included
• How mortgage optionality affects FTP
• Prepayment and behavioural risk
• Levies and funding related structural costs
• How FTP affects product profitability
• What should and should not sit inside FTP
• Why credit risk is separate from FTP
• Why operating costs are separate from FTP
• The relationship between FTP and RAROC
• How to avoid double counting costs
• Who should own each FTP component
• How strategic pricing overlays should work
• Why FTP rates need to be transparent and explainable
Building an FTP rate
We start with a £1 million five year fixed rate mortgage with a customer rate of 5.40%.
The FTP rate is then built from six components:
Base curve: 3.70%
Term liquidity premium: 0.55%
Contingent liquidity: 0.06%
Basis: 0.00%
Optionality: 0.18%
Levies and funding related costs: 0.04%
Total FTP rate: 4.53%
Against a customer rate of 5.40%, the mortgage business retains 87 basis points of post FTP margin.
On £1 million of lending, that represents £8,700 of annualised net interest contribution before recognising the other economics of running the mortgage business.
This example shows why an FTP rate should never be treated as one unexplained funding number.
The base curve reflects the underlying interest rate environment.
The term liquidity premium reflects the bank's cost of obtaining funding for the relevant term.
Contingent liquidity captures liquidity requirements created by the product.
Basis captures relevant currency, index or tenor transformation costs.
Optionality recognises customer behaviour such as mortgage prepayments and early redemptions.
Each component has a different economic purpose.
Where should FTP stop?
A critical part of designing an FTP framework is understanding what should not be included.
Expected credit loss is not FTP.
Operating cost is not FTP.
Capital is not FTP.
FTP should price the funding, liquidity and relevant balance sheet risks transferred between the business and Treasury.
Credit risk, operating costs and capital consumption belong within their respective profitability and risk frameworks.
This distinction becomes particularly important when FTP connects with RAROC.
If the same economic cost appears in both FTP and RAROC, the bank risks double counting it.
Every economic cost should have one home.
Why breaking down the FTP rate matters:
Imagine the mortgage business is told that its FTP rate has increased by 35 basis points.
Knowing the total increase is not enough.
Did the base curve move because market interest rates changed?
Did the bank's term funding spread increase?
Did customer prepayment behaviour change the optionality cost?
Or did management introduce a strategic pricing overlay?
These are completely different economic events.
A transparent FTP framework allows Treasury, ALCO and the business to understand exactly what changed and why.
A good FTP framework should not force every product into the same price.
It should force every product through the same economic questions.
Continue the complete FTP course:
This is part of our comprehensive Funds Transfer Pricing (FTP) course, covering FTP curves, matched maturity pricing, marginal funding costs, liquidity premiums, contingent liquidity, behavioural assumptions, non maturing deposits, optionality, Treasury P&L, RAROC, governance and practical FTP implementation.
In the next session, we go deeper into the first major component of the FTP stack and ask a deceptively simple question:
Which base curve should a bank actually use?
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