TREASURY MANAGEMENT - SESSION 1

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 TREASURY MANAGEMENT
 Treasury generally refers to the funds and revenue at the
disposal of the bank and day-to-day management of the
same.

 The treasury acts as the custodian of cash and other liquid

assets.

 The art of managing, within the acceptable level of risk, the

consolidated fund of the bank optimally and profitably is
called Treasury Management.

 It is the window through which banks raise funds or place funds for its
operations.
INTRODUCTION
 Traditionally, the role of treasury in banks was limited to
ensuring the maintenance of RBI stipulated norms
 CRR
 SLR

 Activity in foreign exchange was confined to meeting

merchants and customers requirements for:
 Imports
 Exports
 Remittances
 Deposits

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 The treasury department is responsible for a company’s
liquidity.
 The treasurer must monitor current and projected cash flows
and special funding needs, and use this information to
correctly invest excess funds, as well as be prepared for
additional borrowings or capital raises.
 The department must also safeguard existing assets, which
calls for the prudent investment of funds, while guarding
against excessive losses on interest rates and foreign
exchange positions.
 The treasurer needs to monitor the internal processes and
decisions that cause changes in working capital and
profitability, while also maintaining key relationships with
investors and lenders. 4
ROLE OF TREASURY DEPARTMENT
 Cash Forecasting
 Working Capital Management
 Cash Management
 Investment Management
 Treasury Risk Management
 Management Advice
 Credit Rating Agency Relations
 Bank Relationships
 Fund Raising
 Credit Granting
 Other Activities 5
CASH FORECASTING
 The accounting staff generally handles the receipt and
disbursement of cash, but the treasury staff needs to compile
this information from all subsidiaries into short - range and
long - range cash forecasts.
 These forecasts are needed for investment purposes, so the
treasury staff can plan to use investment vehicles that are of
the correct duration to match scheduled cash outflows.
 The staff also uses the forecasts to determine when more
cash is needed, so that it can plan to acquire funds either
through the use of debt or equity.
 Cash forecasting is also needed at the individual currency
level, which the treasury staff uses to plan its hedging
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operations.
WORKING CAPITAL MANAGEMENT
 A key component of cash forecasting and cash availability
is working capital, which involves changes in the levels of
current assets and current liabilities in response to a
company’s general level of sales and various internal
policies.
 The treasurer should be aware of working capital levels
and trends, and advise management on the impact of
proposed policy changes on working capital levels.

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CASH MANAGEMENT
 The treasury staff uses the information it obtained from
its cash forecasting and working capital management
activities to ensure that sufficient cash is available for
operational needs.
 The efficiency of this area is significantly improved by
the use of cash pooling systems.

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INVESTMENT MANAGEMENT
 The treasury staff is responsible for the proper
investment of excess funds.
 The maximum return on investment of these funds is
rarely the primary goal.
 Instead, it is much more important to not put funds at
risk, and also to match the maturity dates of investments
with a company’s projected cash needs.

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TREASURY RISK MANAGEMENT
 The interest rates that a company pays on its debt
obligations may vary directly with market rates, which
present a problem if market rates are rising.
 A company’s foreign exchange positions could also be
at risk if exchange rates suddenly worsen.
 In both cases, the treasury staff can create risk
management strategies and implement hedging tactics
to mitigate the company’s risk.

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MANAGEMENT ADVICE
 The treasury staff monitors market conditions constantly,
and therefore is an excellent in - house resource for the
management team should they want to know about
interest rates that the company is likely to pay on new
debt offerings, the availability of debt, and probable
terms that equity investors will want in exchange for their
investment in the company

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CREDIT RATING AGENCY RELATIONS
 When a company issues marketable debt, it is likely that
a credit rating agency will review the company’s
financial condition and assign a credit rating to the debt.
 The treasury staff responds to information requests from
the credit agency’s review team and provides it with
additional information over time.

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BANK RELATIONSHIPS
 The treasurer meets with the representatives of any bank
that the company uses to discuss the company’s financial
condition, the bank’s fee structure, any debt granted to
the company by the bank, and other services such as
foreign exchange transactions, hedges, wire transfers,
custodial services, cash pooling, and so forth.
 A long - term and open relationship can lead to some
degree of bank cooperation if a company is having
financial difficulties, and may sometimes lead to modest
reductions in bank fees.

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FUND RAISING
 A key function is for the treasurer to maintain excellent
relations with the investment community for fund - raising
purposes.
 This community is composed of the sell side, which are
those brokers and investment bankers who sell the
company’s debt and equity offerings to the buy side,
which are the investors, pension funds, and other
sources of cash, who buy the company’s debt and
equity.
 While all funds ultimately come from the buy side, the
sell side is invaluable for its contacts with the buy side,
and therefore is frequently worth the cost of its
substantial fees associated with fund raising. 14
CREDIT GRANTING
 The granting of credit to customers can lie within the
purview of the treasury department, or may be handed
off to the accounting staff.
 This task is useful for the treasury staff to manage,
since it allows the treasurer some control over the
amount of working capital locked up in accounts
receivable.

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OTHER ACTIVITIES
 If a company engages in mergers and acquisitions on a
regular basis, then the treasury staff should have
expertise in integrating the treasury systems of
acquirees into those of the company.
 For larger organizations, this may require a core team of
acquisition integration experts.
 Another activity is the maintenance of all types of
insurance on behalf of the company.
 This chore may be given to the treasury staff on the
grounds that it already handles a considerable amount
of risk management through its hedging activities, so
this represents a further centralization of risk
management activities. 16
OBJECTIVES OF THE TREASURY
 To take advantage of the attractive trading and arbitrage
opportunities in the bond and forex markets.
 To deploy and invest the deposit liabilities, internal generation
and cash flows from maturing assets for maximum return on a
current and forward basis consistent with the bank’s risk
policies/appetite.
 To fund the balance sheet on current and forward basis as
cheaply as possible taking into account the marginal impact of
these actions.
 To effectively manage the forex assets and liabilities of the
bank.
 To manage and contain the treasury risks of the bank within
the approved and prudential norms of the bank and regulatory
authorities. 17
OBJECTIVES OF THE TREASURY (CONTD..)
 To assess, advise and manage the financial risks
associated with the non-treasury assets and liabilities of
the bank.
 To adopt the best practices in dealing, clearing,
settlement and risk management in treasury operations.
 To maintain statutory reserves – CRR and SLR – as
mandated by RBI on current and forward planning basis.
 To deploy profitably and without comprising liquidity the
clearing surpluses of the bank.
 To identify and borrow on the best terms from the market
to meet the clearing deficits of the bank.
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OBJECTIVES OF THE TREASURY (CONTD..)
 To offer comprehensive value-added treasury and
related services to the bank’s customers.
 To act as a profit center for the bank.

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ORGANIZATIONAL STRUCTURE
 It should facilitate the handling of all market operations
from dealing to settlement, custody and accounting, in
both the domestic and foreign exchange markets.
 As follows:
 Front–Office: Dealing – Risk Taking
 Mid–Office: Risk Management and Management Information
 Back–Office: Confirmations, Settlements, Accounting and
Reconciliation

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 STRUCTURE OF AN INTEGRATED TREASURY

 The treasury department is manned by the front office,

mid office, back office and the audit group. In some
cases the audit group forms a part of the middle office
only.

 The dealers and traders constitute the front office. In

the course of their buying and selling transactions, they
are the first point of interface with the other participants
in the market (dealers of other banks, brokers and
customers).

 They report to their department heads. They also

interact amongst themselves to exploit arbitrage
opportunities.
 STRUCTURE OF AN INTEGRATED TREASURY

 A mid office set up, independent of the treasury unit,

responsible for risk monitoring, measurement analysis and
reports directly to the Top management for control.

 This unit provides risk assessment to Asset Liability

Committee (ALCO) and is responsible for daily tracking of
risk exposures, individually as well as collectively.

 The back office undertakes accounting, settlement and

reconciliation operations.

 The audit group independently inspects/audits daily

operations in the treasury department to ensure adherence to
internal/regulatory systems and procedures.
STRUCTURE OF AN INTEGRATED TREASURY
 ADVANTAGES OF INTEGRATING TREASURY OPERATIONS

 Is to improve portfolio profitability, risk insulation and also to

synergize banking assets with trading assets.

 This is achieved through efficient utilization of funds, cost effective

sourcing of liability, proper transfer pricing, availing arbitrage
opportunities, online and offline exchange of information between
the money and forex dealers, single window service to customers,
effective MIS, improved internal control, minimization of risks and
better regulatory compliance.

 An integrated treasury acts as a centre of arbitrage and hedging

activities.

 It seeks to maximise its currency portfolio and free transfer of

funds from one currency to another so as to remain a proactive
profit centre.
FRONT-OFFICE FUNCTIONS
 It has a responsibility to manage investment and market risks
in accordance with instructions received from bank’s ALCO.
 It is undertaken through the dealing room which acts as the
bank’s interface to international and domestic financial
markets.
 The dealing room is the center for market and risk
management activities in the bank.
 It is the clearing house for risk and has the responsibility to
manage the treasury risks taken in all areas of the bank.
 In view of this, control over the activities of the treasury and
its staff are critical to ensure that the bank is protected from
undue market risk.
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MID-OFFICE FUNCTIONS
 Responsible for onsite risk measurement, monitoring
and management reporting.
 Limit setting and monitoring exposures in relation to
limits.
 Assessing likely market movements based on internal
assessments and external/internal research.
 Evolving hedging strategies for assets and liabilities.

 Interacting with bank’s Risk management department on

liquidity and market risk.
 Monitoring open currency positions.

 Calculating and reporting VAR. 26

MID-OFFICE FUNCTIONS (CONTD..)
 Stress testing and back testing of investment and trading
portfolios.
 Risk-return analysis.

 Marking open positions to market to assess unrealized

gain and losses.

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BACK-OFFICE FUNCTIONS
 Deal slip verification.
 Generation and dispatch of interbank confirmations.

 Monitoring receipt of confirmations from counterpart

banks.
 Monitoring receipt of confirmations of forward contracts.

 Effecting / receiving payments.

 Settlement through CCIL.

 Monitoring receipt of forex funds in interbank contracts.

 Statutory reports to the RBI.

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BACK-OFFICE FUNCTIONS (CONTD..)
 Management of nostro funds-to advise latest funds
position to enable the F/O to take the decision for the
surplus/short fall of funds.
 Reconciliation of nostro / other accounts.

 Monitoring approved exposure and position limits.

 Accounting

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FUNCTIONS OF A TREASURER
 Ensuring strict compliance with the statutory
requirements of maintaining the stipulated CRR and
SLR.
 Liquidating management by:
 Ensuring the optimum utilization of residual resources
through investments.
 Raising the additional resources required for meeting credit
demands at optimal cost.
 Managing market and liquidity risks in the transactions.

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BASIC TREASURY FUNCTIONS
Domestic Operations
 Maintenance of statutory
reserves
 Managing liquidity
 Profitability deployment of
reserves
 Trading and arbitrate
 Hedge and cover
operations
 Mid/Back – Office
function(s)
Forex Operations
 Extending cover to foreign
exchange trade
transactions
 Funding and managing
forex assets and liabilities
 Providing hedge to forex
risks proprietary and for its
constituents
 Trading and Arbitrage
 Mid/Back Office functions 31
RESPONSIBILITIES OF A TREASURER
 General financial oversight
 Funding, fundraising and sales

 Financial planning and budgeting

 Financial reporting

 Banking, book-keeping and record-keeping

 Control of fixed assets and stock

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GENERAL FINANCIAL OVERSIGHT
 Oversee and present budgets, accounts and financial
statements to the management committee
 Liaise with designated staff about financial matters

 Ensure that appropriate financial systems and controls

are in place
 Ensure that record-keeping and accounts meet the
conditions of funders or statutory bodies
 Ensure compliance with relevant legislation.

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FUNDING, FUNDRAISING AND SALES
 Advise on the organization's fundraising strategy
 Ensure use of funds complies with conditions set by
funding bodies
 Ensure fundraising and sales complies with relevant
legislation and is bound by effective financial systems
and controls
 Ensure effective monitoring and reporting

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FINANCIAL PLANNING AND BUDGETING
 Prepare and present budgets for new or ongoing work
 Advise on financial implications of strategic and
operational plans
 Present revised financial forecasts based on actual
spend.

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FINANCIAL REPORTING
 Present regular reports on the organization's financial
position
 Prepare accounts for audit and liaising with the auditor,
as required
 Present accounts at the AGM

 Advise on the organization's reserves and investment

policy.

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BANKING, BOOK-KEEPING AND RECORD-
KEEPING

 Manage bank accounts

 Set up appropriate systems for book-keeping,
payments, lodgments & petty cash
 Ensure everyone handling money keeps proper records
and documentation

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CONTROL OF FIXED ASSETS AND STOCK
 Ensure proper records are kept
 Ensure required insurances are in place.

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RISK MANAGEMENT
 One of the major responsibility is to manage the risks
arising out of the financial transactions entered into by
the treasury.
 It has to manage the liquidity risk and price risk in
addition to the counterparty risk and issuer risk.
 There should be a well-defined contingency liquidity
plan, term structure for interest rate limits, maximum
cumulative overflow limits, factor sensitivities, etc.
 These limits should be monitored by an independent risk
manager, and the reports highlighting these limits, their
usage and excesses, if any, should be generated by an
independent system, monitored and managed by
technology and operations. 39
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