For decades, funds transferpricing has been one of the most important management tools for thefinancial industry, as it is the key factor in determiningthe profitability of a credit unions' members, products,organizational units and channels. With clearer insight into howthese factors contribute to a credit union's net interest margin,executives can make more informed decisions regarding itsprofitability drivers and therefore effectively determine productpricing.

The challenge is not necessarily the calculating of FTP ratesbut in how many of today's credit unions fall short in terms of howthey analyze and leverage that information to make more-informeddecisions. Many institutions focus solely on calculating preciseFTP rates, which under-utilizes the analytical value that a deeperFTP reporting tool would provide.

Implementing a sophisticated, well-structured FTP mechanism willprovide credit unions with margin clarity throughout every level ofthe organization. To create a clearer picture of member, businessunit, product or officer profitability, a credit union must startwith a theoretically sound approach to calculating FTP. This wouldinclude an FTP system with comprehensive calculation methodologiesthat are inclusive of appropriate assumptions reflecting thecharacteristics of the institution's products, such as FTP rates, aFTP yield curve and even spread adjustments. These are necessary asFTP, if calculated correctly, will be processed for each individualaccount (record level) and be based on that product'scharacteristics.