7.4 Information on the cost-benefit allocation mechanism

On the set-up of the liquidity cost-benefit allocation mechanism, competent authorities should ensure that they receive from institutions the following:

• a. description of liquidity cost-benefit allocation mechanism as well as the criteria for the selection of the liquidity and funding elements that ensure all relevant benefits and costs are taken into account, as well as any adjustment frequency of the prices;
• b. description of the interlinkages between the liquidity cost-benefit allocation mechanism and the risk management and overall management of the institution.

For the institutions with liquidity transfer pricing (LTP) mechanisms in place, competent authorities should ensure that the information referred to in the previous paragraph also includes description of the set-up and functioning of LTP, and in particular of the interlinkages between LTP and strategic decision making as well as front office decision making on asset and liability generation.

7.4.2 Operational documentation

On evidencing cost-benefit allocation of the implementation of the liquidity mechanism, competent authorities should ensure that they receive from institutions the following:

• a. description of the current liquidity cost-benefit allocation mechanism and a quantitative overview of its current calibration (e.g. interest rate curves, internal reference rates for main categories of assets and liabilities in use, etc.);
• b. description of the current integration of the liquidity cost-benefit allocation mechanism into the measurement of profitability for new asset and liability generation, both on-balance-sheet and off-balance-sheet;
• c. description of the current integration of the liquidity cost-benefit allocation mechanism into performance management, where necessary split out into the different business lines/units or regions.

For the institutions with LTP mechanisms in place, the information referred to in the previous paragraph should also cover the functioning of LTP, and in particular the relation between LTP and key risk ratios.