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Treasury management – a perspective ssld

Treasury management – a perspective ssld

This presentation broadly covers Mumbai University MMS Semester IV - Elective - Treasury Management.

It starts with History; factors leading to modern treasury management; main objectives; Integrated treasury; departments of treasury - Front, Middle and Back office.

www.abhijeetdeshmukh.com

This presentation broadly covers Mumbai University MMS Semester IV - Elective - Treasury Management.

It starts with History; factors leading to modern treasury management; main objectives; Integrated treasury; departments of treasury - Front, Middle and Back office.

www.abhijeetdeshmukh.com

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Treasury management – a perspective ssld

  1. 1. Treasury Management – A Perspective ABHIJEET DESHMUKH WWW.ABHIJEETDESHMUKH.COM
  2. 2. Treasury Management Definition of Banking as per Banking Regulation Act 1949 Section 5 B :- “the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.”  The department handles the bank's investments in securities, foreign exchange, asset/liability management, risk management and cash instruments.  The treasury department of a bank is also responsible for balancing and managing the daily cash flow and liquidity of funds within the bank.  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. Definition:  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.
  3. 3. History of Bank Treasury Traditionally in 70’s & Early 80’s the Role of Treasury in Indian Banks was confined to following  To ensure CRR (Cash Reserve Reserve) maintenance  SLR maintenance  Investment in GOI & State Government bonds  Forex confined Import & Export Finance & Remittances & Deposits Market Conditions were :-  Regulated Interest rates (Deposit & Lending rates) by RBI  Regulated RBI auction system for Market Borrowing  Presence of FERA & highly controlled Forex market  No Liquid Money Markets  No Risk Management tools and Derivative Products even for Hedgeing.
  4. 4. Factors Leading to Evolution of Banks Treasury  1985 – Committee on Working of Monetary Systems  1987 – Working Group on Money Markets Above initiated various steps to reform the money market to develop a infrastructure and instrument to widen and deepen the market which was not reflecting the position of true liquidity in the system  Discount and Finance House of India (DFHI), a money market maker, was formed to provide institutional mechanism to market player by dealing in short term money market instruments like T-Bill & Bill discounting  Introduction of Commercial Paper and Certificate of Deposit  Interest Rate (Bank Deposit and Lending Rates) Regulation was taken off in stages and completely removed by May 1989  LIC and All India Financial Institutions were allowed in Call and Notice money market as lenders.  Revised Repo’s were introduced
  5. 5. Factors Leading to Evolution of Banks Treasury  Subsidiary General Ledger account (SGL), a demat account for holding Gsec was introduced  Delivery Vs Payment (DVP) was introduced to streaming online settlement & counterparty risk of Gsec Deal along with NDS Platform for trading.  RBI introduced transparent and competitive auctions, thus aligning yields to actual market rates.  RBI introduced monetary liquidity tools like OMO & LAF(Repo)  Post Liberalization, the process of deregulation and financial market liberalization expedited  Introduction of FEMA in place of FERA  De-regulation of market by shifting to market determined Exchange rates.  Introduction of Derivatives products and permission to Corporates and Banks to use them for Risk Management.
  6. 6. Factors Leading to Evolution of Banks Treasury  Permission to India Corporates to raise funds in International Markets resulting financial instruments like Global Depository Receipts (GDR); Foreign Currency Convertible Bonds (FCCB) and External Commercial Borrowing (ECB)  Permission to invest funds mobilized through Foreign Currency Non-Resident (FCNR); Exchange Earner Foreign Currency Account (EEFC); Resident Foreign Currency Account (REC) in overseas market. It was the key for Indian Banking system and for integrating the markets.  Permission to Banks to initiate Cross Currency positions overseas  Allowing Banks to Borrow/Invest overseas 25% initially to now 100% of their unimpaired Tier I capital as at the close of the previous quarter or USD 10 million (or its equivalent), whichever is higher, without RBI permission.  “The Investment portfolio was viewed as an alternative to the Credit portfolio, which was historically source of profit for banks and it resulted in emergence of specialized Treasury Management”
  7. 7. Globalization Lead to  Introduction of FDI, opening of many sectors, FII Inflows as lead to massive cross border financial inflow and emergence of diverse, deep, liquid and diligent Financial products and Equity markets.  Distinction between Short term and Long term interest rate is got blur. Corporates can raise Long term funds at short term rates  Integration of Indian and Global Financial Markets and both got in sync with each other.  Narrow spreads between Bid and Offer rates & Forward rate is a now purely the Inflation interest rate differential  Interest Rate Volatility accurately captured by the Gsec yields Number of primary dealers become active players resulted in deepening of debt markets and eliminating counterparty risks  Customized Financial & Derivative Products Innovations for Trading and Hedging  Emergence of Indian Corporates in Global Markets by acquiring major companies in overseas markets requiring advisory support like M&A, Merchant banking from Indian Banks.
  8. 8. Objective of Treasury Management Funds Management Profit Center Liquidity Management Asset Liability & Risk Management
  9. 9. Fund Management Fund Management is estimating the Liquidity Requirement of a Bank and meeting those in a Cost Effective manner.  Deployment of Surplus funds  To raise resources at competitive rates from domestic & global markets on current and forward basis.  Effective manage Forex funds and liabilities  Liquidity Requirement Planning for various periods with acceptable risk tolerance  Effective daily Cash Management / working Capital management due to Deposit inflow  Focusing on increasing CASA Deposits.  Customizing Deposit Products  Investing in various Financial Products from Fund management perspective
  10. 10. Liquidity Management Liquidity Management is the ability of Fund the asset and meet the Financial Obligations  Maintenance of Regulatory Reserves – CRR & SLR – as mandated by RBI on current and planning basis.  Raising of Tier I & Tier II  Create the Capital Reserves and for NPA’s.  Meeting Capital Adequacy Ratio as per Basel Norms  Maintain the Liquidity Ratio by investing 30 days cash flow in Quality and unencumbered Short term liquid instruments like CP and CD.  Hedge the Liquidity Risk and have policy framework around it  Managing short term funds across currencies
  11. 11. Asset Liability Management ALM is a monitoring the institutions liquidity profile  Constitute the ALCO (Asset Liability Committee) and draft ALCO Policy with acceptable risk tolerance  Monthly conduct ALCO meeting and assess Asset Liability mismatches against the risk limit.  Strive for Funding Long term Assets through stable Long term liabilities  Monitor the Liability patterns for Liquidity & maturity perspective and work for quality short term funds.  Regularly perform Liquidity profile of Investment Portfolio other than Liquid assets.  Hedge against risky proprietary investment products & use derivatives to manage risks in client’s business  Maintain Transfer Pricing while dealing with own subsidiaries.
  12. 12. Profit Center Profit Center includes all the activities directed towards increasing the profitability of the bank with laid down Risk framework  Investment – It is done with a Long term perspective. It includes investment in SLR, Non SLR, Derivatives, Money Market, Equities, Forex. The aim is to earn higher yield than the its cost of funds.  Proprietary Trading – It is a short term perspective to make trading profit many a time intra-day profit from underlying temporary movements in the securities and forex market. For E.g. Gsec trading.  Spreads – Hunting for opportunities of spreads with the intra-securities markets. For e.g. Bank can borrow short term at 5% and invest is CP for 7%  Arbitrage: Looking out for arbitrage opportunities in Forex market / inter-market opportunities. For e.g. INR Deposits invested in LIBOR+Spread in US/INR using buy/sell swaps  Advisory / Customer Services – offer Fee based customized products and advisory servicers like Merger and Acquisition; Merchant Banking, Derivative structures, Corporate Forex, Import/Export Finance, Wealth Management & other services
  13. 13. 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.  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.
  14. 14. Integrated Treasury Structure Chief / Head Dealer Dealer (Proprietary) Forex Money Market Investment Desk Hedge Desk Derivative Desk Securities Trading Equity Trading Advisory Services Chief Risk Officer Dealer (Customer) Forex Money Market Securities Trading Risk (Dealing Room) ALM Support Group Compliance (Dealing Room) Accounts Training Market Research Treasury Head Policy and MIS Internal Audit Market Risk
  15. 15. Integrated Treasury function SLR/CRR Equity/MF/Venture Raising of Tier II capital. Derivatives. Foreign Exchange Call/Notice/Term Money, CP, CD, Front office/Mid Office./Back office. Management/L.A.F /CB LO/Market repo/FC Buy sell swap/ALM Corporate Debt /Debenture.
  16. 16. The Treasury Structure FRONT OFFICE/ DEALING ROOM BACK OFFICE/ TREASURY ADMINISTRATION MID OFFICE/ RISK MANAGEMENT
  17. 17. The Front Office / Dealing Room  The Treasury has a responsibility to manage market risk in accordance with instructions received from the bank’s ALCO.  The Dealing Room is the brain of the bank which manages Investment Portfolio of the entire bank.  This is undertaken through the Dealing Room which acts as the bank’s interface to domestic and international financial markets.  it is the clearing house for such risk and has the responsibility to manage the market risk taken in all areas of the bank, on behalf of customers, and on behalf of the bank, within the policies and limits prescribed by the Board and RMC.  For this reason significant authority is given to the Treasurer, and the Dealing Room staff to commit the bank to market risk.  Thus controls over the activities of these staff are critical to ensure that the bank is protected from undue market risk.  The dealers has to follow strict Dealing room guidelines and ethics.
  18. 18. The Middle Office  The duties and responsibilities of the Middle Office vary from bank to bank.  Middle Office is a relatively new concept in the risk management structure, not all banks will have formal Middle Office structures.  Middle Offices are in place primarily to provide market risk monitoring, evaluation and reporting for ALCO and Treasury.  The Middle Office is the first line of review of dealing activities and it provides timely assessment of dealing activities and consolidated market risk exposures of the bank.  The Middle Office must report to ALCO independent of the Treasury. It is inappropriate that any access to Middle Office systems is given to Treasury staff.  As the Middle Office is the primary source for market risk analysis in the bank, it is essential that “segregation of duty” principles are clearly maintained.  Middle Office provides key market risk analysis to Dealing Room management and ALCO, its reporting line to the ALCO Secretariat must be separate from Treasury to ensure independent risk evaluation
  19. 19. The Back Office  The key controls over market risk activities, and particularly over Dealing Room activities, are exercised by the Back Office.  It is critical that both a clear segregation of duties and reporting lines are maintained between Dealing Room staff and Back Office staff, as well as clearly defined physical and systems access between the two areas.  The Back Office and Middle Office, where present, are also entrusted with the responsibility of ensuring the timeliness and completeness of data in regard to market risk activities and providing ALCO and management with verified reports from the bank’s books as defined in bank policy and procedures.  Monitoring and reporting (including Regulatory Reportinf) of risk limits and usage including open positions, product usage, counterparty settlement, overall limits and portfolio limits are the responsibility of the Back Office or Middle Office, where in place.  Control over payments systems, particularly those related to Dealing Room activities is the responsibility of the Back Office. Under no circumstances should staff with access and/or authority to the Dealing Room or dealing mechanism have any authority, responsibility or access to bank payment systems.
  20. 20. The Back Office  Reporting prompt resolution of exceptions and excesses are vital responsibilities of the Back and Middle Offices and key control considerations. Key controls performed in Confirmation Management are :  The control over confirmations both inward and outward.  All confirmations must be verified by Back Office staff for consistency with Dealing Room forms and reports. Any follow up of discrepancies between the two (including confirmations received where no dealer’s record is provided) must be performed independently by the Back Office in a timely manner.  Confirmations must under no circumstances be sent out by or received by the dealing area.  The control over dealing accounts, vostros (other bank money, held by us) and nostros (our money, held by the other bank) must also be timely, accurate and discrepancies followed up independently and in a timely manner.  Revaluations and marking-to-market risk exposures, where required by policy and RBI directives, must be carried out by the Back Office, for bank records, from rates received independent of the Dealing Room.
  21. 21. Investment Committee  The Investment Committee is constituted in terms of Board approved Investment Policy every year.  It is also mandated by RBI.  The Committee is headed by the Executive Director. Other members are GM (Credit), GM (Treasury), GM (MASD), GM (RMD), DGM (Treasury) and AGM/ CMs (Front Office, Treasury).  The Committee discusses/ reviews the prevailing market conditions, likely trends in the financial markets, economic scenario, interest rate / liquidity scenario etc. and accordingly formulates broad investment strategy every day.  The decisions taken by Investment Committee are properly recorded and meticulously complied with.
  22. 22. Statutory Liquidity Ratio (SLR)  Sec 24 of BR Act  Till recently could be stipulated to minimum of 21.5 % of NDTL  Recent Amendment to BR Act has removed the lower ceiling for maintenance of SLR  In Central/ State G.Secs and Other approved Securities, Cash balances with RBI, SBI, & identified banks, cash in hand & Gold  Approved Securities as mentioned in Sec 5 of BR Act  SLR can be kept more than required
  23. 23. Cash Reserve Ratio (CRR)  Under RBI Act Sec 42.  Recent Amendment to RBI Act has removed the lower and upper ceilings for maintenance of CRR  Presently stipulated at 4.25% of NDTL  CRR kept in Current A/c with RBI at 18 Designated Centers  Daily minimum balance required to be maintained is 70% of average fortnightly requirement.  For e.g. if total CRR balance required to be maintained is Rs.100 cr per day, then on a cumulative product basis, banks have to maintain at least Rs.1400 cr during a reporting fortnight, but on any particular day the balance should not be less than Rs. 70 cr.  RBI is not paying any interest on balances maintained as CRR.
  24. 24. Thank You

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