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Integrated Treasury (Structure & Mechanics)

Integrated Treasury
The reforms set in since the past few years has brought along with it a host of risks for the Banks, apart from a ariety of opportunities! "ow banks will ha e to learn to operate in a more deregulated en ironment and a di ersified and competiti e market place, which will re#uire them to manage risks better! $ecent olatility in e%change rate mo ements and domestic interest rate le els has indicated the influence of the global market within the country! Such olatilities would precipitate substantial losses and at times irretrie able situations for se eral banks! These situations warrant a proacti e or prompt reacti e mo es from the Bank! It is in this conte%t the urgent need of T$&'S($) M'"'*&M&"T for the Banks emerges! Banks with an e%tensi e branch network has to set up a centrali+ed Treasury and ,ealing $oom, to counter the market situations and to contain the risk e%posures at the earliest! (ntil a few years back, many of the Indian Banks were gi ing a secondary importance to Treasury management! There are dangers in gi ing treasury operation a secondary role! ' significant proportion of the treasury related problems are to be attended immediately-for instance, loss of interest arising from surplus funds a ailable for the bank on day-to-day basis! 'n open currency risk which has been identified but not acted upon for lack of time means that Bank profits are at risk for possibly one or more day.s mo ement in olatile foreign e%change markets can be ery e%pensi e indeed! Therefore, that, e en in a relati ely small organi+ation, it is essential that treasury work is under taken by at least one indi idual with a sole or primary responsibilities to co er, at least, cash management and currency management! ' few of the Banks ha e already set up fully functioning treasuries and a couple of them ha e set up integrated treasuries with /ore% and ,omestic dealers sitting in the same dealing room! The word I"T&*$'TI0" means consolidation or merger or centrali+ation! In the present conte%t it is the consolidation or centrali+ation of the segmented financial markets like Money Market! ,ebt & 1apital Market and /ore% Market at the macro le el and integration of the respecti e Treasuries at the operation le el at Banks2/inancial Institutions! 3et us discuss this in the following! Banking reforms which were initiated in the beginning of the 45.s is slowly opening the domestic economy to the global market! 0pportunities are widening for the Banks, /inancial Institutions, 1orporate and others, which would result in intense competition, strain on the margins etc! 't the macro le el when the domestic market2economy is integrating with the global economy, it is needless to emphasi+e the need for integration of the micro le el units! /or e%ample, different segments within the /inancial Markets are almost integrated! The /inancial Market which was earlier segregated into different watertight compartments like Money Market, ,ebt Market, 1apital Market6 /ore% Market etc! ha e been almost integrated! "ow money can freely flow, of course with lesser regulations, from one market to the other market! The participants in these markets, which were confined in their respecti e markets, ha e been gi en partial freedom to enter other markets! "ow /inancial Institutions which were confined to long term market ha e been permitted to enter short term in Money Market to lend in call and borrow for a minimum period of 7 months to 8 year! $ecently the 1orporate too ha e been gi en partial freedom to lend in the call market! 1orporate ha e also been permitted to borrow not only from the open domestic market but also from the global market! Banks ha e been permitted to enter the 1apital2,ebt Market, /ore% Market and Money Market with partial freedom in certain cases, to mobili+e and2or deploy resources! Banks, if not for their own needs, are forced to enter these markets ery often and render ser ices to their clients which ha e access to these markets! /or e%ample a 1orporate accessing the o erseas Market for &%ternal 1ommercial Borrowing has to ultimately depend on bankers for utili+ing the funds it has raised or con erting the funds and bringing into the country!

Integrated Treasury (Structure & Mechanics) Thus we can say, with liberali+ation of the /inancial System, markets are almost fully integrated! 0nce the 1apital 'ccount 1on ertibility 91'1) fully comes, all these markets would ha e been fully integrated! The impact of the financial integration on 1'1 can be summari+ed as follows - :romotes competition resulting in better #uality products and ser ices Impro es #uality and number of /inancial 'ssets as a result of greater li#uidity and deeper market! - $educes margins and more efficient allocation2 intermediation Interest rates to align with global interest rates Interest rate differential to reflect in /oreign &%change forward rates! ' oids inducements for ta% e asion and capital flight 0pportunities for di ersion2distribution of risks

Integrated Treasury (Structure & Mechanics)






:resently e%cept couple-of treasuries, almost all the Treasuries of :ublic Sector Banks are operating in isolation! /or e%ample, /ore% Treasury and ,omestic Treasury of many of the banks are operating independently! There may be times that the /ore% and ,omestic Treasury of these Banks might ha e worked on different directions there by neutrali+ing an ad antageous position or e en ad ersely affecting the Bank.s financial position! This is because the /ore% Treasury may not be knowing the position of the ,omestic Treasury or that the perception of both the treasuries may be different or in opposite directions! 1ommunication2information gap between these two treasuries also may lead to such detrimental position for the bank! This may e en lead to affecting the good will of the Bank! There may be instances when the integrated treasuries of other banks may take arbitraging opportunities on this Bank on its unrelated2opposite le els2positions of the treasuries! /or e%ample there may be instances when the ,omestic treasury of the Bank may be lending funds to another Bank, which may, in turn deploy in /oreign 1urrency deposit with the former! There are a few Banks where e en the /unds Management (Money Market Treasury) and In estment Management (1apital and ,ebt Market Treasury) are functioning independently! <ere also these Banks are losing opportunities within the ,omestic market when the interest rates and asset2security prices mo e in the same direction! /urther almost all trade and capital mo ements which cross international borders gi e rise to a foreign currency 'sset or create foreign currency 3iability! Sub=ect to regulatory constraint these currencies may be retained in that currency and placed or borrowed in the o erseas markets or domestic markets for that currency! Moreo er now that Banks ha e been selecti ely permitted to in est in2borrow from o erseas market, such opportunities can be planned only if the Bank has an integrated Treasury! Banks ha e now been selecti ely gi en licenses to import precious metals for the resident Metal traders! Since this operation in ol es buying of Metal from the international market against ,ollar alue and then pricing it in the domestic Market, the Bank dealing in such trades ha e to operate from an Integrated Treasury! It is now well understood that $eser e Bank of India inter enes in the ,omestic ($upee) market to regulate the /oreign &%change market! /or instance, when the Indian $upee started falling steeply and crossed $s! >5 2? and also simultaneously when /orward :remium went to di++y highs in the beginning of the year 844@, $BI signaled rise in short term interest rates and mopped up li#uidity from the system by increasing 1$$ and reducing the $efinance limits! This took the o ernight 1all rates to 8>5A le els and the rates stayed abo e B5A continuously for a fortnight! This strengthened the $upee and cooled down forwards and normalcy came into the market within a monthCs time! In such situations, a Bank should ha e its /ore% and $upee treasury operating with the same focus and in the same direction! There are chances that the profits made by one treasury in such olatile situations are negated by the other treasury on account of its inad ertent operations!

Integrated Treasury (Structure & Mechanics)


The ma=or functions of a treasury unit arte as followsD Reserve management Investment: It in ol es, i) Meeting 1$$ & S3$ obligations ii) <a ing an appropriate mi% of portfolio to optimi+e yield & duration! ,uration is the weighted a erage ElifeC of a debt instrument o er which in estment in that instrument is recouped! ,uration 'nalysis is the tool used to monitor the price sensiti ity of a in estment instrument to interest rate changes! Funds !"#u"d"ty $anagement: It in ol es, i) 'nalysis of ma=or cash flows arising out of 'sset liability transactions! ii) :ro iding a well de eloped & di ersified liability base to fund the arious assets in the balance sheet of the Bank! iii) :ro iding policy inputs to the strategic planning group on the bank on funding mi%(currency, tenor & cost) & yoeld e%pected in credit & in estment! Term $'ney:

Asset !"a%"&"ty $anagement

'3M calls for determining the optimal si+e & growth rate of the balance sheet & also price the 'sset 3iabilities in accordance with prescribed guidelines! Successi e reduction in 1$$ rates & '3M practices by banks increase the demand of funds from tenor of abo e 8B days (Term Money) to match duration of their assets! R"s( $anagement: Integrated Treasury manages all market risks associated with a BankCs liabilities & assets! The market risk of liabilities to floating interest rate risk & asset liability mismatches! The market risk for assets can arise from, i) (nfa orable change in interest rates! ii) Increasing le el of disintermediation! iii) Securiti+ation of assets! i ) &mergence of credit deri ati es etc! Fhile he credit risk assessment continues to lies in the hands of 1redit department, the treasury would monitor the cash inflow impact from changes in assts prices due to interest rate changes by adhering to prudential e%posure limits! Trans)er *r"+"ng: Treasury is to ensure that the funds of the banks are deployed optimally, without sacrificing yield or li#uidity! 'n integrated treasury unit has the idea of bankCs o erall funding needs as well as direct access to arious markets (like money market, capital market, fore% market, etc)! <ence ideally banks should pro ide benchmark rates, after summing market risk to arious business groups & product categories about the correct business strategy to adopt! Der"vat"ve ,r'du+ts: Treasury can de elop Interest $ate Swaps (I$S) & other rupee based21ross 1urrency deri ati e products for hedging BankCs own e%posures and also sell such products to customers2other banks!


Integrated Treasury (Structure & Mechanics)

Ar%"trage: Treasury units of banks undertake this by simultaneous buying and selling of the same type of assets in two different markets to make risk-less profits! Ca,"ta& Ade#ua+y: This function focuses on #uality of assets, with $eturn on 'ssets ($o') being a key criterion for measuring the efficiency of deployed funds! 'n integrated treasury is a ma=or profit center! It has its own : & 3 measurement! It undertakes e%posures through proprietary trading (deals done to make profits out of mo ements in market interest 2 e%change rates) that may not be re#uired by general banking!

Integrated Treasury (Structure & Mechanics)

' BI$,.S GI&F 0/ T$&'S($) 0:&$'TI0"S

,ealing is the most sensiti e operations in a Treasury! Huickness, accuracy, proacti e but balanced decisions, sensiti ity of the information they are handling are some of the aspects of their functioning! This warrants a conduci e en ironment as well as easy access to ma%imum information! To facilitate these, ,ealers are pro ided with an e%clusi e ,ealing $oom, with all the communication facilities like multi telephone lines, hotlines with ital centers, fa%, tele%, Internet connecti ity etc! The ,ealing room telephone numbers of all the participants in the market should be readily a ailable2accessible for the dealers! If re#uired .hot lines. are to be arranged! This is apart from the information access by way of connecti ity with2through a good Fire agency like $euters, ,ow Iones, Bridges etc!, and with "S&2B03T terminals! Software packages programmed to the arious needs of the Treasury but ensuring data entry and confirmation2authori+ation through identification should be pro ided! :rogramme should take care of functional segregation too so that any de iation is totally prohibited! The system and procedures, e%posure2risk limits etc! should be made a ailable for the respecti e dealers, DUTIES OF DEA!ERS: ,ealer has to operate in the inter bank market according to the guidelines laid down by the Management! Ideally ,ealers ha e to confer with the 1hief ,ealer before he enters the market! Based on the pre ious days market and the Bank.s own business re#uirements2broad strategies, plan should be drawn for the day.s operations! DEA!ING *ROCEDURE: The ,ealers prepare themsel es for the operations in the day in their respecti e markets! ,ealing operations generally takes place o er telephone, and such market is called .telephone market.! 's the deals are concluded o er .word of mouth., it calls for a ery high standard of credibility, ethics and e%pertise! It is e#ually necessary for identification of the oices of the brokers2dealers in the market! ,ealers should always concentrate in their respecti e market2 areas of function, by contacting with other Banks, Institutions, :rimary2Satellite dealers brokers etc! 0nce a bank dealer has #uoted a price and terms he is bound to deal on those terms sub=ect to acceptance of the counter party and within a reasonable period! If the #uotes are gi en to broker, the dealer should make it clear the terms of the deal and time up to, which the #uote is alid! In case the broker is not able to strike the deal within the time limit gi en, broker should en#uire whether the #uote holds good! Fhile finali+ing the deal the broker must gi e the name of the counterparty bank and confirm that the deal closed! 0nce the deal is finali+ed counter-party name should not be substituted2changed! 'll the information recei ed from the market are =otted down on the sheet2book by the ,ealer! ,eals struck are recorded on the ,eal slips! ,eal slip should contain the following informationD ,eal "o!, date and time of deal concluded "ature of transaction ,etails of Security 2currency, amount, rate etc! ,etails of the counter party "ame of the Broker and brokerage payable 'ny other information rele ant to the deal! ,eal slip, duly signed2authenticated by the concerned dealer should be passed to the back office for further processing and settlement!


Integrated Treasury (Structure & Mechanics) Main responsibility of the Back up office is to ensure that all the guidelines, system & procedures stipulated by the Bank and go erning $egulations are complied with, transaction-by-transaction! "e ertheless Back office ensure the followingD 1onfirmation of contracts2deals is obtained from the respecti e counterparties and duly erified for correctness! ,iscrepancies noticed are rectified on the same day Brokers contract conforms to the ,eal brokered! Brokered deals are entered in the "S& trade :roper authority2ratification has been obtained where er e%posure2powers are e%ceeded, same day! "o Bankers $eceipt (B$) is issued where er S*3 facility is a ailable! Fhere er B$ is issued it is on the basis of Bank.s own in estment account only and also the B$ issued is not outstanding beyond 8B days! B$s issued are redeemed by actual deli ery of scrips and not by any other method! Sufficient balance of stock2security is held in the S*3 account before issuing S*3 transfer form S*3 recei ed is lodged immediately S*3 bounced cases are promptly reported to concerned $egional office of $BI! Transaction documents are preser ed in orderly way prompt updating of prescribed $egisters :eriodical submission of $eturns2Statements!



0nce the deals are settled, the necessary accounting entries are made by this section! This section closely follows up the transactions, maintain2updates the records2reconciles the securities position periodically, maintains necessary records pertaining to each transaction systematically and maintains necessary ledgers2 registers pre subscribed by $BI2<ead 0ffice! 's this Section has to ensure that all rules and regulations are complied by the respecti e sections, in effect, it is like a watchdog for the Treasury operations! $e iew of the portfolio, follow up of periodical interest collection on in estments 2 redemptions, report generations for enabling '3102 Management decisions are a few of other duties of this section!

Integrated Treasury (Structure & Mechanics)

'TT$IB(T&S 0/ *00, T$&'S($) :&$S0""&3

There are no laid down rules or guidelines e%plaining attributes of good Treasury personnel! (nlike the staff of other departments of the Bank, staff of Treasury has to be selecti ely chosen, as this department is ery sensiti e one for the Bank! Similarly as an effecti e Treasury department has to adopt a ery acti e and participati e role in the Bank.s business, the staff members of such department must de elop a thorough understanding of the Bank.s corporate policy and ob=ecti es and in ol e themsel es as much as possible in achie ing the goal! *i en below are a few features of nature of Treasury business, which makes it sensiti e and most important organ of the Bank! 8! It handles oluminous funds daily, ;! Interacts with other Banks2Institutions in the market, both domestic and global, as a representati e of the whole Bank! 7! "eed to take fast decisions, which should comply arious rules2regulations and also are profitable with the Bank! >! ,ecision taken, good or bad for the Bank, creates an impression about the Bank in the Market! B! 'ccess to ital and sensiti e information about the Bank J! 'ction2inaction in the market is being watched by the monetary $egulatory authorities

Though it is difficult to enlist all the attributes a good Treasury officer should ha e, it should include at least the following attributes! <e should, 8! <a e high degree of integrity and professionalism ;! Be good numerate to assess the information he recei es and the financial impact of his decisions on the Bank! 7! Be preferably a finance2 macro economic discipline >! Be good articulator2negotiator be a proacti e and responsible B! Be a .team man. as #uick and fre#uent consultations is warranted in a olatile market situation

Integrated Treasury (Structure & Mechanics)


The whole Treasury function of the Bank can either be centralised at one center or decentrali+ed at different centers but under a single o erall super ision! The ad antages of a 1entralised Treasury can be summari+ed as followsD 8! ' 1entrally organi+ed treasury would ha e the total picture of li#uidity (current2cash and long term) of the Bank! This would enable it to take decision2control on the utili+ation2deployment of the funds to the best ad antage of the Bank! ;! 's the $eser e management is a ital function of the Treasury, it is ad antageous2prudent to ha e a single 1entralised Treasury so that it is monitored closely from time to time so that not only default is a erted but also bare minimum surplus only is maintained o er the statutory re#uirements! 7! It will be able to take ad antage of funds in transit within the Bank.s network like inter-branch funds mo ement, mo ement of funds between $BI and non-$BI centers, etc! 0therwise there is possibility that these funds are ignored and left idle in the banking system! >! 1entralised Treasury pre ents unnecessary mo ement of funds around different centers but organi+es in such a way that actual transmission of funds is minimi+ed! B! ' 1entralised Treasury enables the Bank to deal in big #uantumCs in the market and take ad antage of the wholesale market! J! ' 1entralised Treasury would ha e better managerial control, responsibility and risk control! If the treasury is decentrali+ed in smaller units, one unit would not necessarily be aware of the e%posure taken by the other unit! 3ikewise when the market is highly olatile, a pro-acti e treasury may ha e to change its position within short time to a oid risk! This is possible only if the Treasury is centralised! K! $eporting and fast implementation of management2'310 decisions is possible only if the Treasury is centralised! If it is decentrali+ed, time consumed for collection, compilation, and analysis of the data will be costly! 3ater, implementation of the '310 decision may get delayed, which may cost to the Bank further! Main disad antage of the centralised treasury is that the Bank may not be able to take ad antage of the .better markets. at other centers! 3ikewise, as the in ol ement in financial matters is centralised other centers may not know the importance of treasury management, which may reflect in their actions2omissions!

Integrated Treasury (Structure & Mechanics)


The Structure of the Treasury ,epartment is ery simple! It consists of Top Management, Middle 0ffice, Back 0ffice, Treasurer, 'udit <ead, /ore% ,ealers, ,eri ati e ,ealers, Money Market ,ealers, /unds & 3i#uidity Management& $isk Management! Treasurer is the person responsible for all the transactions of the Treasury department! <e has to report directly to the Top Management! The structure of Integrated Treasury can be beter understood from the following diagram6

Top Management

Middle 0ffice

Back 0ffice



$isk Management

/oreign &%change

/unds & 3i#uidity Management

,eri ati es

Money Market


Integrated Treasury (Structure & Mechanics)



The management of Integrated Treasury is di ided in the following wayD 8! Top management ;! Middle 0ffice 7! Back 0ffice T', $anagement: The treasury department should reflect the way the business itself is organised! That is to say, it is unlikely to be an effecti e department if, for instance, it is organised on a loose and decentralised basis while the rest of the business is organised to gi e the management effecti e central control! Thus the Top Management of Integrated Treasury en=oys the highest authority & has the power of decision-making! $"dd&e O))"+e: ' mid-office set up, independent of Treasury unit, acts as a unit responsible for risk monitoring, measurement & analysis & reports directly to the top management for control! This unit pro ides risk assessment to 'sset 3iability 1ommittee ('310) & is responsible for daily risk e%posures, indi idually as well asa collecti ely! Ba+( O))"+e: Main responsibility of the Back up office is to ensure that all the guidelines, system & procedures stipulated by the Bank and go erning $egulations are complied with, transaction by transaction! "e ertheless Back office ensure the following D $egisters :eriodical submission of $eturns2Statements Brokered deals are entered in the "S& trade ,iscrepancies noticed are rectified on the same day 1onfirmation of contracts2deals is obtained from the respecti e counterparties, etc!


Integrated Treasury (Structure & Mechanics)

'udit of an integrated treasury is a comple% task re#uiring high le el of skills, knowledge of market practices and the rele ant regulatory en ironment! Treasury income constitutes a significant portion of a bankCs income, many a time e#ual to the entire income recei ed from ad ances and the e%tensi e branch network of banks! 'n auditor of an integrated bank treasury operation will ha e to be aware of, the rele ant regulatory standards, the aluation methods applicable, terminologies used that he has to be familiar with and then proceeds with broad guidelines for e aluation of internal controls (including those relating to information systems)! ' model audit program that can be tailor made to suit indi idual needs has also been attempted!
Many banks ha e set up integrated treasuries, encompassing both rupee and /ore% denominated transactions! 'n integrated approach to treasury management in ol es a common dealer or desk dealing in both domestic and /ore% financial markets! This enables the bank to optimi+e its funding and fund deployment and take ad antage of arbitrage opportunities between these markets Treasury income constitutes a significant portion of a bankCs income, many a time e#ual to the entire income recei ed from ad ances and the e%tensi e branch network of banks! Treasury operations are in ariably of high alue and due to the ery nature of its operations, are susceptible to manipulation, fraud or error and conse#uently to the arious types of risks en isaged by 'uditing and 'ssurance Standards (''S) J!


By now it has dawned on all auditors that they cannot afford to ignore the computers and they form the integral part of the organi+ation they are auditing! These systems affect the working of the organi+ation to such a le el that in e%treme cases, an unsuitable solution can e en kill the company and the auditor better forecast this! The #uestion then comes to mind is that should the .new genera tion. computer sa y generation auditors tackle it while the rest go to the hills and retireL

0AAS 123
Mnowledge of business of a bank treasury is usually low, e en in an enlightened community like 1hartered 'ccountants! 1onse#uently, it is important to ac#uire a thorough knowledge of the products in ogue in the market, market practices, the permissible aluation methods, the regulatory standards prescribed by the $eser e Bank of India ($BI), /oreign &%change ,ealers 'ssociation of India (/&,'I) and /i%ed Income Money Market and ,eri ati es 'ssociation (/IMM,'), the processes followed by the bank, internal controls e%ercised, information systems used etc! 'n idea of the types of trades, settlements, instruments in ogue, certain operational issues relating thereto, principles of aluation etc are set out in the ensuing paragraphs for general understanding!


The e%tent of computeri+ation is usually e%tensi e in treasuries! This calls for strict controls in such an en ironment! $obust software co ering the entire gamut of functionality re#uired for smooth functioning of treasury, a proper security en ironment, controls in place to pre ent unauthori+ed usage of files, systems, etc, start2end-of-the day process, business continuity and disaster reco ery plans, well documented user and technical manuals, audit trails in the software, e%ception reports, complete trail of all back end changes made are a must! 1omputer assisted audit techni#ues and a tool, which could e%tract data to analy+e them and identify e%ceptions, would be in aluable for re iew of &,: controls!


Integrated Treasury (Structure & Mechanics)


These are to broadly co erD

&%istence of in estment policy 'dherence to in estment policy and compliance to $BI guidelines System of purchase and sale of in estments, delegation of powers, reporting systems, segregation of back office functions etc! 1ontrols o er in estments including periodic erification2 reconciliation of in estments with book records Galuation mode, changes in aluations compared with pre ious year, ade#uacy of pro isions System of monitoring income from in estments! Software2system analysis S3$21$$ re#uirement-system of ensuring compliance :rocedure for re aluation of "ostro accounts and outstanding foreign e%change contracts $e iew of ostro accounts $econciliation of /1"$, &&/1 and $/1 balances and monitoring deployment of funds 1laims arising out of delayed settlement of Inter bank funds Borrowings outside India :rogress in Banking is an e#ual parameter of the cultural de elopment of a ci ili+ation and like any other field6 this sector too has not been spared by the technical re olution! Fhile tele% machine heralded faster fund transfer for decades beginning from the second half of the si%ties, later in entions put a turbo charge in the speed of such transfers! Fhile local clearing lagged behind, we ha e seen the introduction of $eal Time *ross Settlement ($T*S) system by the $BI! 0ne hopes the e%tension of the concern for a speedier settlement of all fund transfers! To the business, this spells an automatic potential for increase in turno er!

Fhile the en ironment has turned from manual to computeri+ed, the audit techni#ues for the traditional auditor need slight fine-tuning to e%ploit the technical ad antage! 'fter all, if the computer can calculate interest correctly in a sample of B5 'ccounts, it can do it accurately for B crore accounts! 's auditors can place reliance on this and thus ad=ust co erage and direction accordingly, System auditors do pro ide a much-needed support to the traditional accountants and one hopes that all ma=or systems should be audited at regular inter als to ensure minimum distraction to the traditional auditor!


Integrated Treasury (Structure & Mechanics)

Banking business is gradually becoming more and more international! It has become a worldwide trend for 1orporate to e%pand and to spread their risk amongst many countries and markets! 0n account of the reforms that are taking place, more and more Banks also would cross-frontiers for customers, sources of supply and in estment! But all cross-frontier trade ine itably gi es rise to foreign e%change e%posure for one or the other one! 1onsider a simple e%ample of a man who wishes to purchase machinery from Fest *ermany! Fe will assume that the purchaser is in India and has the choice of the currency in which he should buy and pay for the machines! Basically he has three choices here, he may either agree to buy in terms of Indian rupee or , Marks or some other currency! It may seem that if he purchases in Indian $upee, then there is no foreign e%change problem arising, but the foreign e%change problem then arises for the seller of the machine! <e will be in receipt of Indian $upees (I"$) and will wish to sell it for , Marks on his local market! If on the other hand, the machine is in oiced in , Marks, then the Indian buyer will first ha e to buy the , Marks with which to buy the machine! &ither way a foreign e%change transaction is in ol ed for somebody! If the goods are in oiced in a third currency, for instance (S dollars, then first of all the Indian buyer must buy the (S dollars and arrange payment in (S dollars to the *erman supplier! In turn the *erman supplier must then sell the dollars and con ert into , Marks to pay his local e%penses in producing the machine! In this e ent we ha e two foreign e%change deals to do, in the pre ious case only one!


The sub=ect of /oreign e%change is surrounded in mystic for many and as a result there is tendency to belie e that it must be much more comple% than is actually the case is! <owe er the truth is that, with all the comple%ities in /oreign e%change operations, and despite many centuries of e olution, only four types of deal ha e so far come in to e%istence! They areD B0$$0F 3&", B() S&33 There are no others! If the basic mechanics of these four types of deal can be followed through in detail then many of the problems of the sub=ect can be easily understood! 'll the other more sophisticated types of transaction are merely combinations of the abo e four transactions!


The participants in the /ore% market can be classified in the following three classes "3 C'mmer+"a& Ban(s: They participate as an intermediary for their clients 2 customers who wish to operate in the market! Fhite dealing for their clients, its own foreign e%change position changes! Then they operate on their own account to s#uare off their position! "ow that Banks ha e been permitted to in est 2 borrow to the e%tent of 8BA of their "et worth in 2 form the o erseas market, Banks are operating to take arbitraging opportunities in the /ore% market!


Integrated Treasury (Structure & Mechanics) ""3 C'r,'rate Cust'mers 7 +&"ents: Most of the /oreign &%change transactions originate from &%port2 Import and 2 or ,irect In estments2Borrowings! &%port2Import usually in ol es the 1orporate in the country! In these transactions, the corporate concern is not only the /oreign currency he is recei ing or paying but also the rate that may be pre ailing when he actually get the payment or makes the payment! <ence he would wish to co er the risk of &%change rate fluctuations! /oreign ,irect In estment constitutes not only the ac#uisition of assets o erseas, but also generation of liabilities abroad! <ence in all such cases, the 1orporate may ha e to hedge to co er the risks in ol ed! """3 Reserve Ban( ') Ind"a: $BI.s one of the main task, apart from the control of inflation and price stability, is &%change rate parity! In a fi%ed e%change market, the role was to maintain the alue of the $upee against the foreign currencies! <owe er now that we are slowly entering into a free 2 floating e%change market, $BI, like any other central Bank may inter ene to maintain the &%change rate parity at desired le els, contain the olatility and infuse confidence in the local currency in the international market!


' foreign e%change deal is a contract to e%change a bank balance in one currency for a bank balance in another currency at an agreed price for settlement on an agreed date! <ere the rate at which one currency is agreed to be e%changed for another is stated as &%change rate! 3et us take the e%ample of a customer wishing to buy (S dollar and to seli Indian $upee, and for simplicity we will assume that the rate of e%change is I"$ 74!>B N?8, the customer is buying (S ? B million for settlement on 8@ March and has a dollar account at 'B1 Bank in "ew )ork! The effect is that a contract has been made to e%change a $upee bank balance for a (S ,ollar bank balance! 'lso, of course, funds belonging to the customer will now be pro ided to his supplier in discharge of his debt for the goods supplied! Meanwhile the bank has probably dealt in the inter bank market to buy (S ? B million against $upee or. s#uared off. the deal in the market, so as to s#uare their position again! The normal foreign e%change deal done in the market is for . alue spot.! This means that contract will be settled on the .spot. date which is normally set ; days ahead of the day on which the deal is done! This two-day period allows time for the arious payment instructions to be e%changed and effected and for any e%change control formalities to be cleared! Most of the deals in the foreign e%change market are done on spot basis! Spot ,eals are for immediate deli ery of one currency with cash settlement in two working days time! If the cash settlement is made on the same day of the deli ery of the currency, it is termed as 1ash 2 $eady transactions! If the 1ash settlement is on the ne%t working day, it is called a T0M (short of .tomorrow.)! In /orward ,eals, prices are agreed today but payable on a future deli ery date, usually beyond spot period! /or e%ample an e%porter e%pecting receipt of /oreign e%change at the end of 7 months can sell these amount of foreign e%change, in 7 month forward! This guarantees him the sale proceeds in terms of his local currency! *enerally /orward price is the spot price ruling on the day the deal is done plus the interest differential on the two currencies in ol ed, for the period concerned! /or eg! Suppose that spot (S? 8N I"$ >5 and the interest rates for J months period in (S is B!BA while in India is 85A! <ere a Bank, say ', can borrow (S, 8 mio (million) for J months OB!BA and sell it in the market on spot rate and get I"$ >5 mio! I"$ >5 mio is kept in inter bank term money at 85A for J months! Simultaneously, assuming that the forward rate for (S?2I"$-is same as the spot, the Bank buys (S ? 8 mio J months forward to repay his loan!


Integrated Treasury (Structure & Mechanics)

1ross rate is another term, which is ery often used in /oreign &%change operations! ' cross rate is the rate of e%change between two currencies that does not in ol e the domestic currency! <owe er in the international markets today cross rates mean rates that do not in ol e the (S ,ollar! This term can be better understood from the following e%ample! 'n Indian businessman is on tour in *ermany and wants to know what happened to alue of Indian $upee (I"$) against (S ,ollar ((S,) since he left 3ondon couple of days back! It was USD 89 INR :4;<:<8 (e%pressed in Indian Term) when he was =ust lea ing India! The *erman "ews paper states the price of foreign currency in terms of their local currency i!e! ,eutsche Mark (,&M)! <e gets the following rates from the "ewspaper 0"3 US=8 9 DE$ 8;>1>2 0""3 INR 822 9 DE$ ?;@: The businessman wants to know the alue of (S? in Indian terms! The second #uote gi en abo e can be e%pressed in Indian term by taking reciprocal of the rate! TAen DE$ 8 9 INR 8227?;@:9 INR 18;<4>:;;;; 0"3 By taking reciprocal of first #uote we get alue of ,&M in (S terms as followsD DE$ 8 9 US =878;>1>2 9 US = 2;<?B2< ;;;0""3 1ombining (i) and (ii) abo e, we get DE$ 8 9 INR 18;<4>: 9 US = 2;<?B2< i!e!, US = 2;<?B2< 9 INR 18;<4>: Therefore alue of (S, in Indian term is USD 8 9 INR 18;<4>:72;<?B2< 9 INR :4;?>8? Thus the Indian Businessman understands that alue of (S ,ollars in Indian terms of has come down from INR :4;<:<8 t' INR :4;?><2


Integrated Treasury (Structure & Mechanics)

,eri ati es are financial instruments (deri ed from certain basic elements such as e%change rates, interest rates, e#uities and commodities called the underlying assets) whose alue reflects the changing prices of the underlying assets! ,eri ati es markets ha e a aluable economic role to play in fostering financial efficiency! ' reduction of risk is a reduction of uncertainty facing the in estor and a deri ati e meets e%actly this ob=ecti e! ,eri ati es ensure an e en distribution of risk in the financial system, which reduces the number of potential e%plosi e points and proneness of the system to crisis precipitation! The origin of all deri ati es is the commodities markets! In the early days most of the deri ati es trading was in agricultural commodities! Today more than half of the trading is in financial instruments such as bonds, stocks and foreign currencies! 'lthough trading in foreign currencies and treasury bonds started in the se enties, the deri ati es market got a real boost only in the eighties when stock inde% futures and oil futures came on the scene! The changing nature of the markets also brought forth new sets of market players other than the traders in commodities! /utures markets ha e become an integral part of how financial institutions such as banks, pension funds, insurance companies manage their risks and their portfolio of assets! Forld o er there has been a phenomenal growth in the deri ati es market in the last ;B years! The market has in ented and inno ated ingenious ways to manage the market risks, which ha e manifested themsel es as deri ati e instruments! Some of the key deri ati e products are discussed belowD

In a forward contract a seller agrees to deli er goods to the buyer on some future date at some fi%ed rate! "o money changes hands at the time the contract is entered into! /or e%ample a farmer growing onions may sell some portion of his crop before har est to the buyer at a fi%ed price, for deli ery after har est! /or the farmer this transaction reduces the risk of selling in the market after har est at lower prices! <e has locked in a profit by this operation! This profit would ha e been more or less if he had waited until the har est to sell onions at the .spot. price then pre ailing in the .cash market.! Thus the farmer has .hedged. himself against the risk of a downward mo ement in onion prices by entering into a forward contract in the forward market! /orward markets ha e e%isted and flourished for centuries! The initiation of organi+ed futures trading in 8@>@ at 1hicago Board of Trade was a natural outgrowth of the acti e forward market in commodities that e%isted at that time! Two of the largest forward markets today are swaps and currency markets! It is estimated that more than ? B55 billion of both swaps and foreign currency forward contracts are written e ery year!

' futures contract is an agreement between the seller and the buyer which re#uires the seller to deli er to the buyer a specified #uantity and grade of an identified commodity at a fi%ed time in the future at a price agreed to when the contract is first entered into! In market terminology the seller is called the .short. and the buyer is called the .long.! Such future contracts will be bought and sold on designated contract markets known as the commodity or future e%changes! Fhile futures contracts are similar to forward contracts they differ from each other in the following respects! '! Fhereas forward contracts are custom tailored contracts, futures are standardi+ed contracts! B! /utures ha e no buy sell spreads! Instead there is an e%plicit brokerage fee! 1! /orward contracts are one to one transactions between known counterparties! <istorically the parties in ol ed in forward markets ha e been large and sophisticated! The main reason for this is that all forward contracts entail credit risk6 the risk that one of the counter parties will default on the obligations under the contract! In contrast to this the future contracts are e%change-traded instruments where for the buyer as well as the seller, the counterparty will be the e%change!


Integrated Treasury (Structure & Mechanics) ,! /orward contracts are normally made with an intention to deli er or make cash payment on e%piration of the contract! ,eli ery is not made in connection with a futures contract, e en if the contract contains specific deli ery pro isions!

The reason why deli ery is not made is that people typically enter into futures contracts not to buy or sell the EunderlyingC, which is a commodity or a financial instrument! The contracts are entered into as hedges to offset the risk of a long or a short position in the underlying! The person who is long on bonds will hedge his price risk by going short on bond futures! The hedger who loses on his long position in bonds will offset the loss by an e#ual gain he will make when he closes out his position in futures! In case of forward contracts, risk depends on the counterparty! In case of futures there is no risk at all because e%change itself is the counterparty to e ery contract! The contracts are also entered into by speculators! They do not normally trade in the underlying and hence do not ha e to in est the whole corpus at one go is likely to dri e the prices up!

Before the in ention of interest rate swaps, corporate borrowers relied almost e%clusi ely on creditors for interest rate hedges! The act of borrowing and establishing an interest rate risk were inseparable! ' company choosing to raise fi%ed rate funds had to borrow2from fi%ed rate in estors, whereas ariable rate funds were pro ided by ariable rate in estors! Matching the choice of creditors and the type of interest rate was difficult! The instrument of swap was born outC of the necessity to get around these problems! /Aat are sDa,s. Swaps are e%changes of cash flow obligations of two or more parties! 'n interest rate swap is a contractual agreement between two (or more) parties to e%change differently structured interest rate obligations based on notional principal amount! The agreement is normally e%ecuted through a broker or a market maker generally an in estment bank! The party with access to but does not demand for fi%ed rate funds raises them through a bond issuance, the party with demand for fi%ed rate funds but access to only ariable rate funds raises the ariable rate funds! Then an interest rate contract is arranged between the two, whereby one party (the party wishing to borrow fi%ed rate) pays a fi%ed annuity in e%change for a ariable cash flow stream from the other party! The contract is continuous with the underlying bond issue! The transaction is not a loan, but a mutual e%change of interest payments, one in which no principal is e%changed!

'n option unlike a futures contract imposes an obligation on only one party! The contract gi es the holder (buyer of the option) the right, but not the obligation to buy or sell a stated #uantity and #uality of an underlying asset on a future date at a price agreed to while entering into the contract! ' Pcall optionP gi es one the right to buy and a Pput optionP gi es one the right to sell! If the buyer of the option chooses to e%ercise this right the seller of the option is then obligated to perform - that is either to purchase or sell the commodity! Fhen the buyer of the option in okes his rights.he either pays the agreed- upon price (strike price) and recei es deli ery of the commodity (a call option) or deli ers the commodity and recei es the payment (a put option)! The seller of an option contract is called the .writer of the option.! 0ptions are of two types! &uropean option and 'merican option! In a &uropean option the holder can e%ercise his right only on the e%piration date! In an 'merican option he can e%ercise the right on any date between the purchase date and the e%piration date! It is pertinent to note that a .putC is not the re erse of a .call.! :uts and 1alls are two distinct instruments, each of which may be bought or sold! Thus, whereas futures #uotes gi e =ust one price per instrument per period, options #uotes gi e - two pricesD one for rele ant put and one for rele ant call!


Integrated Treasury (Structure & Mechanics)

INTRODUCTION DEFINITION: The money market is a wholesale market for low-risk, highly li#uid, short-term l0(s (I0( N :romissory "ote (I 0we )ou))! It is a market for arious sorts of debt securities rather than e#uities! Fithin the confines of the money market each day banks acti ely trade in arious instruments! The transactions include outright as well as Prepo transactions P! The heart of the acti ity in the money market occurs in the trading rooms of dealers and brokers of money market instruments /inancial literature pro ides no standardi+ed definition of the term Pmoney marketP! Some writers employ the term broadly to include the comple% arrangements by which lenders and borrowers of money capital (capital other than e#uity capital) are brought together, and by which outstanding bonds and other obligations are bought and sold! This approach is similar to the meaning of the P1apital MarketP e%cept that it does not include the e#uity transactions! 't the other end, money market embraces only open markets for near-money, li#uid assets! 's per the narrow definition, Money Market embraces the arious arrangements that ha e to do with issuance, trading and redemption of low-risk, short-term, marketable obligations whose prices ary only moderately! Both long-term obligations and customer loans are e%cluded! The boundary line is drawn to include only those instruments that possess high degree of li#uidity and at the same time pro ide a moderate yield! The Money Market is a market for short-term financial assets that are close substitutes for money! The important feature of a money market instrument is that it is li#uid and can be turned o er #uickly at low cost and it pro ides an a enue for e#uilibrating the short-term surplus funds of lenders and the re#uirements of borrowers! There is strictly no demarcated distinction between short-term money market and long-term capital market and in fact there are integral links between the two markets as the array of instruments in the two markets in ariably form a continuum! ECONO$IC FUNCTION: The basic function of the money market is to pro ide efficient facilities for ad=ustment of li#uidity positions, of commercial banks, non-bank financial institutions, business corporations and other in estorsQ ' smoothly functioning money market fosters the flow of funds to the most important uses throughout the nation and the world, and throughout the range of entire economic acti ities! In the process, interest rate differentials are narrowed, both geographically and industrially, and economic growth is promoted! In contrast with customer loans, the open markets are entirely ob=ecti e and free from personal considerations! 0bligations are bought from dealers who offer to sell at lowest prices (highest yields) and are sold to dealers who bid to buy at the highest prices (lowest yields)! The money market is essentially a market dealing in short- term instruments spanning for a period of one year or below! ' number of transactions take place daily shifting ast sums of money between the banks! The money market offers a forum for the banks in managing their short-term li#uidity! Banks may either be in surplus funds or in deficit6 they will ha e to take care of their daily re#uirements for funds to meet daily drawings on them and 1$$! They may ha e to borrow or lend in call money depending upon their position! Thus call money transactions form a part of the money market! Since the surplus cannot be kept idle, banks with surplus will ha e to deploy these funds profitably! Money market offers opportunities for short-term placements of funds through short-term money market instruments! 'part from the banks, money market pro ides opportunity to other institutions and corporate to deploy their short-term surpluses! $eser e Bank of India through arious open market operations in the form of repos and T-bill auctions monitors the money supply in the economy! The rates of interest are deregulated! 't present, there


Integrated Treasury (Structure & Mechanics) is no benchmark rate for either short-term or long-term in estments in securities2instruments! The aried acti ities of money market participants determine short-term rates!

SHORT TER$ INSTRU$ENTS 0$ONEY $ARKET INSTRU$ENTS3: Ca&& $'ney $ar(et: 1all money refers to that transaction which is recei ed or deli ered by the participants in the call money market and where the funds are returnable ne%t day! The call money transactions are also referred to as o ernight funds! "otice money on the other hand is a transaction where the participants recei e or deli er for more than two days but generally for a ma%imum of fourteen days! In both the cases the transaction is unsecured! 's a prudential measure therefore, a counterparty e%posure limits are fi%ed according to which the lender lends money! $esorting to the call2notice money transactions reflect temporary mismatch of funds during the short period of 8 to 8> days as the case may be! The participants, who ha e surplus, lend money to shed the mismatch for the relati e period! The participants who are short of funds, on the other hand, would borrow funds for the relati e period! The rate at which the funds will be deployed or borrowed will be determined on the basis of the market conditions at a gi en point of time! Fhen the market is highly li#uid the funds would be easily a ailable whereas the funds will be difficult to obtain in a tight money market conditions! The rates are low in easy money (li#uid) market and the rates would be high in tight money market! ' li#uid market can turn tight e en o ernight due to sudden changes in the financial en ironment, the policy of the central monetary authority or the *o ernment etc or e en any other e%ternal factor which has an implication on the financial market and also ice ersa! Treasury B"&&s: Treasury bill is a short-term money market instrument at the same time, a short-term security by which the *o ernment raises finance to meet its short-term re#uirements! The in estment in the Treasury bills is reckoned for the purpose of Statutory 3i#uidity $eser e (S3$) re#uirements! The periodicity of the T-Bills is D 8> days, ;@ days, 48 days, 8@; days and 7J> days! :eriodically, $eser e Bank of India comes out with the T-Bills auctions (the T-Bills are offered for bids and do not carry a fi%ed coupon)! Fhereas in the case of 48 day T-Bill the amount is notified in the case of other T-Bills it is not! T-Bill transactions are routed through the S*3'2c! Being a short-term instrument, it has a good secondary market! 'll the participants in the money market can sell the T-Bills, apart frorfi others, including the parties who participate in the T-Bills auctions to the non-competiti e bids! In absence of a de eloped money market, the T-Bill rate becomes a reference rate for the relati e maturities! Ban( De,'s"ts: The banks are permitted to keep deposits with other banks for a period of 8B days and abo e! The rate of interest on such deposits is free to be determined by the two banks between themsel es through negotiations! These deposits are not reckoned for the purpose of 1ash $eser e $atio (1$$) re#uirements! 3ike call2notice money transactions and the deposit transactions of the bank the transaction of the bank deposit is e idenced by way of deposit receipt! These deposits are not transferable but they could be prematurely closed at the discretion of the lender! Cert")"+ate ') De,'s"ts 0CDs3: The scheme of 1ertificate of ,eposits was introduced by $BI as a step towards deregulation of interest rates on deposits! (nder the scheme Scheduled 1ommercial Banks, 1o-operati e Banks (e%cept 3and ,e elopment Banks) can issue 1,s, for a period of not less than 7 months and upto a period of not more than 8 year! The /inancial Institutions specifically authorised by $BI, howe er can issue 1,s for a


Integrated Treasury (Structure & Mechanics) period not below 8 year and not abo e 7 years! ,ue to the negotiable character of the 1, the same could be sold after the lock-in period thus enabling the in esting bank to create li#uidity! This instrument is useful to the corporate for parking their surplus short-term funds! C'mmer+"a& *a,er 0C*3: In iew of the de elopment of the money market, yet another instrument was introduced in the form of 1ommercial :aper! Similarly highly rated corporate borrowers ha e been permitted to issue 1:s as a source of short-term borrowing! To be eligible to issue 1: a company should satisfy the following criteria D 8! The tangible net worth of the issuing company is not less than $s!> 1rores! Tangible net worth means the paid-up capital plus free reser es (including balances in the share premium account, capital and debenture redemption reser es and any other reser e not being created for repayment of any future liability or depreciation in assets or for bad debts or reser e created by re aluation of assets), as per the latest audited balance sheet of the issuing company, as reduced by the accumulated balance of loss, balance of deferred re enue e%penditure as also intangible assets! ;! Forking capital (/und based) limit of the company is not less than $s!> 1rores!

7! & ery issue of 1: shall be treated as a fresh issue, in other words before another 1: issue is offered the earlier issue has to be repaid! >! 1:s are to be issued in multiples of $s!B lakhs with a minimum of $s!;B lakhs (face alue)! B! 1: is in the form of (sence :romissory "ote negotiable by endorsement and deli ery as per the format prescribed by $BI! It shall be issued at discount as in the case of 1,s! The rate of discount shall be determined by the issuing company! The issuing company shall bear the e%penses of the issue of 1: such as dealer.s fee, rating agency.s fee and any other rele ant charges such as stamping charges as per Indian Stamp 'ct etc!


Integrated Treasury (Structure & Mechanics)

/(",S M'"'*&M&"TD


/unds management represents the core of sound financial planning! 'lthough it is not a new concept, practices, techni#ues, and norms ha e been re ised substantially in recent years! /unds management is the process of managing balance sheet and off-balance sheet instruments to ma%imi+e and maintain the spread between interest earned and paid while ensuring the bankCs ability to pay off liabilities and fund asset growth! Therefore, a bankCs funds management practices will affect earnings and li#uidity! ' sound basis for e aluating funds management is by understanding the bank, the customer mi%, the asset liability composition, and the economic and competiti e en ironment! The ade#uacy of policies, procedures, and management information systems must be determined, and the effect of funds management practices on li#uidity and interest rate risk analy+ed! 3i#uidity risk is related to, but substantially different from, interest rate risk! 3i#uidity risk arises from mismatching the maturities of assets and liabilities! Interest rate risk arises from mismatching the repricing of assets and liabilities! Both risks may be increased by rumored or e%isting asset #uality deterioration! :oor asset #uality will introduce maturity mismatches through assets failing to pay off as agreed, or repricing mismatches through the borrowerCs inability to pay higher rates on ariable rate loans! $umored asset problems may cause a run on deposits, which, in turn, will result in both maturity and price mismatches!

3i#uidity ManagementD
3i#uidity represents the ability to accommodate decreases in deposits and other purchased liabilities, and fund increases in assets! /unds must be a ailable at reasonable prices relati e to competitors, and in maturities re#uired to support prudently medium to longer-term assets! 3i#uidity is essential in all banks to compensate for e%pected and une%pected balance sheet fluctuations and to pro ide funds for growth! The cost of li#uidity is a function of market conditions and the degree of risk, both interest and credit, reflected in the bankCs balance sheet! If li#uidity needs are met through holdings of high #uality li#uid assets, the cost becomes the income sacrificed by not holding higher yielding long term and2or lower #uality assets! If li#uidity needs are not met through li#uid asset holdings, a bank may be forced to ac#uire additional funds under ad erse market conditions at e%cessi ely high rates! In large banks, howe er, maturing assets or their li#uidation do not pro ide assured li#uidity continuously! In those banks, asset li#uidity is supplemented by the ability to roll o er maturing liabilities and ac#uire new ones daily! Brokered deposits are one e%ample of ac#uired li#uidity! Such deposits are placed by money brokers with banks offering the highest rates! 0ften these are problem banks that are in need of li#uidity but can least afford the higher interest e%pense! ' bankCs reliance on those funds should be in estigated! The ade#uacy of a bankCs li#uidity will ary from bank to bank! In the same bank, at different times, similar li#uidity positions may be ade#uate or inade#uate depending on anticipated need for funds! In addition, a li#uidity position that is ade#uate for one bank may be insufficient for another bank! ,etermining the ade#uacy of a bankCs li#uidity position depends upon an analysis of the banksD R :resent and anticipated asset #uality! R :resent and future earnings capacity! R <istorical funding re#uirements! R 1urrent li#uidity position! R 'nticipated future funding needs! R 0ptions for reducing funding needs or attracting additional funds! R Sources of funds!


Integrated Treasury (Structure & Mechanics)

To pro ide funds to satisfy li#uidity needs, a bank must perform one or a combination of the followingD R ,ispose of li#uid assets! R Increase short-term borrowing (and2or issue additional short- term deposit liabilities)! R ,ecrease holdings of nonli#uid assets! R Increase liabilities of a term nature! R Increase capital funds! /orecasting future e ents is essential to li#uidity planning! Management must consider the effect those e ents are likely to ha e on funding re#uirements! If management does not consider future e ents and plan the bankCs funding strategy accordingly, the bank will be run by the dictates of the economy rather than by management! 'll banks are affected by changes in the economic climate! <owe er, sound financial management can buffer negati e changes and accentuate positi e ones! Information that management should consider in li#uidity planning includesD R &conomic forecasts! R Internal costs of funds! R Mismatches in the balance sheet! R Interest rate forecasts! R 'nticipated funding needs! Management also must ha e contingency plans in case its pro=ections are wrong! &ffecti e contingency planning in ol es identifying minimum and ma%imum li#uidity needs and weighing alternati e courses of action designed to meet them! 1ontingencies that may affect a bankCs li#uidity includeD R "ew business opportunities! R 'c#uisitions! R "ew management! R &arnings decline! R "on performing asset increase! R ,owngrading by a rating agency! 0nce li#uidity needs ha e been determined, management must decide how to meet them through such methods as asset management, liability management, or a combination of both!


Integrated Treasury (Structure & Mechanics)

/rom an era of glorious certainties, the world now thri es on uncertainties! 1loser home, the Indian financial markets ha e witnessed far-reaching changes at an unprecedented pace o er the past fi e years! Banks faced intense competition for business on both the assets as well as the liabilities sides! ,uring the same period the banks also witnessed increasing olatility in both domestic interest rates as well as foreign e%change rates! 'lso e%ternal shareholders as well as the go ernment2$BI e%erted pressure upon the management of the banks to maintain spreads, profitability and long-term iability! The combination of the abo e factors has necessitated the banks to take a comprehensi e and structured look at the risks associated with the business of banking! The abo e pressures will only increase with time! The management of banks will ha e to base their business decisions on an integrated risk management process! This process has to be for the entire balance sheet and has to be dri en by its corporate strategy! $isk is a part of any business.s le%icon and understanding and subse#uently, managing it is the most important concern! In banking as well, risk is inherent in the business, and as Mr! Falter Friston, e%-1&0, 1itibank put it, PThe business of banking is the business of risk management, plain and simple, that is the business of bankingP! *i en the importance of risk management, it is no wonder that it is today recei ing scrutiny from the world.s top banking regulators! Bank of International Settlements (BIS), the /ederal $eser e acti ities in the (nited States, Bundesbank in *ermany, $eser e Bank of India ha e all indicated their concern at the risktaking of banks! These regulatory bodies ha e e%pressed concern as not only has the en ironment become a lot riskier with e%change rates and interest rates being e%tremely olatile, but also a large amount of bank capital is spread internationally looking for returns! The need to study the impact of recent olatility and the appropriate measures and controls re#uired, takes us to the ery root! Fhat does risk mean and where can it reside in a bank.s operations!


Fhat e%actly is risk and how is it definedL $isk can be defined as the uncertainty in outcome or more specifically as the olatility of une%pected outcomes! The origins of the word risk can be traced to 3atin, through the /rench ris#ue and the Italian risco! The original sense of risco is cut off like a rock, from the 3atin re-, back, and secare, to cut! <ence, the sense of peril to sailors who had to na igate around dangerous, sharp rocks! 3ike sailors, bankers too need to na igate the seas of financial and non-financial risks! NONFFINANCIA! RISKS: The non-financial risks to which banks are e%posed to, are D Business risk and Strategic risk! The description of each of these risk is gi en belowD a3 Bus"ness r"s(: These are the risks that the bank willingly assumes to create a competiti e ad antage and add alue for shareholders! Business, or operating risk pertains to the product market in which the bank operates, and includes technological inno ations, marketing and product design! :roducts designed by the bank may be made superfluous by technological ad ancement! 'n e%ample would be doorto-door deposit marketing that could pro e ery costly in comparison with internet dri en banking! ' bank with a pulse on the market and dri en by technology as well as a high degree of customer focus could be relati ely protected against this risk!


Integrated Treasury (Structure & Mechanics) %3 Strateg"+ r"s(: These are those that result from a fundamental shift in the economy or political en iro.nment! Such an e%ample would be the nationali+ation of Indian banks or on the international arena, the negati e sentiment against deri ati e transactions in which all deri ati e dealers were caught (after the fall of Barings and other highly publici+ed deri ati e disasters including *ibson *reetings, 0range 1ounty)! Strategic risks usually affect the entire industry and much more difficult to protect against! FINANCIA! RISKS: The financial risks also are of a myriad nature! *enerally, financial risks are classified into the broad categories of market risks, credit risks, li#uidity risks, operational risks, and legal risks! Though the regulators the world o er ha e chosen to focus on credit risk, other risks too are ery important and are increasingly coming into the focus and recei ing attention from the authorities! 'n outline of each of the ma=or risks can be seen below, $ar(et r"s(: Market risks are those which cause olatility in earnings or alue owing to ariations in market factors like interest rates, e%change rates, e#uity or commodity prices! 's against other risks like credit risks which affect specific banks (owing to bankspecific credit decisions), market risks affect the industry as a whole! The impact on each bank would howe er ary depending on the e%posure of each bank! These would include basis risk - an e ent that occurs when relationships between products used to hedge each other break down! Market risk can take two formsD absolute risk, measured by the loss potential in rupee terms, and relati e risk, relati e to a benchmark inde%! Fhile the former focuses on the olatility of total returns, the latter measures risk in terms of tracking error or de iation from an inde%! Cred"t r"s(: This risk arises when counter-parties are unwilling to or unable to fulfil their contractual obligations! Its effect is measured by the cost of replacing cash flows if the other party defaults! 'n e%ample being if the bank has placed a 1: with company S on the back of a deposit from depositor )! Fhen company S is unable to honor the repayment of the 1:, the bank suffers a set back as it has to make good the amount to depositor ) in any e ent! More generally, credit risk can also lead to losses when debtors, e en when not defaulting, are downgraded by credit rating agencies, usually leading to a fall in the market alue of their obligations (and also a rise in cost of new borrowings)! !"#u"d"ty r"s(: 3i#uidity risk usually takes two formsD market or product li#uidity and cash flow or funding! Market or product li#uidity i!e! the first type of risk arises when a transaction cannot be conducted at pre ailing market prices due to insufficient market acti ity! This can occur in markets that are ery shallow or products that ha e been specifically designed (0 er the 1ounter products)! It would be a big problem for 0T1 contracts and when dynamic hedging is used! 3i#uidity risk is ery difficult to #uantify and it can ary across market conditions! Market2product li#uidity risk can be managed by setting limits on certain markets or products and by means of di ersification! The second type of risk refers to the inability to meet cash flow obligations, which may force early li#uidation! /unding risk can be controlled by proper planning of cash flow needs (by setting limits on gaps) and by di ersification! O,erat"'na& r"s(: 0perational risks refer to potential losses resulting from inade#uate systems, management failure, faulty controls, fraud, or human error! This includes e%ecution risk, which encompasses situations where trades fail to be e%ecuted, sometimes leading to costly delays or penalties, or more generally, any problem in back-office


Integrated Treasury (Structure & Mechanics) operations, which deal with the recording of transactions and reconciliation of indi idual trades with the bank.s aggregate position! 0perational risk also includes fraud, situations where traders intentionally falsify information, and technology risk, which refers to the need to protect systems from unauthori+ed access and tampering! 0ther e%amples are systems failures, losses due to natural disasters, or accidents in ol ing key indi iduals! The best protection against operational risks consists of redundancies of systems, clear separation of responsibilities with strong internal controls, and regular contingency planning! Galuation issues also create potential operational problems! Model risk is the subtle danger that the model used to alue positions is flawed! Traders using an option-pricing model for e%ample would be e%posed to model risk if the parameters were erroneous! !ega& r"s(: 3egal risks arise when counter-party does not ha e the legal or regulatory authority to engage in a transaction! It can take the form of shareholder lawsuits against corporations that suffer large losses! 3egal risks also include compliance and regulatory risks, which concern acti ities that might breach go ernment regulations, such as market manipulation, insider trading, and suitability restrictions! The regulatory framework, howe er, aries widely across countries and e en within a country, may be sub=ect to changes and differences of interpretation! Imperfect understanding of regulations can lead to penalties! $egulatory risk manifests itself in enforcement actions, and interpretation!


&%posure to one risk could lead to e%posure to another! It is ery possible that the risks faced by the bank be correlated! /or an e%ample the telescoping of market and credit risk, consider the o erseas debt crisis of the 84@5s! 'merican (and other) commercial banks had been eager to lend to de eloping countries like Bra+il and Me%ico, but they hoped to escape e%posure to currency, interest and credit risk! 'n instrument known as the syndicated &urodollar loan seemed to pro ide the perfect answer! It was denominated in dollars (no currency risk), was payable on a floating rate basis (no interest risk), and was made to go ernments (which were unlikely to go out of business)! But, after (S interest rates skyrocketed in the early 84@5s, countries like Me%ico and Bra+il went into defaultD they were unable to make the interest payments on their loans and the general credit assumption that go ernments do not default pro ed to be ery wrong! In short, market risk had turned into credit risk, and on a huge scale! Similarly, other risks can also lead to the bank facing an altogether different risk from the one it started with!


Integrated Treasury (Structure & Mechanics)

Fhile the processes of treasury operations and the basics behind the ser ices that banks offer to meet them ha e remained pretty much unchanged for #uite a long time, technology has allowed for increasing automation, impro ed timeliness, greater accuracy, and a comple%ity not e en pre iously considered! 0 er the last ten to fifteen years corporate treasury management systems (1TMS) ha e de eloped from sophisticated spreadsheets, through simple proprietary bank-pro ided cash management applications, to increasingly comple% and capable networked treasury management systems! 'lthough there are still some treasuries around today that are content with a spreadsheet package, the further treasury systems e ol e, the more treasurers re#uire a wider range of sophistication in their systems! 's technology de elops, so there is the ability for systems to become more ad anced6 with this ad anced technology a ailable, treasuries are then forced to look at ways to increase the cost effecti eness of their functions! Similarly, the greater the need to cut costs within a treasury function, the greater need to pro ide lower cost treasury operations through treasury systems - lower cost in terms of direct costs, time and potentially resources! ITMS is a suite of end-to-end treasury and in estment management solutions, co ering the front-, middle- and back-office of a bank, primary dealer or corporate treasury! It supports a wide range of instruments including /i%ed Income Securities, Money Markets, /oreign &%change, &#uities and also ,eri ati es like /utures, /orward $ate 'greements, Interest $ate Swaps and 1urrency 0ptions! Integration is accomplished at many le els - across product desks, at the pre-trade analytics and dealing layer, at the limits and risk management layer, at the reporting and accounting layer as well as at the o erall treasurer perspecti e ITMS facilitates Straight Through :rocessing (ST:) by supporting interfaces to a number of e%ternal systems surrounding the TreasuryD among others, trading platforms and rate feeds, confirmation and payment messaging systems, trade finance applications, core banking and general ledger systems!


Integrated Treasury (Structure & Mechanics)


:ressures to impro e straight-through processing rates and deal with new accounting regulations such as I'S 74 are forcing many treasuries to re isit their o erall IT strategy! The right platform can enhance decision-making, control and communications with operating units and banking partners! Iust as important in these cost conscious times, an IT re iew may re eal opportunities to reduce transactionprocessing costs! The treasury.s system platform forms the backbone of its operations and includes se eral hardware and software components, which are either company-wide standard or treasury specific! It is de eloped in line with the treasury.s IT strategy, in accordance with modern methodologies, and designed, implemented and managed to enable a harmonious and fle%ible en ironment with the necessary le el of security and a ailability! The treasury IT strategy is a documented ision of how that information technology will be strategically managed within an organisation, pro iding a means of measuring the effecti eness of plans, isions and targets! It is also key for cost control, and a foundation for in estment and organi+ational decision-making! It will help you to create a clear structure and is a means of internal and e%ternal communications! Basically, it ser es as a framework to capitali+e on pre ious in estments as well as to facilitate necessary de elopments! The treasury.s strategy and targets usually aim to satisfy management e%pectations of ha ing fle%ible, reliable and low-cost funding, financial risk control and efficient processing with minimi+ed operational risk! /rom these targets the goals for the supporting organisation and systems platform can be deri ed and defined to achie e synergies and higher process efficiency, including straight-through processing (ST:)! The treasury then benefits from economies of scale, reduced ulnerability by decreasing the dependence on key staff and higher a ailability and performance!

F"ve *r"n+",a& Bu"&d"ng B&'+(s:

The IT strategy is de eloped using fi e principal building blocksD business re#uirements6 system platform6 components6 IT organi+ation6 and support organi+ation! /igure 8D The /i e Building Blocks to a Successful Treasury IT Strategy


Integrated Treasury (Structure & Mechanics)

$a,,"ng tAe Bus"ness Re#u"rements: Mapping of the present set up, e%pectations and demands is essential! "ot only those within the treasury, but also those units with business interfaces to the treasury! 0ften, it is also ad isable to make use of .know-how. from outside the group, from banks and other information pro iders, on possible solutions! ' clear o er iew of the present set up will also pro e helpful when deciding how to implement the new platform! System *&at)'rm O,t"'ns: 0nce you ha e determined what the business re#uirements are, it is necessary to de elop a system platform or infrastructural solution, which will best achie e these re#uirements! /or e%ample, what alternati es are a ailableL Fhat is the group.s IT policy on system platformsL Fhat factors will influence the choiceL There are a number of factors that will determine the final decision! The geographical location of the treasury will determine the re#uired IT capabilities, as will the financial markets that need to be co ered! <ow the company is set up, both legally and with regard to the decision-making hierarchy, will also influence the end solution! It is essential to bear in mind any specific reporting re#uirements when making a decision! Internal reporting issues and statutory demands should be considered! 0ther influencing factors include application types, the group technical infrastructure and o erall integration re#uirements, and the business and technical support options a ailable! To determine the platform options demands technical e%pertise and a thorough understanding of the trends in both the IT and financial areas! The new platform should be sustainable and scalable in order to cater for future changes in the treasury business operations and technological progress! CA''s"ng C'm,'nents: 1omponents are the treasury management system(s), the information system(s) and other applications, as well as network solutions, workstations, middleware, database management system and the like! Through using components in line with group standards (your company may ha e a policy to use certain web tools and technical middleware), you facilitate your choice and integration of those components! The IT strategy will usually only contain a high le el description of components with a rough list of their pros and cons! ' more in-depth analysis and recommendation of components is usually performed when the IT strategy is implemented! IT Organ"sat"'n: ' system platform created, implemented and supported, based on the treasury.s business re#uirements, will pro e to be a strong foundation to facilitate the fulfillment of business targets and help to fatten the bottom line! Therefore, many treasuries choose to de ote resources to manage and further de elop the system platform once it has been implemented! ' dedicated treasury IT manager is becoming more common and their role is to manage the treasury.s system en ironment! This is highly comple% and consists of far more components than in other business units, usually with higher demands on a ailability and performance! Su,,'rt Organ"sat"'n: The support organisation, which essentially supports the treasury.s system platform, consists of a number of application and hardware pro iders, internal IT support and treasury IT supports, among others! To find a manageable mi% and a workable management organisation, while a oiding dependency on key personnel, can often pro e difficult! The design of the support organisation is crucial in order to achie e e%pected synergies, increased efficiencies and cost control! :rocedures for #uality assurance (H'), for e%ample, system documentation, maintenance and support logs and segregation of duties, further strengthen the chances of a successful platform implementation and smooth operations!


Integrated Treasury (Structure & Mechanics)


<a ing de eloped the IT strategy using the fi e building blocks (see /igure 8), the strategy is then documented in the strategy document! There are se eral ways to achie e this and the following model ser es as a framework! /igure ;D Steps To ,e eloping 'nd :resenting The Treasury IT Strategy

'nalysing the findings from the fi e building blocks will lay the foundation for the strategy! 'll treasury internal factors and treasury e%ternal factors, as well as the present treasury platform, are mapped and described (see /igure ;)! Fith this information it is possible to agree on a long-term ision statement that may typically contain e%pressions such as PscalableP, PglobalP, PsecureP and Phigh a ailabilityP! ' oid words like PbenchmarkP and Pbest-of-breedP, since interpretations can ary! Be as precise as possible and stri e to make the isions timeless! Fith the ision statement agreed the ne%t step is to perform a S!F!0!T analysis from the treasury.s perspecti e! ,iscuss the strengths and weaknesses of the treasury operations and the opportunities and threats emanating from outside the treasury group! 't this stage any issues affecting the strategy will be confronted by the organisation! Fith the ision clear and the S!F!0!T analysis conducted the strategy is formulated! The strategy, which is often limited in time, sets out a map, which consists of the chosen system platform, the types of components to be used and an organisational structure! It may also consist of statements such as Pstreamlining technical interfacing using middlewareP, P;>-hour operationsP, Pcontingency and reco ery planningP, Paccessibility ia the internetT! Fith the strategy clearly set out, details of the targets and actions are documented! This is ery much hands-on and di ides tasks among members of the pro=ect group, which includes the users, internal IT, support and third parties! /inally, it is important to be aware of the critical success factors when mo ing forward! Initially, it is essential to get commitment from senior management as well as from the users! Make comparisons between the cost of in estment against the operational and financial risk and2or the group.s financial net! Fith these factors secure, make realistic time plans ensuring that there is enough time in reser e for contingency! Fhen implementing, do so using a step-by-step approach! 'bo e all, be consistent and stay within the strategic framework!


Integrated Treasury (Structure & Mechanics)

In+reas"ng Treasury E))"+"en+y "n an eFtrad"ng Env"r'nment

In recent years, many large- and medium-si+ed companies ha e implemented or upgraded their treasury management systems (TMS)! <owe er, these systems are not yet to pro ide the fully integrated, efficient solution re#uired for a seamless combination of li#uidity management, transaction e%ecution, settlement and reporting! )et, electronic trading platforms are now maturing to the point that they can help companies to make headway in o erall efficiency and controls! This re#uires standards for integration that can be reali+ed with an effecti e co-operation of system pro iders, trading platforms, corporate clients and their banks! Dr"ve )'r Integrat"'n: Fith the de elopment of SM3-based real-time interfaces, reliable and relati ely low-cost connections can be established between systems with different strengths in functionality! 's a result, companies can realise efficient system support for their arying operations by implementing a limited set of well-designed interfaces! This a oids the eternal search for one system that co ers all functionality needs for a longer period of time and its corresponding costly implementation! Fith the introduction of electronic trading ia the Internet, this process is being accelerated! Both companies and their banks ha e an interest in realising low-cost integration across organisational boundaries to better trade e%ecution, settlement and controls! F're"gn EG+Aange Trad"ng *&at)'rms: Fith the proper functionality, the recently emerging internet-based trading platforms allow banks to benefit from integration between themsel es and their banks and to share best practices in trading and settlement processes without lengthy and costly implementation processes! Such impro ements can be continuous as long as the platforms continue to de elop new functionality, which re#uires sufficient fair competition between the platforms! In this conte%t, in ;555, Shell made an e#uity in estment in 1urrene%, an operational, independent, multi-bank internet-based foreign e%change (/S) ser ice, and announced its acti e support of the platform.s de elopment! ,e elopments in the internet and impro ements in banks. IT infrastructures ha e propelled these platforms! /or more than a decade, banks ha e gathered e%perience in electronic trading of financial instruments ia speciali+ed trading platforms such as &BS and $euters, which were designed for use in inter-bank markets! Fhile banks ha e been trading electronically with each other for se eral years, they ha e been reluctant to e%ecute transactions with clients by any other means than o er the telephone! <owe er, three years ago, due to market pressure and the need to impro e internal efficiencies, se eral banks mo ed to pro ide proprietary trading solutions to a limited group of clients! This re#uired significant efforts on behalf of those banks to realise the internal integration and centralisation of credit management, pricing, trade e%ecution and settlement operations! These banks ha e effecti ely created a backbone for the multi-bank electronic trading! "ot all banks are fully prepared technically, as yet for such electronic trading! To ensure sufficient openness and competiti eness in the /S market, as well as other markets the trading platforms may co er in the future, it is important these platforms, such as 'tria%, /Sall and 1urrene%, not only support multiple technical infrastructures but also partly manual processes on the banking side! Im,r'vements "n Trade EGe+ut"'n: Trade e%ecution and straight-through processing (ST:) has been greatly impro ed by electronic trading! In markets with fre#uently changing prices, such as /S and short-term cash markets, the best price for a particular transaction cannot be disco ered easily o er the phone! ,ifferences in offerings between banks can be small in basis points but significant in monetary terms! The key is to find the counterparty bank with the li#uidity offering that matches the needs of the company! Multi-bank electronic trading can significantly impro e trade e%ecution, as long as the banks pro ide multiple price disco ery mechanisms, which are designed to find the best price in a ariety of circumstances! /or instance, smaller transactions can be ser ed with a re ersed auction process but larger ones usually re#uire a string of targeted transactions or management of orders! :rime brokerage-type models should be added to allow companies to transact with


Integrated Treasury (Structure & Mechanics) any bank connected to the platform while settling with the name of one of its relationship banks! This allows firms to maintain relationships with a limited group of banks while pro iding access to the li#uidity of any specific bank connected to the platform! :rice disco ery should also be supported by publishing on the platform unfiltered indicati e market prices from multiple sources that are independently in ol ed in the markets, such as inter-dealer brokers or inter-bank trading platforms! Better E))"+"en+y: 'part from impro ed trade e%ecution, the multi-bank trading platforms can boost operational efficiency through streamlining internal processes around the transaction e%ecution! This streamlining start with the first le el of integration through uploads of deals to be e%ecuted to the platform and deal capture of e%ecuted deals in the TMS! This allows for a more efficient process for both clients and their banks but does not pro ide seamless ST:! /irst, trades do not only consist of single deals that will ne er be altered or amended! /ull ST: re#uires, for instance, support forD amendments, cancellations, allocations, rolls and aggregations! Second, for trades to be settled automatically, controls need to be in place to ensure authorised trading within predefined limitations! Since workstations are used to register static data and check compliance to dealer and credit limits, this would only re#uire the TMS to pro ide fully authorised and erified deals to the trading platform! <owe er, with the potential use of multiple trading platforms or trading practices, this would re#uire a fully functional, real-time interface with, in the background, real-time data collection by the TMS! 's an alternati e, the TMS could with regular inter als pro ide U in between trading rounds, say U the restrictions within which the trading platform controls and updates the trading position until the ne%t upload of data! :rocessing of settlements can also be done in two ways6 ia a sometimes semi-automated process or by a highly automated and controlled process! The usual route of payment instructions to be initiated by the TMS can be adhered to, but this process can be less efficient than arranging settlement ia the trading platform directly and pro iding the status of settlement to the TMS after each step in the process for monitoring and accounting purposes! ,ifferent solutions can suit different needs, but it also indicates that a pragmatic approach does not necessarily lead to multiple standards! 's long as platforms and TMS pro iders can come to an agreement on the limited options and define the data to be pro ided to or from a particular system, along with the protocols for the controlled e%change of that data, arious solutions can be implemented rapidly without large in estments by workstation pro iders or their clients! Interna& Transa+t"'ns: The internal li#uidity management of companies can also be impro ed with the use of electronic trading platforms! Transactions of /S, loans and deposits between a treasury and its subsidiaries are similar to those with e%ternal counterparties! Therefore, trading platforms can pro ide alue by allowing internal trades to be e%ecuted ia the same platform! It re#uires thorough netting and aggregation mechanisms, as well as the ability for routing of these transactions through different treasury companies, for these platforms to add alue to e%isting internal trading processes! 't Shell, three operational models are supported! The preferred option is the automated +ero balancing of accounts between subsidiaries and central treasury! Second best is an automated transaction e%ecution of /S, loans and deposits between subsidiaries and central treasury! The third model enables subsidiaries to operate through one single platform transactions with the central treasury whene er possible and the remainder with local banks when re#uired! Since a single platform is being used, this allows centralised settlement of both e%ternal and internal transactions with the direct in ol ement of the trading platform! C'F',erat"'n /"tA Ban(s: There is an urgent need to impro e the confirmation process with counterparty banks and standardise the settlement of transactions with the in ol ement of se eral settlement banks! 1onfirmations can be effecti ely dealt with by the trading platforms without the manual interference of a treasury.s and banks.


Integrated Treasury (Structure & Mechanics) back offices as long as the post-trade e ents pre iously described are dealt with! ,iscussions are continuing with banks to accept the legality of confirmations registered by the electronic trading platforms! :rocessing of payments and receipts re#uires impro ed interfaces between TMS and &/T systems or between e-trading platforms and such &/T systems! ' multi-bank solution with well-designed interfaces that do not re#uire limited manual controls is one good option! In 0ctober, Swift announced a solution for companies to gain access to the Swift network, which would allow corporates to be part of a standardised and secure settlement network! The opening pro ided by the banks for corporates to be part of Swift ia bank-administered closed user groups is a positi e step! The in ol ement of Swift in Twist has facilitated talks with settlement banks on how this bank-administrated Swift-access can work in practice and what standard process can be used to facilitate a seamless payment process! Sett"ng Standards F'r Integrat"'n: 1o-operation between TMS pro iders, trading platforms and their users is crucial in defining and implementing the best way to integrate trading platforms with e%isting TMSs! Such co-operation will allow all participants to rapidly reap the benefits of ST: U or realise greater operational efficiency, impro ed controls and reduced error rates by connecting acti ities ia the systems that support them! It is this and the ability to accelerate the proliferation of best practices throughout the market, which dro e Shell to form Twist (the Treasury Forkstation Integration Standards Team)! Twist is a coalition that brings together representati es from treasury departments, large banks, leading pro iders of treasury workstation solutions and e%change trading platforms, which are dri ing standards for electronic /S dealing and settlement among all participants of the /S market! The organisation is open to all treasury pro iders and platforms! Initially, Twist focused on two main areas of functionalityD producing a standard for uploading trades to be e%ecuted from supporting systems to a trading platform and for capturing /S trading details from a trading platform in internal treasury management systems! The group launched the first ersion of the treasury system interface standard in May ;558, followed by a second in September, which co ers trade and settlement confirmation, new trades, collections of trades, amendments, cancellations, allocations, rolls, aggregations, and split settlements! Se eral Twist members are already using interfaces based on this standard! The /pM3 /S :roducts Forking *roup has been working with Twist to incorporate the Twist specifications into its own standards! Ensur"ng Bene)"ts: &lectronic trading and integration can impro e the efficiency of treasury operations considerably! ' proacti e approach, howe er, is re#uired to align all the interests of corporates, pro iders and banks! By dri ing the adoption of industry wide best practices at this early stage of the e/S market, fragmentation can be pre ented, thus a oiding the de elopment of multiple standards among pro iders or dominant market standards that do not suit all the different needs! 'ddressing the concerns of each party in ol ed ensures that operational standards de eloped within, for e%ample, Twist will benefit all and will help dri e the efficiency and growth of the global /S market or other markets to be addressed in the future!


Integrated Treasury (Structure & Mechanics)


3ike e ery other staff department 1orporate Treasury departments see themsel es confronted with the challenge to e%change information with their operating companies in the most efficient way! Both management and the operating companies e%pect to be bothered as little as possible and to recei e consolidated information back as #uickly as possible! <owe er, to fulfill these e%pectations Treasury ,epartments nowadays are confronted with a hea y workload re#uiring a great deal of manual work! This is caused byD 1onsolidation of all re#uired information that is deli ered in different formats and e%ported from arious applications (spreadsheet, plain te%t, &$: e%ports, etc) ,istribution of Treasury information between operating companies and 1orporate Treasury ia all sorts of communication channels (fa%, phone, email) The approach to Treasury Technology is that it should enable your organi+ation to make the transformation from e%isting operations based on arious stand-alone applications to an integrated Treasury Management solution, which allows Banks to operate and communicate according to best practices! To achie e this *etronics 1onsulting found a solution in an application called TreasurInet! /Aat "s TreasurInet. TreasurInet is a complete web-based TMS with all re#uired functionality! The integrated input application can also be placed on top of your e%isting TMS, ensuring automatic Treasury information flow throughout the entire company in a web-enabled en ironment! The entire system uses browser-based software designed to enable entities to achie e the benefits of an integrated Treasury solution without the cost of running a dedicated system themsel es! 'mong the functionality of TreasurInet is Inter 1ompany "etting, Transaction $egistration (payments, deals, etc!), 1ash flow /orecasting and In-house Banking! 'll data is processed directly on-line and TreasurInet ensures that transactions are processed throughout their life in a controlled and secure manner! 's a result, management information can be pro ided timely and accurately! The TreasurInet database is an organi+ationCs primary record of its Treasury acti ities! The management information generated by TreasurInet pro ides an accurate and comprehensi e iew of the current financial position and any financial risks arising from its Treasury dealings!

TreasurInet )un+t"'na&"ty:
Nett"ng: "etting is a well-established Treasury tool to increase efficiency and reduce the costs of cross-border payments! The challenge facing netting so far has been the cost of implementation and operation! Implementing and maintaining software or pro iding training and support to users at subsidiaries can place a hea y burden on small Treasury departments! $unning the netting can in ol e handling multiple input formats, manual processing of data and time -consuming reporting re#uirements! Fhen using TreasurInet, netting participants will use a template designed by 1orporate Treasury, ha e direct access to their own data and take responsibility for maintaining it! This gi es participants control & autonomy and reduces the administrati e burden at the Treasury department! The use of templates also minimi+es the chance for errors and misunderstandings at the Treasury department! CasA F're+ast"ng: The cash forecasting tool based on the template pro ided by 1orporate Treasury allows the operating companies to submit their forecasts in the underlying base currency, thus a oiding time-consuming and error


Integrated Treasury (Structure & Mechanics) prone manual con ersions! The consolidated cash forecast gi es the Treasury department an o er iew of the local cash surpluses or shortages, which makes optimal li#uidity management achie able! Transa+t"'ns: Besides payments (internal and e%ternal) the transaction module supports a ariety of deal types e!g! loans, deposits, /S and deri ates! &%amples of the processes e%ecuted by the application once a transaction has been input are alidation, limit checks, calculating interest settlements, updating the *eneral 3edger, production of payment instructions or &/T messages! $anagement "n)'rmat"'n and re,'rt"ng: 's e ery mature Treasury Management System, TreasurInet pro ides e%tensi e management information e!g! ' cash balance summary with deal flows and cash mo ements (forecast and actual) ' list of daily payments and receipts, forecast and actual, at any date (future or historic) ' report of counterparty limits, e%posure and a ailability 'n analysis of all loans & draw downs and in estments by counterparty and deal type ' summary of annual interest for the financial year showing a erage balances, a erage interest rates and interest amount by counterparty and deal type! ' maturity profile analysis for future periods showing arious comparati es U fi%ed ersus floating, debt ersus in estments, etc! ' cash position summary showing current balances including net future changes ' gap analysis report for assets and liabilities ' four-year interest forecast 'part from a large number of standard reports that are already a ailable, your reporting re#uirements can be customi+ed on demand by Treasury"et or by using a third party reporting tool! 'ny report produced by TreaurInet can be directed to the printer or directly to an &%cel spreadsheet, Ford or &mail! TreasurInet a++ess: (sers access the application ia a web browser on their Intranet or ia the Internet! Since there is only one copy of the application, there are no local technical support issues such as software updates, different operating systems, Findows regional settings and so forth! The use of the Internet centrali+es the distribution, implementation and maintenances of the software!


Integrated Treasury (Structure & Mechanics)


0 er the last ten to fifteen years corporate treasury management systems (1TMS) ha e de eloped from sophisticated spreadsheets, through simple proprietary bank-pro ided cash management applications, to increasingly comple% and capable networked treasury management systems! 'lthough there are still some treasuries around today that are content with a spreadsheet package, the further treasury systems e ol e, the more treasurers re#uire a wider range of sophistication in their systems! The demands for treasury functions to become more effecti e is the main dri ing force for the e olution of treasury systems! 0n the other hand, the a ailability of ad anced technology in treasury systems dri es the e olution of treasuries themsel es! 's technology de elops, so there is the ability for systems to become more ad anced6 with this ad anced technology a ailable, treasuries are then forced to look at ways to increase the cost effecti eness of their functions! Similarly, the greater the need to cut costs within a treasury function, the greater need to pro ide lower cost treasury operations through treasury systems - lower cost in terms of direct costs, time and potentially resources! (sing sophisticated networked treasury systems operating o er local area networks and e en wide area networks, it is now possible to operate across the globe using the Internet! /or some time it has been possible to run treasury centres across one or two international locations using leased lines from telecommunications companies! <owe er, this has always been both e%tremely costly and rife with technical problems! Fith the introduction of Pweb-enabledP and Internet-capable treasury systems, it is now possible to construct efficient, cost-effecti e global treasury systems that combine powerful analytical, processing, administrati e and reporting functions! Therefore, it can be sensible to ha e one central head office for a multinational organisation! 's a result, many organisations are now considering radically changing the way in which they organi+e their treasuries, as it is no longer necessary to maintain and operate se eral disparate treasury functions! In-house banks and shared ser ice centers ha e now become easier to set up and administer through treasury management systems! 'nother technological ad ance that is currently ha ing an impact on treasury management is straight through processing or ST:, which as its name implies, means that information re#uired within an operation is transported from beginning to end seamlessly! This makes good business sense as what is the point in creating only half a solution when a total solution can be createdL <owe er, only fi e or si% years ago, corporate treasury management systems that supported some areas of a treasury operation, in fact created additional manual work in others! Typical areas re#uiring additional manipulation of data included writing reports or configuring e%port files that were imported into another system in order that the end result, where er that turned out, would satisfy the internal re#uirements of the treasury! Many corporate treasury management systems ha e now e ol ed to the point where much of this type of manual inter ention is becoming redundant! But will this e olution stopL Fhich systems will make other systems redundantL 1ertainly &nterprise $esource :lanning (&$:) systems ha e been created to do e%actly that, but to date they lack the depth of functionality of the 1TMSs! The key to e olution for the 1TMS must be integration - endors of complementary systems (for e%ample, electronic dealing systems, payments systems, matching systems, and accounting systems) need to e%tend their co-operations! It would certainly make life easier for the Treasurer! 's with all organisms, e olution is gradual! Some treasuries still run on spreadsheets, others use leading-edge technology! The Internet is only =ust becoming a iable and secure option for many different kinds of financial systems e en though it has been around for some time! It is apparent through our regular contact with corporate treasurers and banking partners that the Internet is still not entirely trusted by many because of potential security issues! 1orporate treasury systems will only ad ance in accordance with the re#uirements of the treasury marketplace - attempts by 1TMS endors to second-guess the needs of the


Integrated Treasury (Structure & Mechanics) market most often lead to redundant de elopments! Systems must be de eloped by 1TMS endors, in con=unction with their customers, with new technology pro iding the means to impro e treasury operations! The role of treasury will change and e ol e, but there is no danger of it becoming e%tinct! Fhat may change within the ne%t three to fi e years is likely to be the efficiency of the internal functions of a treasury! This will be brought about by greater automation of manually intensi e tasks and integration of third party applications enabled by corporate treasury management systems! Typical areas that will be impro ed by this include deal management, specifically deal capture and deal and cash flow maintenance6 and in the back office, specifically payments, confirmations, cash management, reconciliation, forecasting, re aluation and accounting! 's systems e ol e, they are de eloped to perform simple manual tasks, freeing treasurers to focus on more demanding analytical tasks! ,eal capture from electronic trading systems is one of the latest ad ances in 1TMS! 1orporate treasury systems are now embracing predominantly electronic /S transfer ia the PwebP! This means that it is possible to capture trades without re-keying data! Fill this then spur automatic confirmation and payments directly from the initial trade captureL Fhen e erything is automated within a secure en ironment, there should no longer be a need for erification and authori+ation of confirmations and payments, but electronic trading systems (/S, securities, e#uities etc!) introduced into financial institutions ha e not replaced all human traders! <owe er, numbers are reduced, certainly, as producti ity has been significantly enhanced! 1on ersely, consider the treasury function in less ad anced countries and organi+ations - they may perform similar functions, but there is lower producti ity due to greater reliance on manual operations! Treasury management systems ha e now reached maturity in terms of the range of functions they pro ide - do not e%pect any radically new de elopments! /urther de elopments are likely to be incremental and will either assimilate functions currently performed by other systems or in ol e the impro ement of integration with other systems, both inside and outside the target organisation! <owe er, the blurring of the boundaries of the integral parts of a treasury will continue! 's automation and integration takes a grip on systems, so there will be less need for the intermediate steps of manual inter ention - from deal capture to cash management and accounting, automation will be the key - it is sensible to predict that only analytical functions will continue to play a ma=or role for the treasurer! But precisely how long this e olution takes might re#uire the foresight of "ostradamus! <ow will this new technology in integration and automation affect what in estment is re#uiredL Treasurers are often concerned about the in estments they make in technology, insofar as it is hard to predict how things will mo e and which in estments will become obsolete #uickly, as opposed to those that will endure and lend themsel es to enhancement! Substantial in estment in hardware may become obsolete if a company and its systems are merged with another organisation or if a global or other centralisation treasury strategy is put in place! If this is a serious concern to a senior IT manager or 1I0, the answer is to let someone else take the risk, like an application ser ice pro ider ('S:)! 'n 'S: will enable a treasury department to predict costs more accurately and effecti ely rent a system rather than make one-off license payments for both the systems. software and the re#uired hardware! More and more companies are outsourcing their IT departments! 0thers remain concerned about the security and robustness of an 'S: and, where global treasuries are concerned, whether data can be stored in other countries! 's an alternati e or a natural progression from an 'S:, a treasury department may choose to opt for an 0S:, 0utsourced Solution :ro ider, which rents the hardware and treasury management software! Many outsourcing centers already e%ist within the corporate treasury market and by selecting one of these, effecti ely, the whole treasury operation can then be rented! Taking this route will gi e peace of mind to those treasurers that are concerned about keeping abreast of continually e ol ing software, lea ing the risk to an .e%pert. who is better prepared and able to take it on! But will this arrangement create an infle%ible


Integrated Treasury (Structure & Mechanics) treasuryL Fill the treasury operation become a tradable functionL :erhaps it may lead to yet another acronymD TS: - Treasury Ser ice :ro iderQ In whate er direction technology allows treasury operations to e ol e, it is fairly clear that nothing happens o ernight! There is ne er a Pbig bangP e olution of treasury systems, more a gradual mo e towards a more cost effecti e and controllable function, using today.s technologies! It.s a race for the endors to compete in and for the corporate treasuries to e aluate the results carefully before making any drastic decisions! Fhat treasurers need to do is to ensure that they ha e a complete understanding of the role of the treasury function and how that function is e%pected to e ol e in line with future de elopments of their organisation! $emember that systems are de eloped as solutions to problems (e%isting or potential future)! The problems or opportunities must first be identified!


Integrated Treasury (Structure & Mechanics)


PERSON INCHARGE: $rs; B"na Naru&a

0Interna& Sen"'r Aud"t'r3

PURPOSE OF QUESTIONNAIRE: *r'Ie+t D'r( ') T;Y;B;C'm 0Ban("ng

T',"+: I"T&*$'T&, T$&'S($) I" B'"MS (ST$(1T($& & M&1<'"I1S) Is Integrated Treasury rea&&y ne+essary )'r Ban(s. /Ay. '! )es, because it increases the speed of transactions & also impro es efficiency! E; Is tAere Integrated Treasury $anagement System "n y'ur %an(. '! )es, since past one & a half year! E; Is F'reG Treasury g'"ng t' get a %''st due t' tA"s system. H'D. '! )es, because it ensures fast transactions & it is also confidential!


E; H'D tAe $'ney $ar(et Transa+t"'ns are g'"ng t' get a))e+ted tr'ugA Integrated Treasury. '! The Treasurers will ha e direct contact with the dealers, which will enable them to be in touch with the market! E; Is tAere a need )'r a s,e+"a&"Jed (n'D&edge t' +'ndu+t aud"t ') Integrated Treasury. '! )es, the auditor must be aware of the software that the bank is using which is only possible when he is aware of the computeri+ed audit E; H'D tA"s system Aas "m,r'ved tAe se+ur"ty ') Transa+t"'n. '! This system re#uires special knowledge & skill to run any process & also there are many passwords to enter the system, which are kept confidential! E; /Aat are tAe In"t"at"ves ') Integrated Treasury. '! $eal Time *ross Settlement ($T*S), 1entralised /und Management System(1/MS), "egotiated ,ealing System(",S)! E; /Aat are tAe %as"+ tA"ngs tAat y'u &''( )'r "n s')tDare. '! The Software must be user friendly along with it the software must be secure, easy to operate! E; D'es tA"s system a&&'D t' %e m're e))"+"ent and +ut +'st. '! )es, it is less e%pensi e & more efficient! E; H'D D"&& tA"s system resAa,e tAe Ban("ng Industry. '! It will enable different banks to create contact at no time & one can also know about the li#uidity position & also about the re#uirements of the banks E; /"&& Integrated Treasury System )&'ur"sA "n Ind"a. '! )es, it has great future because ours is an open economy & we are prone to adopt new things that are ad antageous to us!


Integrated Treasury (Structure & Mechanics)

Treasury ,epartment is directly or indirectly in ol ed in day-to-day business of the Bank and it is in ol ed in the day-to-day asset liability management of the bank! Treasury will be able to, through arious techni#ues, manage risks through its arious operations bring down the cost of funds and also impro e the margins! $eser es Management, In estment Management, 3i#uidity (both short term and long term) Management, are the other ma=or functions of the Treasury Management! It is certain that ma=or international corporates are seeing real added alue in being able to link treasury centers together and make stronger links with their own subsidiaries! The technology making this happen is the internet and web-enabling of TMSs! Ma=or corporates can see real alue in being able to merge their treasury centers into a single, central database, allowing for more accurate and #uicker analysis of the group.s finances! "ew technology that brings about greater functionality and fle%ibility in structuring treasury operations means that it is now possible to redefine the scope of a bank.s treasury re#uirements to better suit each bank.s business! Treasury handles ery sensiti e and ery important function of the Bank! <ence it has been set up in specific structure for smooth but transparent operations! 's technology de elops, so there is the ability for systems to become more ad anced6 with this ad anced technology a ailable, treasuries are then forced to look at ways to increase the cost effecti eness of their functions! Thus making the Treasury centralised will lead to betterment of Banking Industry & will one day form a Single Banking system all o er the world!