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Treasury operations –

Front office, back office

and mid office operations

Treasury is the treasure or the valuables of the

government, centre and states and extended to semi-
government bodies, corporate and non-corporate bodies,
and financial institutions including banks that operate
this treasury.

Treasury management therefore refers to all activities

involving the management of revenues, inflow and
outflow of governments, banks and corporate. Treasury
is a special term within a compass of the broader term
Historical Evolution

• Historically, the treasure was

gold, silver and precious
metals mined from inside the
soil of the land of a kingdom
and belongs to the king.

• When British India Company

came to trade with India,
these treasures were used to
exchange goods and for trade
by both Indian and foreign
Treasury as Money Management

• The basis of treasury

operations is money and near
money assets like money
market instruments,
government securities, new
and existing securities of
corporate units, etc. the money
in terms of foreign currencies
is traded in the FOREX
Domestic Money Foreign Money
Credit Inter-bank money Government Securities Foreign currency and
(Gilt-Edged) Market credit instruments

Cash Demand Drafts Mail Treasury Bills Equity Foreign Currency Notes
Transfers Cheques Preference Shares
Telegraphic Debentures
Commercial Bills
Bankers Draft and
Created by RBI Participation Public Sector Bonds Foreign currency Bonds
Certificates UTI Bonds Forward Currencies
Commercial Papers Other Bonds Net Balance
Certificates of
Factorization Bills

Discount and
Finance House of

Created by Banks Money Market Stock Market New FOREX Market

Case Study

Barings Bank
Nick Leeson
• Barings Bank, the oldest
merchant banking company in
England, was founded in1762

• In 1890 it faced bankruptcy in the

aftermath of a significant amount
of investment lost in South
America following the
Argentinean revolution

• At that time, they had been

bailed out by the Bank of England
and other London banks

• Brings continued in traditional

merchant banking, building up a
reputation based on corporate
finance, strong investment
• In 1984 it acquired the
stockholding business of small
stock broking company

• Baring Brother and Company (BB

and Co) then established Baring
Securities Limited (BSL)

• 1980s Tokyo Stock Market boom,

and specialized in Japanese
equity warrants – bonds sold with
warrants exercisable into shares
• Board of the Bank was very satisfied with the
presence on the Asian market and in order to
develop much faster it perceived in the field of
derivates a good source of profits and therefore
decided to establish Baring Futures (Singapore)
Pte Ltd ("BFS")

• On1992, BFS applied for clearing membership of

SIMEX Singapore International Monetary
Exchange Ltd

• Nick Leeson, the chief trader for Barings Futures

in Singapore, who deals in derivatives
Facts of The Case
 Barings collapsed on February 26,
1995, due to the activities of one

 Nick Leeson, who lost almost $1.4


 As the market fell more than 15

percent in the first two months of

 The bank had given a trader a lot of

freedom in his activity.

 Barings Futures suffered huge

losses, which were made even
higher due to the sale of options,
which implied a bet on a stable
 As losses mounted, Leeson
increased the size of the
position, in a stubborn belief he
was right.

 Finally, on 25 February 1995 he

walked away, when he realized
that bank was unable to make
the cash payments required by
the exchanges

 He left behind huge liabilities

totaling $1.4 billion, more than
the entire capital and reserves
of the British institution

 In the aftermath of the activity

of Leeson,

 Barings collapsed and was

purchased by the Dutch
bank/insurance company ING
• The Barings board decided to send to Asia in 1992 a young trader
from a humble background, Nick Leeson, who seemed to know how
to deal in derivatives, a quite new game that few in the financial
fraternity really understood.

• The Bank wanted to become one of the first active banks in this
region of the world and also from this reason the board gave a
trader a lot of freedom in his activity. In 1993, Nick Leeson was
appointed general manager of the bank's Barings Futures subsidiary
in Singapore.

• Trader was authorized to conduct both proprietary and clients

account trading on Far Eastern exchanges, on behalf of other
Barings companies, specifically, Baring Securities Limited
(Singapore), Baring Securities Limited (London), Baring Securities
(Japan), Baring Securities Hong Kong Limited and Banque Nationale
de Paris (Japan).
Activities of nick leeson

• Leeson created an error account numbered “88888” as a holding area for any premiums
or losses that he made. A trader claimed that he initially had opened the account to
conceal a single loss of 20,000 pounds sterling that had resulted from an accounting
error until he could make up the difference through trading. However, he continued
booking various losses on the account and also continued to increase his volume of
trading and level of risk taking.

• Leeson increased the size of his open positions even as his losses increased due to
volatility in the markets. When an earthquake (23 January 1995) in Japan caused a steep
drop-in the Nikkei 225 equity index, Leeson's unauthorised trading positions suffered
huge losses and his operation unravelled.

• On March 3, 1995, the Dutch bank ING purchased Barings for the princely sum of £1,
providing the final chapter in the story of the 223-year-old bank.

• This was a wake-up call for many financial institutions all over the

• Leeson had control over both the trading desk and the back office.

• The function of the back office is to confirm trades and check that all
trading activity is within guidelines. In any serious bank, traders have
limited amount of capital they can deal with and are subject to
closely supervised “position limits”.

• To avoid conflicts of interest, the trading and back office functions are
clearly delineated.

• In addition, most banks have a separate risk-management unit that

provides another check on traders
Treasury dealingsandoperations

Themerchantdeskactasinintermediarybetweenthebranchoffices, maintainorders, receivesreportsasthey

comein, respondstobranchqueries, advisesratesobtainedfromthedealingdesktobranches, passeson

informationandtransactionsmeantforthebranches, tracksbalances.


permittedrates. Tothatextent, theyarerequiredtoscrutinizereportsemanatingfromthebranches. Provisional

ratesarefinalisedtothemerchantdesk. CompetitiveratesareofferedtocustomersatthebranchesbytheIBD/

FDthroughthemerchantdesk, whichcarriesoutthistaskinconsultationwiththedealingroom.

Thechief dealer, andthroughhimtheotherdealers, keepcontinuoustrackof transactionsusingtheposition

booksandgapstatement, maintainmanuallyorinacomputerisedenvironment.

Branchofficesofcommercial bankshavelimitedreasonstoinitiatetransactionsontheirown

account. Themajorityof transactionsareonaccountof theirclients. Transactionsalsoarise


Thesetransactions, originatinginlandandoverseas, mustbeprocessedattheInternational

BankingDepartment(IBD)assoonastheyoccur. Anessential partofthis‘processing’ isthe


ThetwokeymaintainedbythemerchantdeskarethepositionBookandthe GapRegister. The

positionBookrecordsall foreignexchangetransactions, spotorforward, andtrackstheoverall

exposureof thebankonarunningaccountbasis. ThegapRegisterisusedtotrackmaturities,

andhencethecashflows, inforeigncurrenciesinwhich thebankdeals.

Front office Activities
The bank needs to optimize its cash flows in order to ensure that
shortfalls are fully funded, and any surpluses are invested in order
to maximize its returns. Doing the deal is classed as ‘front office’,
where as the reconciliation of payments is ‘back office’.

Historically the dealer wrote the details of the deal on a slip of

paper, which was later input into the system by the back office. A
good treasury function will expect the treasury team to develop
new ways of attracting the cheapest funds.
 It is a necessary for the bank to
attract deposits on a long term.

 One of the banks objectives

therefore will be to have
depositors roll over their money
held on deposit, so that short
term deposit effectively
becomes medium term fund for
the bank basis.
Mid office Activities
 Produces the risk management
reports and checks for
compliance with internal limits.

 Tends to be link with the back

office. Thus manual dealing slip
are collected by middle office
staff for onwards transmission to
the back office.

 Check that dealing slips are

completed correctly and the
settlement instructions are

 Queries from the back offices on

deals would be filtered through
the middle office.
Back Office Activities
• The back office sees to
accounting records,
compliance with
government regulations,
and communication
between branches.
Example -
• In banking, the back office
includes a strong IT
processing system that
handle position keeping,
clearance, and settlement
How does it Operate

• Clearance of trade
comparison and
matching , trade
netting , securities
message and if
securities lending.
Steps involved
• First part is trade
comparison and matching
with both counterparties.
• Next step may involve
netting of trades.
• Check to ensure that
transactions are
appropriately executed.
• Transfer of ownership.
Take an example of BNP Paribas
Securities Services
 Deal with transactions upon the clients’ request
 Booking of transactions involving securities (shares,
bonds, UCITS) that have been executed by the front
office (purchase and/or sales orders)
 Registration of transactions in the electronic
settlement systems
 Ensure timely feedback of information, alerting the
front office to any difficulties encountered
 Contribute, within your team, to improving the
efficiency and reliability of all financial transactions
carried out
Thank You