Answer: A centralized treasury funding center should be implemented to manage the liquidity cushion across business units.

## Explanation Option A is correct because implementing a centralized treasury funding center is indeed a best practice in liquidity transfer pricing (LTP). This approach: - **Centralizes liquidity management**: Allows for efficient allocation and management of liquidity resources across the entire organization - **Provides consistent pricing**: Ensures all business units face the same liquidity costs, promoting fair decision-making - **Enables proper risk management**: The centralized treasury can better monitor and manage the overall liquidity position and cushion - **Aligns incentives**: Business units are charged appropriate liquidity costs for their activities, encouraging prudent liquidity management **Why other options are incorrect:** - **Option B**: While regulatory compliance is important, relying solely on external factors doesn't constitute a best practice. Effective LTP should be driven by internal risk management needs, not just regulatory requirements. - **Option C**: Remuneration policies SHOULD be linked to LTP to properly incentivize business unit managers. Without this linkage, managers might not consider liquidity costs in their decisions, potentially leading to excessive liquidity risk taking. - **Option D**: Contingent collateral calls and derivatives SHOULD be included in the LTP process. These represent significant liquidity risks that need to be properly priced and managed within the overall liquidity framework.

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