My understanding of FTP is just the rates assigned to deposits and rates assigned to loans and the spread in between makes profit for the bank . Is there more to this topic ? I have read about incorrect FTP implementations !What is an example of a bad ftp implementation.Really appreciate if someone could give me some addl info.regards

There is a great deal to this topic. A bad FTP implementation is one that does not account for:1. all important characteristics of the asset or liability in question - term, rate reset index, embedded optionality (e.g. loan/mortgage prepayments, cashable GICs, etc.);2. customer behaviour - retail clients sometimes make financial decisions for non-financial reasons, so traditional financial models that assume strictly financially rational behaviour (i.e. pretty much all of them) need to be adjusted or behaviouralized;3. liquidity. The swap curve is only a starting point for a conglomerate bank's FTP process.This list is not necessarily exhaustive. Getting FTP wrong means that forecasting, performance measurement, compensation and resource allocation are all compromised.

To add a bit more here, how does one FTP a demand deposit like a chequing account? The holder of the account has the option to either increase or decrease the account balance and the bank has the option to adjust the interest rate on it (typically zero or close to zero for chequing accounts, maybe even negative when you consider fees). Retail networks typically forward account balances to a centralized Treasury for management and are in turn paid a fair FTP rate by the Treasury for bringing in essentially free money. What is the fair rate for the FTP? The accounting industry takes a predictably narrow view of such things and treats demand deposits as overnight instruments (hence they don't quality for hedge accounting) - if you believe this story you'd pay the retail network the overnight rate on the aggregate balance. But bankers know that when diversified across a large number of clients (particularly multi-product clients), demand deposit balances are relatively stable (or sticky) and one can count on at least a certain portion of the balances to stick around. So the next questions you have to address for the FTP of such accounts is: i) what portion of the demand account balance is stable (or not interest rate sensitive - i.e. the core portion) and ii) what portion of the balances are interest rate sensitive (i.e. likely to flee should rates move upwards). Once this science/art is done you pay a floating rate FTP to the non-core portion and some term FTP rate to the deemed core portion. Then more science/art is required - you have to decide what is the appropriate term FTP rate to pay on the deemed core portion (i.e. you need to estimate the duration).Lots of things to do for only one product, have just scratched the surface. More later when time permits, ALCO calls...

David,Thanks for the replies. I have been following this topic and am very interested in deposit pricing and fund transfer pricing topics, hence your replies are greatly appreciated. I will read more and come back - I need to ask my CRO what he does at the ALCO's myself....