ALM system implementations — whether Murex, Oracle OFSA, Temenos, or a custom build — consistently underperform in UAT for the same reason: the teams testing them understand interest rate risk conceptually but not computationally. FTP rates, IRRBB gap analysis, LCR computation, NSFR — each of these has a specific numerical methodology that must be tested precisely, not directionally.
FTP: The Internal Pricing Nobody Tests Correctly
Fund Transfer Pricing is the mechanism by which a bank's ALM desk prices internal funds — assets earn the FTP rate from the pool, liabilities pay the FTP rate to the pool. The spread between the instrument rate and the FTP rate is the business unit's contribution to NIM.
Most ALM UAT plans test that an FTP rate is assigned to a transaction. Almost none test the three-method question: is the FTP rate coming from a single pool, a tenor-banded multiple pool, or a matched maturity computation? Each produces a different rate for the same transaction. A system configured for matched maturity FTP that is tested only at the single pool level has not been tested at all.
FTP single pool rate method — one internal rate applied across all products. FTP multiple pool (maturity band) method — rate varies by tenor bucket. FTP matched maturity method — exact tenor matching per product, liquidity premium added.
IRRBB: EVE and NII Are Not the Same Test
Interest Rate Risk in the Banking Book has two distinct measures — NII sensitivity (impact on earnings over 12 months) and EVE sensitivity (impact on economic value of equity). They are computed differently, use different rate shock scenarios, and have different regulatory thresholds. RBI's IRRBB Guidelines 2023 require both. Basel III standardised approach requires six prescribed EVE shock scenarios.
UAT plans typically test NII sensitivity (easier to understand, familiar to credit teams) and skip EVE entirely — or test EVE only under a parallel shock and miss the steepener, flattener, and short rate scenarios that the Basel III framework mandates. The RBI outlier test (EVE decline greater than 20% of Tier 1 capital) is almost never included in UAT.
Banks classified as IRRBB outliers (EVE decline exceeding 20% of Tier 1 under any prescribed scenario) are subject to supervisory escalation and potential Pillar 2 capital add-ons. If your ALM system has never been tested for the outlier threshold, you do not know whether it would correctly flag the breach.
EVE sensitivity under Basel III six-scenario standardised approach. RBI IRRBB outlier test — EVE decline exceeding 20% Tier 1 capital. IRRBB stress test — yield curve inversion scenario (short rates +300bps, long rates -50bps).
LCR: The SLR Advantage That Many Systems Miss
India's LCR framework allows SLR securities (G-Secs, T-Bills, SDLs) to be classified as Level 1 HQLA — giving Indian banks a structural advantage in LCR computation not available in most other jurisdictions. Your system must correctly apply this India-specific treatment. A system that classifies SLR securities as Level 2A (the global default for government securities below certain thresholds) will understate HQLA and show a falsely depressed LCR. This is a misconfiguration that passes UAT if the tester does not know the RBI-specific rule.