Treasury

Integrated Treasury (Structure & Mechanics)
Integrated Treasury
INTRODUCTION:
The reforms set in since the past few years has brought along with it a host of risks for the Banks,
apart from a variety of opportunities. Now banks will have to learn to operate in a more deregulated
environment and a diversified and competitive market place, which will require them to manage risks better.
Recent volatility in exchange rate movements and domestic interest rate levels has indicated the influence of
the global market within the country. Such volatilities would precipitate substantial losses and at times
irretrievable situations for several banks. These situations warrant a proactive or prompt reactive moves
from the Bank.
It is in this context the urgent need of TREASURY MANAGEMENT for the Banks emerges. Banks
with an extensive branch network has to set up a centralized Treasury and Dealing Room, to counter the
market situations and to contain the risk exposures at the earliest.
Until a few years back, many of the Indian Banks were giving a secondary importance to Treasury
management. There are dangers in giving treasury operation a secondary role. A significant proportion of
the treasury related problems are to be attended immediately-for instance, loss of interest arising from
surplus funds available for the bank on day-to-day basis. An 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
movement in volatile foreign exchange markets can be very expensive indeed.
Therefore, that, even in a relatively small organization, it is essential that treasury work is under
taken by at least one individual with a sole or primary responsibilities to cover, at least, cash management
and currency management.
A few of the Banks have already set up fully functioning treasuries and a couple of them have set up
integrated treasuries with Forex and Domestic dealers sitting in the same dealing room.
The word INTEGRATION means consolidation or merger or centralization. In the present context it
is the consolidation or centralization of the segmented financial markets like Money Market. Debt & Capital
Market and Forex Market at the macro level and integration of the respective Treasuries at the operation
level at Banks/Financial Institutions. Let us discuss this in the following.
Banking reforms which were initiated in the beginning of the 90's is slowly opening the domestic
economy to the global market. Opportunities are widening for the Banks, Financial Institutions, Corporate
and others, which would result in intense competition, strain on the margins etc. At the macro level when the
domestic market/economy is integrating with the global economy, it is needless to emphasize the need for
integration of the micro level units. For example, different segments within the Financial Markets are almost
integrated. The Financial Market which was earlier segregated into different watertight compartments like
Money Market, Debt Market, Capital Market; Forex Market etc. have been almost integrated. Now 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 respective markets, have been given partial freedom to enter
other markets. Now Financial Institutions which were confined to long term market have been permitted to
enter short term in Money Market to lend in call and borrow for a minimum period of 3 months to 1 year.
Recently the Corporate too have been given partial freedom to lend in the call market. Corporate have also
been permitted to borrow not only from the open domestic market but also from the global market. Banks
have been permitted to enter the Capital/Debt Market, Forex Market and Money Market with partial
freedom in certain cases, to mobilize and/or deploy resources. Banks, if not for their own needs, are forced
to enter these markets very often and render services to their clients which have access to these markets. For
example a Corporate accessing the overseas Market for External Commercial Borrowing has to ultimately
depend on bankers for utilizing the funds it has raised or converting the funds and bringing into the country.
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Thus we can say, with liberalization of the Financial System, markets are almost fully integrated. Once the
Capital Account Convertibility {CAC) fully comes, all these markets would have been fully integrated.
The impact of the financial integration on CAC can be summarized as follows - Promotes
competition resulting in better quality products and services
Improves quality and number of Financial Assets as a result of greater liquidity and deeper market.
- Reduces margins and more efficient allocation/ intermediation Interest rates to align with global
interest rates Interest rate differential to reflect in Foreign Exchange forward rates.
- Avoids inducements for tax evasion and capital flight Opportunities for diversion/distribution of
risks
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NEED OF INTEGRATION OF THE BANK

TREASURY
Presently except couple-of treasuries, almost all the Treasuries of Public Sector Banks are operating
in isolation. For example, Forex Treasury and Domestic Treasury of many of the banks are operating
independently. There may be times that the Forex and Domestic Treasury of these Banks might have worked
on different directions there by neutralizing an advantageous position or even adversely affecting the Bank's
financial position. This is because the Forex Treasury may not be knowing the position of the Domestic
Treasury or that the perception of both the treasuries may be different or in opposite directions.
Communication/information gap between these two treasuries also may lead to such detrimental position for
the bank. This may even 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 unrelated/opposite
levels/positions of the treasuries. For example there may be instances when the Domestic treasury of the
Bank may be lending funds to another Bank, which may, in turn deploy in Foreign Currency deposit with
the former.
There are a few Banks where even the Funds Management (Money Market Treasury) and Investment
Management (Capital and Debt Market Treasury) are functioning independently. Here also these Banks are
losing opportunities within the Domestic market when the interest rates and asset/security prices move in the
same direction.
Further almost all trade and capital movements which cross international borders give rise to a
foreign currency Asset or create foreign currency Liability. Subject to regulatory constraint these currencies
may be retained in that currency and placed or borrowed in the overseas markets or domestic markets for
that currency.
Moreover now that Banks have been selectively permitted to invest in/borrow from overseas market,
such opportunities can be planned only if the Bank has an integrated Treasury.
Banks have now been selectively given licenses to import precious metals for the resident Metal
traders. Since this operation involves buying of Metal from the international market against Dollar value and
then pricing it in the domestic Market, the Bank dealing in such trades have to operate from an Integrated
Treasury.
It is now well understood that Reserve Bank of India intervenes in the Domestic (Rupee) market to
regulate the Foreign Exchange market. For instance, when the Indian Rupee started falling steeply and
crossed Rs. 40 /$ and also simultaneously when Forward Premium went to dizzy highs in the beginning of
the year 1998, RBI signaled rise in short term interest rates and mopped up liquidity from the system by
increasing CRR and reducing the Refinance limits. This took the overnight Call rates to 140% levels and the
rates stayed above 50% continuously for a fortnight. This strengthened the Rupee and cooled down forwards
and normalcy came into the market within a months time. In such situations, a Bank should have its Forex
and Rupee treasury operating with the same focus and in the same direction. There are chances that the
profits made by one treasury in such volatile situations are negated by the other treasury on account of its
inadvertent operations.
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FUNCTIONS OF INTEGRATED TREASURY

The major functions of a treasury unit arte as follows:
Reserve management & Investment:

It involves,
i) Meeting CRR & SLR obligations
ii) Having an appropriate mix of portfolio to optimize yield & duration.
Duration is the weighted average life of a debt instrument over which investment in that instrument
is recouped. Duration Analysis is the tool used to monitor the price sensitivity of a investment
instrument to interest rate changes.
Funds & Liquidity Management:

It involves,
i) Analysis of major cash flows arising out of Asset liability transactions.
ii) Providing a well developed & diversified liability base to fund the various assets in
the balance sheet of the Bank.
iii) Providing policy inputs to the strategic planning group on the bank on funding
mix(currency, tenor & cost) & yoeld expected in credit & investment.
Asset Liability Management & Term Money:
ALM calls for determining the optimal size & growth rate of the balance sheet & also price the Asset
Liabilities in accordance with prescribed guidelines. Successive reduction in CRR rates & ALM practices by
banks increase the demand of funds from tenor of above 15 days (Term Money) to match duration of their
assets.
Risk Management:
Integrated Treasury manages all market risks associated with a Banks liabilities & assets. The
market risk of liabilities to floating interest rate risk & asset liability mismatches. The market risk for assets
can arise from,
i) Unfavorable change in interest rates.
ii) Increasing level of disintermediation.
iii) Securitization of assets.
iv) Emergence of credit derivatives etc.
While he credit risk assessment continues to lies in the hands of Credit department, the treasury
would monitor the cash inflow impact from changes in assts prices due to interest rate changes by adhering
to prudential exposure limits.
Transfer Pricing:
Treasury is to ensure that the funds of the banks are deployed optimally, without sacrificing yield or
liquidity. An integrated treasury unit has the idea of banks overall funding needs as well as direct access to
various markets (like money market, capital market, forex market, etc). Hence ideally banks should provide
benchmark rates, after summing market risk to various business groups & product categories about the
correct business strategy to adopt.
Derivative products:
Treasury can develop Interest Rate Swaps (IRS) & other rupee based/Cross Currency derivative
products for hedging Banks own exposures and also sell such products to customers/other banks.
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Arbitrage:
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.
Capital Adequacy:
This function focuses on quality of assets, with Return on Assets (RoA) being a key criterion for
measuring the efficiency of deployed funds.
An integrated treasury is a major profit center. It has its own P & L measurement. It undertakes
exposures through proprietary trading (deals done to make profits out of movements in market interest /
exchange rates) that may not be required by general banking.
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A BIRD'S VIEW OF TREASURY OPERATIONS

INFRASTRUCTURE FOR DEALING:
Dealing is the most sensitive operations in a Treasury. Quickness, accuracy, proactive but balanced
decisions, sensitivity of the information they are handling are some of the aspects of their functioning. This
warrants a conducive environment as well as easy access to maximum information. To facilitate these,
Dealers are provided with an exclusive Dealing Room, with all the communication facilities like multi
telephone lines, hotlines with vital centers, fax, telex, Internet connectivity etc. The Dealing room telephone
numbers of all the participants in the market should be readily available/accessible for the dealers. If
required 'hot lines' are to be arranged. This is apart from the information access by way of connectivity
with/through a good Wire agency like Reuters, Dow Jones, Bridges etc., and with NSE/BOLT terminals.
Software packages programmed to the various needs of the Treasury but ensuring data entry and
confirmation/authorization through identification should be provided. Programme should take care of
functional segregation too so that any deviation is totally prohibited. The system and procedures,
exposure/risk limits etc. should be made available for the respective dealers,
DUTIES OF DEALERS:
Dealer has to operate in the inter bank market according to the guidelines laid down by the
Management. Ideally Dealers have to confer with the Chief Dealer before he enters the market. Based on the
previous days market and the Bank's own business requirements/broad strategies, plan should be drawn for
the day's operations.
DEALING PROCEDURE:
The Dealers prepare themselves for the operations in the day in their respective markets. Dealing
operations generally takes place over telephone, and such market is called 'telephone market'. As the deals
are concluded over 'word of mouth', it calls for a very high standard of credibility, ethics and expertise. It is
equally necessary for identification of the voices of the brokers/dealers in the market.
Dealers should always concentrate in their respective market/ areas of function, by contacting with
other Banks, Institutions, Primary/Satellite dealers brokers etc. Once a bank dealer has quoted a price and
terms he is bound to deal on those terms subject to acceptance of the counter party and within a reasonable
period. If the quotes are given to broker, the dealer should make it clear the terms of the deal and time up to,
which the quote is valid. In case the broker is not able to strike the deal within the time limit given, broker
should enquire whether the quote holds good. While finalizing the deal the broker must give the name of the
counterparty bank and confirm that the deal closed. Once the deal is finalized counter-party name should not
be substituted/changed.
All the information received from the market are jotted down on the sheet/book by the Dealer. Deals
struck are recorded on the Deal slips. Deal slip should contain the following information: -
Deal No., date and time of deal concluded
- Nature of transaction
- Details of Security /currency, amount, rate etc.
- Details of the counter party
- Name of the Broker and brokerage payable
- Any other information relevant to the deal.
Deal slip, duly signed/authenticated by the concerned dealer should be passed to the back office for
further processing and settlement.
BACK OFFICE OPERATIONS:
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Main responsibility of the Back up office is to ensure that all the guidelines, system & procedures
stipulated by the Bank and governing Regulations are complied with, transaction-by-transaction.
Nevertheless Back office ensure the following:
Confirmation of contracts/deals is obtained from the respective counterparties and duly verified for
correctness.
Discrepancies noticed are rectified on the same day
Brokers contract conforms to the Deal brokered.
Brokered deals are entered in the NSE trade
Proper authority/ratification has been obtained wherever exposure/powers are exceeded, same day.
No Bankers Receipt (BR) is issued wherever SGL facility is available.
Wherever BR is issued it is on the basis of Bank's own investment account only and also the BR
issued is not outstanding beyond 15 days.
BRs issued are redeemed by actual delivery of scrips and not by any other method.
Sufficient balance of stock/security is held in the SGL account before issuing SGL transfer form
SGL received is lodged immediately
SGL bounced cases are promptly reported to concerned Regional office of RBI. Transaction
documents are preserved in orderly way prompt updating of prescribed Registers Periodical
submission of Returns/Statements.
ACCOUNTING, MONITORING & REPORTING:
Once the deals are settled, the necessary accounting entries are made by this section. This section
closely follows up the transactions, maintain/updates the records/reconciles the securities position
periodically, maintains necessary records pertaining to each transaction systematically and maintains
necessary ledgers/ registers pre subscribed by RBI/Head Office. As this Section has to ensure that all rules
and regulations are complied by the respective sections, in effect, it is like a watchdog for the Treasury
operations.
Review of the portfolio, follow up of periodical interest collection on investments / redemptions,

report generations for enabling ALCO/ Management decisions are a few of other duties of this section.
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ATTRIBUTES OF GOOD TREASURY PERSONNEL

There are no laid down rules or guidelines explaining attributes of good Treasury personnel. Unlike
the staff of other departments of the Bank, staff of Treasury has to be selectively chosen, as this department
is very sensitive one for the Bank. Similarly as an effective Treasury department has to adopt a very active
and participative role in the Bank's business, the staff members of such department must develop a thorough
understanding of the Bank's corporate policy and objectives and involve themselves as much as possible in
achieving the goal.
Given below are a few features of nature of Treasury business, which makes it sensitive and most
important organ of the Bank.
1. It handles voluminous funds daily,
2. Interacts with other Banks/Institutions in the market, both domestic and global, as a representative of
the whole Bank.
3. Need to take fast decisions, which should comply various rules/regulations and also are profitable
with the Bank.
4. Decision taken, good or bad for the Bank, creates an impression about the Bank in the Market.
5. Access to vital and sensitive information about the Bank
6. Action/inaction in the market is being watched by the monetary Regulatory authorities
Though it is difficult to enlist all the attributes a good Treasury officer should have, it should include
at least the following attributes.
He should,
1. Have high degree of integrity and professionalism
2. Be good numerate to assess the information he receives and the financial impact of his decisions on
the Bank.
3. Be preferably a finance/ macro economic discipline
4. Be good articulator/negotiator be a proactive and responsible
5. Be a 'team man' as quick and frequent consultations is warranted in a volatile market situation
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TREASURY CENTRALISED OR DECENTRALISED?
The whole Treasury function of the Bank can either be centralised at one center or decentralized at
different centers but under a single overall supervision. The advantages of a Centralised Treasury can be
summarized as follows:
1. A Centrally organized treasury would have the total picture of liquidity (current/cash and long term)
of the Bank. This would enable it to take decision/control on the utilization/deployment of the funds
to the best advantage of the Bank.
2. As the Reserve management is a vital function of the Treasury, it is advantageous/prudent to have a

single Centralised Treasury so that it is monitored closely from time to time so that not only default
is averted but also bare minimum surplus only is maintained over the statutory requirements.
3. It will be able to take advantage of funds in transit within the Bank's network like inter-branch funds
movement, movement of funds between RBI and non-RBI centers, etc. Otherwise there is possibility
that these funds are ignored and left idle in the banking system.
4. Centralised Treasury prevents unnecessary movement of funds around different centers but organizes
in such a way that actual transmission of funds is minimized.
5. A Centralised Treasury enables the Bank to deal in big quantums in the market and take advantage
of the wholesale market.
6. A Centralised Treasury would have better managerial control, responsibility and risk control. If the
treasury is decentralized in smaller units, one unit would not necessarily be aware of the exposure
taken by the other unit. Likewise when the market is highly volatile, a pro-active treasury may have
to change its position within short time to avoid risk. This is possible only if the Treasury is
centralised.
7. Reporting and fast implementation of management/ALCO decisions is possible only if the Treasury
is centralised. If it is decentralized, time consumed for collection, compilation, and analysis of the
data will be costly. Later, implementation of the ALCO decision may get delayed, which may cost to
the Bank further.
Main disadvantage of the centralised treasury is that the Bank may not be able to take advantage of
the 'better markets' at other centers. Likewise, as the involvement in financial matters is centralised other
centers may not know the importance of treasury management, which may reflect in their actions/omissions.
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STRUCTURE OF INTEGRATED TREASURY

INTRODUCTION:
The Structure of the Treasury Department is very simple. It consists of Top Management, Middle Office,
Back Office, Treasurer, Audit Head, Forex Dealers, Derivative Dealers, Money Market Dealers, Funds &
Liquidity Management& Risk Management. Treasurer is the person responsible for all the transactions of
the Treasury department. He has to report directly to the Top Management.
The structure of Integrated Treasury can be beter understood from the following diagram;
Top
Management
Middle Office Back Office
Treasurer
Risk
Audit Management
Funds &
Foreign Liquidity
Exchange Management
Derivatives Money Market
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TOP, MIDDLE & BACK OFFICE MANAGEMENT

INTRODUCTION:
The management of Integrated Treasury is divided in the following way:

1. Top management
2. Middle Office
3. Back Office
Top Management:
The treasury department should reflect the way the business itself is organised. That is to say, it is
unlikely to be an effective department if, for instance, it is organised on a loose and decentralised basis while
the rest of the business is organised to give the management effective central control. Thus the Top
Management of Integrated Treasury enjoys the highest authority & has the power of decision-making.
Middle Office:
A 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 provides risk
assessment to Asset Liability Committee (ALCO) & is responsible for daily risk exposures, individually as
well asa collectively.
Back Office:
Main responsibility of the Back up office is to ensure that all the guidelines, system & procedures
stipulated by the Bank and governing Regulations are complied with, transaction by transaction.
Nevertheless Back office ensure the following :
Registers Periodical submission of Returns/Statements
Brokered deals are entered in the NSE trade
Discrepancies noticed are rectified on the same day
Confirmation of contracts/deals is obtained from the respective counterparties, etc.
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AUDIT
INTRODUCTION:
Audit of an integrated treasury is a complex task requiring high level of skills, knowledge of market
practices and the relevant regulatory environment. Treasury income constitutes a significant portion of a
banks income, many a time equal to the entire income received from advances and the extensive branch
network of banks.
An auditor of an integrated bank treasury operation will have to be aware of, the relevant regulatory
standards, the valuation methods applicable, terminologies used that he has to be familiar with and then
proceeds with broad guidelines for evaluation of internal controls (including those relating to information
systems). A model audit program that can be tailor made to suit individual needs has also been attempted.
Many banks have set up integrated treasuries, encompassing both rupee and Forex denominated transactions.
An integrated approach to treasury management involves a common dealer or desk dealing in both domestic and
Forex financial markets. This enables the bank to optimize its funding and fund deployment and take advantage of
arbitrage opportunities between these markets Treasury income constitutes a significant portion of a banks income,
many a time equal to the entire income received from advances and the extensive branch network of banks. Treasury
operations are invariably of high value and due to the very nature of its operations, are susceptible to manipulation,
fraud or error and consequently to the various types of risks envisaged by Auditing and Assurance Standards (AAS) 6.
AUDIT APPROACH CHANGE:
By now it has dawned on all auditors that they cannot afford to ignore the computers and they form the inte-
gral part of the organization they are auditing. These systems affect the working of the organization to such a level
that in extreme cases, an unsuitable solution can even kill the company and the auditor better forecast this. The
question then comes to mind is that should the 'new genera tion' computer savvy generation auditors tackle it while the
rest go to the hills and retire?
KNOWLEDGE OF BUSINESS:
(AAS 20)
Knowledge of business of a bank treasury is usually low, even in an enlightened community like Chartered
Accountants. Consequently, it is important to acquire a thorough knowledge of the products in vogue in the market,
market practices, the permissible valuation methods, the regulatory standards prescribed by the Reserve Bank of India
(RBI), Foreign Exchange Dealers Association of India (FEDAI) and Fixed Income Money Market and Derivatives
Association (FIMMDA), the processes followed by the bank, internal controls exercised, information systems used
etc. An idea of the types of trades, settlements, instruments in vogue, certain operational issues relating thereto,
principles of valuation etc are set out in the ensuing paragraphs for general understanding.
EDP CONTROLS (AAS 29):
The extent of computerization is usually extensive in treasuries. This calls for strict controls in such
an environment. Robust software covering the entire gamut of functionality required for smooth functioning
of treasury, a proper security environment, controls in place to prevent unauthorized usage of files, systems,
etc, start/end-of-the day process, business continuity and disaster recovery plans, well documented user and
technical manuals, audit trails in the software, exception reports, complete trail of all back end changes
made are a must. Computer assisted audit techniques and a tool, which could extract data to analyze them
and identify exceptions, would be invaluable for review of EDP controls.
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LONG FORM AUDIT REPORT:

These are to broadly cover:
Existence of investment policy
Adherence to investment policy and compliance to RBI guidelines
System of purchase and sale of investments, delegation of powers, reporting systems, segregation of
back office functions etc.
Controls over investments including periodic verification/ reconciliation of investments with book
records
Valuation mode, changes in valuations compared with previous year, adequacy of provisions
System of monitoring income from investments.
Software/system analysis
SLR/CRR requirement-system of ensuring compliance
Procedure for revaluation of Nostro accounts and outstanding foreign exchange contracts
Review of vostro accounts
Reconciliation of FCNR, EEFC and RFC balances and monitoring deployment of funds
Claims arising out of delayed settlement of Inter bank funds
Borrowings outside India
Progress in Banking is an equal parameter of the cultural development of a civilization and like any other
field; this sector too has not been spared by the technical revolution. While telex machine heralded faster fund trans-
fer for decades beginning from the second half of the sixties, later inventions put a turbo charge in the speed of
such transfers. While local clearing lagged behind, we have seen the introduction of Real Time Gross Settlement
(RTGS) system by the RBI. One hopes the extension of the concern for a speedier settlement of all fund transfers.
To the business, this spells an automatic potential for increase in turnover.
CONCLUSION:
While the environment has turned from manual to computerized, the audit techniques for the traditional
auditor need slight fine-tuning to exploit the technical advantage. After all, if the computer can calculate interest
correctly in a sample of 50 Accounts, it can do it accurately for 5 crore accounts. As auditors can place reliance on
this and thus adjust coverage and direction accordingly, System auditors do provide a much-needed support to the
traditional accountants and one hopes that all major systems should be audited at regular intervals to ensure
minimum distraction to the traditional auditor.
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FOREIGN EXCHANGE
INTRODUCTION:
Banking business is gradually becoming more and more international. It has become a worldwide
trend for Corporate to expand and to spread their risk amongst many countries and markets. On account of
the reforms that are taking place, more and more Banks also would cross-frontiers for customers, sources of
supply and investment. But all cross-frontier trade inevitably gives rise to foreign exchange exposure for one
or the other one.
Consider a simple example of a man who wishes to purchase machinery from West Germany. We
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
D Marks or some other currency.
It may seem that if he purchases in Indian Rupee, then there is no foreign exchange problem arising,
but the foreign exchange problem then arises for the seller of the machine. He will be in receipt of Indian
Rupees (INR) and will wish to sell it for D Marks on his local market. If on the other hand, the machine is
invoiced in D Marks, then the Indian buyer will first have to buy the D Marks with which to buy the
machine.
Either way a foreign exchange transaction is involved for somebody. If the goods are invoiced in a
third currency, for instance US dollars, then first of all the Indian buyer must buy the US dollars and arrange
payment in US dollars to the German supplier. In turn the German supplier must then sell the dollars and
convert into D Marks to pay his local expenses in producing the machine. In this event we have two foreign
exchange deals to do, in the previous case only one.
FOREX OPERATIONS BASICS:
The subject of Foreign exchange is surrounded in mystic for many and as a result there is tendency to
believe that it must be much more complex than is actually the case is. However the truth is that, with all the
complexities in Foreign exchange operations, and despite many centuries of evolution, only four types of
deal have so far come in to existence. They are:
BORROW
LEND
BUY
SELL
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 subject can be easily understood. All the other more sophisticated
types of transaction are merely combinations of the above four transactions.
PLAYERS IN THE FOREIGN EXCHANGE MARKET:
The participants in the Forex market can be classified in the following three classes
i) Commercial Banks:
They participate as an intermediary for their clients / customers who wish to operate in the market.
White dealing for their clients, its own foreign exchange position changes. Then they operate on their own
account to square off their position. Now that Banks have been permitted to invest / borrow to the extent of
15% of their Net worth in / form the overseas market, Banks are operating to take arbitraging opportunities
in the Forex market.
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ii) Corporate Customers / clients:

Most of the Foreign Exchange transactions originate from Export/ Import and / or Direct
Investments/Borrowings. Export/Import usually involves the Corporate in the country. In these transactions,
the corporate concern is not only the Foreign currency he is receiving or paying but also the rate that may be
prevailing when he actually get the payment or makes the payment. Hence he would wish to cover the risk
of Exchange rate fluctuations.
Foreign Direct Investment constitutes not only the acquisition of assets overseas, but also generation
of liabilities abroad. Hence in all such cases, the Corporate may have to hedge to cover the risks involved.
iii) Reserve Bank of India:

RBI's one of the main task, apart from the control of inflation and price stability, is Exchange rate
parity. In a fixed exchange market, the role was to maintain the value of the Rupee against the foreign
currencies. However now that we are slowly entering into a free / floating exchange market, RBI, like any
other central Bank may intervene to maintain the Exchange rate parity at desired levels, contain the volatility
and infuse confidence in the local currency in the international market.
HOW THE FOREX DEAL TAKES PLACE:
A foreign exchange deal is a contract to exchange a bank balance in one currency for a bank balance
in another currency at an agreed price for settlement on an agreed date. Here the rate at which one currency
is agreed to be exchanged for another is stated as Exchange rate.
Let us take the example of a customer wishing to buy US dollar and to seli Indian Rupee, and for
simplicity we will assume that the rate of exchange is INR 39.45 =$1, the customer is buying US $ 5 million
for settlement on 18 March and has a dollar account at ABC Bank in New York.
The effect is that a contract has been made to exchange a Rupee bank balance for a US Dollar bank
balance. Also, of course, funds belonging to the customer will now be provided 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
US $ 5 million against Rupee or' squared off' the deal in the market, so as to square their position again.
The normal foreign exchange deal done in the market is for 'value spot'. This means that contract will
be settled on the 'spot' date which is normally set 2 days ahead of the day on which the deal is done. This
two-day period allows time for the various payment instructions to be exchanged and effected and for any
exchange control formalities to be cleared.
Most of the deals in the foreign exchange market are done on spot basis. Spot Deals are for
immediate delivery of one currency with cash settlement in two working days time. If the cash settlement is
made on the same day of the delivery of the currency, it is termed as Cash / Ready transactions. If the Cash
settlement is on the next working day, it is called a TOM (short of 'tomorrow'). In Forward Deals, prices are
agreed today but payable on a future delivery date, usually beyond spot period. For example an exporter
expecting receipt of Foreign exchange at the end of 3 months can sell these amount of foreign exchange, in 3
month forward. This guarantees him the sale proceeds in terms of his local currency. Generally Forward
price is the spot price ruling on the day the deal is done plus the interest differential on the two currencies
involved, for the period concerned.
For eg. Suppose that spot US$ 1= INR 40 and the interest rates for 6 months period in US is 5.5%
while in India is 10%.
Here a Bank, say A, can borrow USD 1 mio (million) for 6 months @5.5% and sell it in the market
on spot rate and get INR 40 mio. INR 40 mio is kept in inter bank term money at 10% for 6 months.
Simultaneously, assuming that the forward rate for US$/INR-is same as the spot, the Bank buys US $ 1 mio
6 months forward to repay his loan.
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CROSS RATES:
Cross rate is another term, which is very often used in Foreign Exchange operations. A cross rate is
the rate of exchange between two currencies that does not involve the domestic currency. However in the
international markets today cross rates mean rates that do not involve the US Dollar.
This term can be better understood from the following example. An Indian businessman is on tour in
Germany and wants to know what happened to value of Indian Rupee (INR) against US Dollar (USD) since
he left London couple of days back. It was USD 1= INR 39.5351 (expressed in Indian Term) when he was
just leaving India. The German News paper states the price of foreign currency in terms of their local
currency i.e. Deutsche Mark (DEM). He gets the following rates from the Newspaper
(i) US$1 = DEM 1.8280 (ii) INR 100 = DEM 4.63
The businessman wants to know the value of US$ in Indian terms. The second quote given above can be
expressed in Indian term by taking reciprocal of the rate.
Then DEM 1 = INR 100/4.63= INR 21.5983.... (i)
By taking reciprocal of first quote we get value of DEM in US terms as follows:
DEM 1 = US $1/1.8280 = US $ 0.54705 ...(ii)
Combining (i) and (ii) above, we get DEM 1 = INR 21.5983 = US $ 0.54705 i.e., US $ 0.54705 = INR
21.5983 Therefore value of USD in Indian term is USD 1 = INR 21.5983/0.54705 = INR 39.4814
Thus the Indian Businessman understands that value of US Dollars in Indian terms of has come
down from INR 39.5351 to INR 39.4850
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DERIVATIVES
INTRODUCTION:
Derivatives are financial instruments (derived from certain basic elements such as exchange rates,
interest rates, equities and commodities called the underlying assets) whose value reflects the changing
prices of the underlying assets. Derivatives markets have a valuable economic role to play in fostering
financial efficiency. A reduction of risk is a reduction of uncertainty facing the investor and a derivative
meets exactly this objective.
Derivatives ensure an even distribution of risk in the financial system, which reduces the number of
potential explosive points and proneness of the system to crisis precipitation. The origin of all derivatives is
the commodities markets. In the early days most of the derivatives trading was in agricultural commodities.
Today more than half of the trading is in financial instruments such as bonds, stocks and foreign currencies.
Although trading in foreign currencies and treasury bonds started in the seventies, the derivatives market got
a real boost only in the eighties when stock index 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.
Futures markets have become an integral part of how financial institutions such as banks, pension funds,
insurance companies manage their risks and their portfolio of assets.
World over there has been a phenomenal growth in the derivatives market in the last 25 years. The
market has invented and innovated ingenious ways to manage the market risks, which have manifested
themselves as derivative instruments. Some of the key derivative products are discussed below:
FORWARD CONTRACTS:
In a forward contract a seller agrees to deliver goods to the buyer on some future date at some fixed
rate. No money changes hands at the time the contract is entered into. For example a farmer growing onions
may sell some portion of his crop before harvest to the buyer at a fixed price, for delivery after harvest. For
the farmer this transaction reduces the risk of selling in the market after harvest at lower prices. He has
locked in a profit by this operation. This profit would have been more or less if he had waited until the
harvest to sell onions at the 'spot' price then prevailing in the 'cash market'. Thus the farmer has 'hedged'
himself against the risk of a downward movement in onion prices by entering into a forward contract in the
forward market.
Forward markets have existed and flourished for centuries. The initiation of organized futures trading
in 1848 at Chicago Board of Trade was a natural outgrowth of the active forward market in commodities
that existed at that time. Two of the largest forward markets today are swaps and currency markets. It is
estimated that more than $ 500 billion of both swaps and foreign currency forward contracts are written
every year.
FUTURES CONTRACTS:
A futures contract is an agreement between the seller and the buyer which requires the seller to
deliver to the buyer a specified quantity and grade of an identified commodity at a fixed 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 exchanges. While futures contracts are similar to forward
contracts they differ from each other in the following respects.
A. Whereas forward contracts are custom tailored contracts, futures are standardized contracts.
B. Futures have no buy sell spreads. Instead there is an explicit brokerage fee.
C. Forward contracts are one to one transactions between known counterparties. Historically the parties
involved in forward markets have been large and sophisticated. The main reason for this is that all
forward contracts entail credit risk; the risk that one of the counter parties will default on the
obligations under the contract. In contrast to this the future contracts are exchange-traded instruments
where for the buyer as well as the seller, the counterparty will be the exchange.
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D. Forward contracts are normally made with an intention to deliver or make cash payment on
expiration of the contract. Delivery is not made in connection with a futures contract, even if the
contract contains specific delivery provisions.
The reason why delivery is not made is that people typically enter into futures contracts not to buy or
sell the underlying, 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 equal 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 exchange itself is the counterparty to every contract.
The contracts are also entered into by speculators. They do not normally trade in the underlying and
hence do not have to invest the whole corpus at one go is likely to drive the prices up.
SWAPS:
Before the invention of interest rate swaps, corporate borrowers relied almost exclusively on
creditors for interest rate hedges. The act of borrowing and establishing an interest rate risk were
inseparable. A company choosing to raise fixed rate funds had to borrow/from fixed rate investors, whereas
variable rate funds were provided by variable rate investors. Matching the choice of creditors and the type of
interest rate was difficult. The instrument of swap was born out of the necessity to get around these
problems.
What are swaps?

Swaps are exchanges of cash flow obligations of two or more parties. An interest rate swap is a
contractual agreement between two (or more) parties to exchange differently structured interest rate
obligations based on notional principal amount. The agreement is normally executed through a broker or a
market maker generally an investment bank. The party with access to but does not demand for fixed rate
funds raises them through a bond issuance, the party with demand for fixed rate funds but access to only
variable rate funds raises the variable rate funds. Then an interest rate contract is arranged between the two,
whereby one party (the party wishing to borrow fixed rate) pays a fixed annuity in exchange for a variable
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 exchange of interest payments, one in which no principal is
exchanged.
OPTION CONTRACTS:
An option unlike a futures contract imposes an obligation on only one party. The contract gives the
holder (buyer of the option) the right, but not the obligation to buy or sell a stated quantity and quality of an
underlying asset on a future date at a price agreed to while entering into the contract. A "call option" gives
one the right to buy and a "put option" gives one the right to sell. If the buyer of the option chooses to
exercise this right the seller of the option is then obligated to perform - that is either to purchase or sell the
commodity. When the buyer of the option invokes his rights'he either pays the agreed- upon price (strike
price) and receives delivery of the commodity (a call option) or delivers the commodity and receives the
payment (a put option). The seller of an option contract is called the 'writer of the option'.
Options are of two types. European option and American option. In a European option the holder can
exercise his right only on the expiration date. In an American option he can exercise the right on any date
between the purchase date and the expiration date.
It is pertinent to note that a 'put is not the reverse of a 'call'. Puts and Calls are two distinct
instruments, each of which may be bought or sold. Thus, whereas futures quotes give just one price per
instrument per period, options quotes give - two prices: one for relevant put and one for relevant call.
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MONEY MARKET
INTRODUCTION & DEFINITION:
The money market is a wholesale market for low-risk, highly liquid, short-term lOUs (IOU =
Promissory Note (I Owe You)). It is a market for various sorts of debt securities rather than equities. Within
the confines of the money market each day banks actively trade in various instruments. The transactions
include outright as well as "repo transactions ". The heart of the activity in the money market occurs in the
trading rooms of dealers and brokers of money market instruments
Financial literature provides no standardized definition of the term "money market". Some writers
employ the term broadly to include the complex arrangements by which lenders and borrowers of money
capital (capital other than equity 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 "Capital Market" except that
it does not include the equity transactions. At the other end, money market embraces only open markets for
near-money, liquid assets.
As per the narrow definition, Money Market embraces the various arrangements that have to do with
issuance, trading and redemption of low-risk, short-term, marketable obligations whose prices vary only
moderately. Both long-term obligations and customer loans are excluded. The boundary line is drawn to
include only those instruments that possess high degree of liquidity and at the same time provide 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 liquid and can be turned over quickly at low
cost and it provides an avenue for equilibrating the short-term surplus funds of lenders and the requirements
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 invariably form a continuum.
ECONOMIC FUNCTION:
The basic function of the money market is to provide efficient facilities for adjustment of liquidity
positions, of commercial banks, non-bank financial institutions, business corporations and other investors! A
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 activities. 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 objective and free from personal considerations.
Obligations 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. A number of transactions take place daily shifting vast sums of money between the
banks. The money market offers a forum for the banks in managing their short-term liquidity. Banks may
either be in surplus funds or in deficit; they will have to take care of their daily requirements for funds to
meet daily drawings on them and CRR. They may have 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 have to deploy these funds profitably. Money market offers opportunities
for short-term placements of funds through short-term money market instruments. Apart from the banks,
money market provides opportunity to other institutions and corporate to deploy their short-term surpluses.
Reserve Bank of India through various 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. At present, there
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is no benchmark rate for either short-term or long-term investments in securities/instruments. The varied
activities of money market participants determine short-term rates.
SHORT TERM INSTRUMENTS (MONEY MARKET INSTRUMENTS):
Call Money Market:
Call money refers to that transaction which is received or delivered by the participants in the call
money market and where the funds are returnable next day. The call money transactions are also referred to
as overnight funds. Notice money on the other hand is a transaction where the participants receive or deliver
for more than two days but generally for a maximum of fourteen days. In both the cases the transaction is
unsecured. As a prudential measure therefore, a counterparty exposure limits are fixed according to which
the lender lends money. Resorting to the call/notice money transactions reflect temporary mismatch of funds
during the short period of 1 to 14 days as the case may be. The participants, who have surplus, lend money
to shed the mismatch for the relative period. The participants who are short of funds, on the other hand,
would borrow funds for the relative period.
The rate at which the funds will be deployed or borrowed will be determined on the basis of the
market conditions at a given point of time. When the market is highly liquid the funds would be easily
available whereas the funds will be difficult to obtain in a tight money market conditions. The rates are low
in easy money (liquid) market and the rates would be high in tight money market. A liquid market can turn
tight even overnight due to sudden changes in the financial environment, the policy of the central monetary
authority or the Government etc or even any other external factor which has an implication on the financial
market and also vice versa.
Treasury Bills:
Treasury bill is a short-term money market instrument at the same time, a short-term security by
which the Government raises finance to meet its short-term requirements. The investment in the Treasury
bills is reckoned for the purpose of Statutory Liquidity Reserve (SLR) requirements. The periodicity of the
T-Bills is : 14 days, 28 days, 91 days, 182 days and 364 days. Periodically, Reserve Bank of India comes out
with the T-Bills auctions (the T-Bills are offered for bids and do not carry a fixed coupon). Whereas in the
case of 91 day T-Bill the amount is notified in the case of other T-Bills it is not. T-Bill transactions are
routed through the SGLA/c. Being a short-term instrument, it has a good secondary market. All 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-competitive bids. In absence of a developed money market, the
T-Bill rate becomes a reference rate for the relative maturities.
Bank Deposits:
The banks are permitted to keep deposits with other banks for a period of 15 days and above. The
rate of interest on such deposits is free to be determined by the two banks between themselves through
negotiations. These deposits are not reckoned for the purpose of Cash Reserve Ratio (CRR) requirements.
Like call/notice money transactions and the deposit transactions of the bank the transaction of the bank
deposit is evidenced by way of deposit receipt. These deposits are not transferable but they could be
prematurely closed at the discretion of the lender.
Certificate of Deposits (CDs):
The scheme of Certificate of Deposits was introduced by RBI as a step towards deregulation of
interest rates on deposits. Under the scheme Scheduled Commercial Banks, Co-operative Banks (except
Land Development Banks) can issue CDs, for a period of not less than 3 months and upto a period of not
more than 1 year. The Financial Institutions specifically authorised by RBI, however can issue CDs for a
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period not below 1 year and not above 3 years. Due to the negotiable character of the CD the same could be
sold after the lock-in period thus enabling the investing bank to create liquidity. This instrument is useful to
the corporate for parking their surplus short-term funds.
Commercial Paper (CP):
In view of the development of the money market, yet another instrument was introduced in the form
of Commercial Paper. Similarly highly rated corporate borrowers have been permitted to issue CPs as a
source of short-term borrowing. To be eligible to issue CP a company should satisfy the following criteria :
1. The tangible net worth of the issuing company is not less than Rs.4 Crores. Tangible net worth
means the paid-up capital plus free reserves (including balances in the share premium account,
capital and debenture redemption reserves and any other reserve not being created for repayment
of any future liability or depreciation in assets or for bad debts or reserve created by revaluation
of assets), as per the latest audited balance sheet of the issuing company, as reduced by the
accumulated balance of loss, balance of deferred revenue expenditure as also intangible assets.
2. Working capital (Fund based) limit of the company is not less than Rs.4 Crores.
3. Every issue of CP shall be treated as a fresh issue, in other words before another CP issue is
offered the earlier issue has to be repaid.
4. CPs are to be issued in multiples of Rs.5 lakhs with a minimum of Rs.25 lakhs (face value).
5. CP is in the form of Usence Promissory Note negotiable by endorsement and delivery as per the
format prescribed by RBI. It shall be issued at discount as in the case of CDs. The rate of
discount shall be determined by the issuing company. The issuing company shall bear the
expenses of the issue of CP such as dealer's fee, rating agency's fee and any other relevant
charges such as stamping charges as per Indian Stamp Act etc.
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FUNDS & LIQUIDITY MANAGEMENT
FUNDS MANAGEMENT:
Funds management represents the core of sound financial planning. Although it is not a new concept,
practices, techniques, and norms have been revised substantially in recent years. Funds management is the
process of managing balance sheet and off-balance sheet instruments to maximize and maintain the spread
between interest earned and paid while ensuring the banks ability to pay off liabilities and fund asset
growth. Therefore, a banks funds management practices will affect earnings and liquidity.
A sound basis for evaluating funds management is by understanding the bank, the customer mix, the
asset liability composition, and the economic and competitive environment. The adequacy of policies,
procedures, and management information systems must be determined, and the effect of funds management
practices on liquidity and interest rate risk analyzed. Liquidity risk is related to, but substantially different
from, interest rate risk. Liquidity 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 existing asset quality deterioration. Poor asset quality will introduce maturity mismatches
through assets failing to pay off as agreed, or repricing mismatches through the borrowers inability to pay
higher rates on variable rate loans. Rumored asset problems may cause a run on deposits, which, in turn, will
result in both maturity and price mismatches.
Liquidity Management:
Liquidity represents the ability to accommodate decreases in deposits and other purchased liabilities,
and fund increases in assets. Funds must be available at reasonable prices relative to competitors, and in
maturities required to support prudently medium to longer-term assets. Liquidity is essential in all banks to
compensate for expected and unexpected balance sheet fluctuations and to provide funds for growth.
The cost of liquidity is a function of market conditions and the degree of risk, both interest and
credit, reflected in the banks balance sheet. If liquidity needs are met through holdings of high quality
liquid assets, the cost becomes the income sacrificed by not holding higher yielding long term and/or lower
quality assets. If liquidity needs are not met through liquid asset holdings, a bank may be forced to acquire
additional funds under adverse market conditions at excessively high rates. In large banks, however,
maturing assets or their liquidation do not provide assured liquidity continuously. In those banks, asset
liquidity is supplemented by the ability to roll over maturing liabilities and acquire new ones daily.
Brokered deposits are one example of acquired liquidity. Such deposits are placed by money brokers
with banks offering the highest rates. Often these are problem banks that are in need of liquidity but can
least afford the higher interest expense. A banks reliance on those funds should be investigated.
The adequacy of a banks liquidity will vary from bank to bank. In the same bank, at different times,
similar liquidity positions may be adequate or inadequate depending on anticipated need for funds. In
addition, a liquidity position that is adequate for one bank may be insufficient for another bank. Determining
the adequacy of a banks liquidity position depends upon an analysis of the banks:
Present and anticipated asset quality.

Present and future earnings capacity.
Historical funding requirements.
Current liquidity position.
Anticipated future funding needs.
Options for reducing funding needs or attracting additional funds.
Sources of funds.
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To provide funds to satisfy liquidity needs, a bank must perform one or a combination of the
following:
Dispose of liquid assets.
Increase short-term borrowing (and/or issue additional short- term deposit
liabilities).
Decrease holdings of nonliquid assets.
Increase liabilities of a term nature.
Increase capital funds.
Forecasting future events is essential to liquidity planning. Management must consider the effect
those events are likely to have on funding requirements. If management does not consider future events and
plan the banks funding strategy accordingly, the bank will be run by the dictates of the economy rather than
by management. All banks are affected by changes in the economic climate. However, sound financial
management can buffer negative changes and accentuate positive ones.
Information that management should consider in liquidity planning includes:

Economic forecasts.
Internal costs of funds.
Mismatches in the balance sheet.
Interest rate forecasts.
Anticipated funding needs.
Management also must have contingency plans in case its projections are wrong. Effective
contingency planning involves identifying minimum and maximum liquidity needs and weighing alternative
courses of action designed to meet them.
Contingencies that may affect a banks liquidity include:

New business opportunities.
Acquisitions.
New management.
Earnings decline.
Non performing asset increase.
Downgrading by a rating agency.
Once liquidity needs have been determined, management must decide how to meet them through
such methods as asset management, liability management, or a combination of both.
23
RISK MANAGEMENT
INTRODUCTION:
From an era of glorious certainties, the world now thrives on uncertainties. Closer home, the Indian
financial markets have witnessed far-reaching changes at an unprecedented pace over the past five years.
Banks faced intense competition for business on both the assets as well as the liabilities sides. During the
same period the banks also witnessed increasing volatility in both domestic interest rates as well as foreign
exchange rates. Also external shareholders as well as the government/RBI exerted pressure upon the
management of the banks to maintain spreads, profitability and long-term viability. The combination of the
above factors has necessitated the banks to take a comprehensive and structured look at the risks associated
with the business of banking. The above pressures will only increase with time. The management of banks
will have 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 driven by its corporate strategy.
Risk is a part of any business's lexicon and understanding and subsequently, managing it is the most
important concern. In banking as well, risk is inherent in the business, and as Mr. Walter Wriston, ex-CEO,
Citibank put it, "The business of banking is the business of risk management, plain and simple, that is the
business of banking".
Given the importance of risk management, it is no wonder that it is today receiving scrutiny from the
world's top banking regulators. Bank of International Settlements (BIS), the Federal Reserve activities in the
United States, Bundesbank in Germany, Reserve Bank of India have all indicated their concern at the risk-
taking of banks. These regulatory bodies have expressed concern as not only has the environment become a
lot riskier with exchange rates and interest rates being extremely volatile, but also a large amount of bank
capital is spread internationally looking for returns.
The need to study the impact of recent volatility and the appropriate measures and controls required,
takes us to the very root. What does risk mean and where can it reside in a bank's operations.
MEANING OF RISK IN BANKING OPERATIONS:
What exactly is risk and how is it defined? Risk can be defined as the uncertainty in outcome or
more specifically as the volatility of unexpected outcomes. The origins of the word risk can be traced to
Latin, through the French risque and the Italian risco. The original sense of risco is cut off like a rock, from
the Latin re-, back, and secare, to cut. Hence, the sense of peril to sailors who had to navigate around
dangerous, sharp rocks.
Like sailors, bankers too need to navigate the seas of financial and non-financial risks.
NON-FINANCIAL RISKS:
The non-financial risks to which banks are exposed to, are : Business risk and Strategic risk. The
description of each of these risk is given below:
a) Business risk: These are the risks that the bank willingly assumes to create a competitive
advantage and add value for shareholders. Business, or operating risk pertains to the product market in
which the bank operates, and includes technological innovations, marketing and product design. Products
designed by the bank may be made superfluous by technological advancement. An example would be door-
to-door deposit marketing that could prove very costly in comparison with internet driven banking. A bank
with a pulse on the market and driven by technology as well as a high degree of customer focus could be
relatively protected against this risk.
24
b) Strategic risk: These are those that result from a fundamental shift in the economy or political
enviro'nment. Such an example would be the nationalization of Indian banks or on the international arena,
the negative sentiment against derivative transactions in which all derivative dealers were caught (after the
fall of Barings and other highly publicized derivative disasters including Gibson Greetings, Orange County).
Strategic risks usually affect the entire industry and much more difficult to protect against.
FINANCIAL RISKS:
The financial risks also are of a myriad nature. Generally, financial risks are classified into the broad
categories of market risks, credit risks, liquidity risks, operational risks, and legal risks.
Though the regulators the world over have chosen to focus on credit risk, other risks too are very
important and are increasingly coming into the focus and receiving attention from the authorities. An outline
of each of the major risks can be seen below,
Market risk: Market risks are those which cause volatility in earnings or value owing to
variations in market factors like interest rates, exchange rates, equity or commodity
prices. As against other risks like credit risks which affect specific banks (owing to bank-
specific credit decisions), market risks affect the industry as a whole. The impact on each
bank would however vary depending on the exposure of each bank. These would include
basis risk - an event that occurs when relationships between products used to hedge each
other break down.
Market risk can take two forms: absolute risk, measured by the loss potential in rupee
terms, and relative risk, relative to a benchmark index. While the former focuses on the
volatility of total returns, the latter measures risk in terms of tracking error or deviation
from an index.
Credit risk: 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. An example being if the bank has placed a CP with company X on
the back of a deposit from depositor Y. When company X is unable to honor the
repayment of the CP, the bank suffers a set back as it has to make good the amount to
depositor Y in any event. More generally, credit risk can also lead to losses when debtors,
even when not defaulting, are downgraded by credit rating agencies, usually leading to a
fall in the market value of their obligations (and also a rise in cost of new borrowings).
Liquidity risk: Liquidity risk usually takes two forms: market or product liquidity and
cash flow or funding.
Market or product liquidity i.e. the first type of risk arises when a transaction cannot be
conducted at prevailing market prices due to insufficient market activity. This can occur
in markets that are very shallow or products that have been specifically designed (Over
the Counter products). It would be a big problem for OTC contracts and when dynamic
hedging is used.
Liquidity risk is very difficult to quantify and it can vary across market conditions.
Market/product liquidity risk can be managed by setting limits on certain markets or
products and by means of diversification.
The second type of risk refers to the inability to meet cash flow obligations, which may
force early liquidation. Funding risk can be controlled by proper planning of cash flow
needs (by setting limits on gaps) and by diversification.
Operational risk: Operational risks refer to potential losses resulting from inadequate
systems, management failure, faulty controls, fraud, or human error. This includes
execution risk, which encompasses situations where trades fail to be executed, sometimes
leading to costly delays or penalties, or more generally, any problem in back-office
25
operations, which deal with the recording of transactions and reconciliation of individual
trades with the bank's aggregate position.
Operational risk also includes fraud, situations where traders intentionally falsify
information, and technology risk, which refers to the need to protect systems from
unauthorized access and tampering. Other examples are systems failures, losses due to
natural disasters, or accidents involving key individuals. The best protection against
operational risks consists of redundancies of systems, clear separation of responsibilities
with strong internal controls, and regular contingency planning.
Valuation issues also create potential operational problems. Model risk is the subtle
danger that the model used to value positions is flawed. Traders using an option-pricing
model for example would be exposed to model risk if the parameters were erroneous.
Legal risk: Legal risks arise when counter-party does not have the legal or regulatory
authority to engage in a transaction. It can take the form of shareholder lawsuits against
corporations that suffer large losses. Legal risks also include compliance and regulatory
risks, which concern activities that might breach government regulations, such as market
manipulation, insider trading, and suitability restrictions. The regulatory framework,
however, varies widely across countries and even within a country, may be subject to
changes and differences of interpretation. Imperfect understanding of regulations can lead
to penalties. Regulatory risk manifests itself in enforcement actions, and interpretation.
RELATIONSHIP WITH OTHER FINANCIAL RISKS:

Exposure to one risk could lead to exposure to another. It is very possible that the risks faced by the
bank be correlated. For an example the telescoping of market and credit risk, consider the overseas debt
crisis of the 1980s. American (and other) commercial banks had been eager to lend to developing countries
like Brazil and Mexico, but they hoped to escape exposure to currency, interest and credit risk. An
instrument known as the syndicated Eurodollar loan seemed to provide 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 governments (which were unlikely to go out of business). But, after US interest rates skyrocketed in
the early 1980s, countries like Mexico and Brazil went into default: they were unable to make the interest
payments on their loans and the general credit assumption that governments do not default proved to be very
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.
26
MECHANICS
INTRODUCTION:
While the processes of treasury operations and the basics behind the services that banks offer to meet
them have remained pretty much unchanged for quite a long time, technology has allowed for increasing
automation, improved timeliness, greater accuracy, and a complexity not even previously considered. Over
the last ten to fifteen years corporate treasury management systems (CTMS) have developed from
sophisticated spreadsheets, through simple proprietary bank-provided cash management applications, to
increasingly complex and capable networked treasury management systems. Although there are still some
treasuries around today that are content with a spreadsheet package, the further treasury systems evolve, the
more treasurers require a wider range of sophistication in their systems.
As technology develops, so there is the ability for systems to become more advanced; with this
advanced technology available, treasuries are then forced to look at ways to increase the cost effectiveness
of their functions. Similarly, the greater the need to cut costs within a treasury function, the greater need to
provide 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 investment management solutions, covering the front-,
middle- and back-office of a bank, primary dealer or corporate treasury. It supports a wide range of
instruments including Fixed Income Securities, Money Markets, Foreign Exchange, Equities and also
Derivatives like Futures, Forward Rate Agreements, Interest Rate Swaps and Currency Options. Integration
is accomplished at many levels - 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 overall treasurer
perspective
ITMS facilitates Straight Through Processing (STP) by supporting interfaces to a number of external
systems surrounding the Treasury: among others, trading platforms and rate feeds, confirmation and
payment messaging systems, trade finance applications, core banking and general ledger systems.
27
BUILDING A SUCCESSFUL TREASURY IT STRATEGY

Pressures to improve straight-through processing rates and deal with new accounting regulations
such as IAS 39 are forcing many treasuries to revisit their overall IT strategy. The right platform can
enhance decision-making, control and communications with operating units and banking partners. Just as
important in these cost conscious times, an IT review may reveal opportunities to reduce transaction-
processing costs.
The treasury's system platform forms the backbone of its operations and includes several hardware
and software components, which are either company-wide standard or treasury specific. It is developed in
line with the treasury's IT strategy, in accordance with modern methodologies, and designed, implemented
and managed to enable a harmonious and flexible environment with the necessary level of security and
availability.
The treasury IT strategy is a documented vision of how that information technology will be
strategically managed within an organisation, providing a means of measuring the effectiveness of plans,
visions and targets. It is also key for cost control, and a foundation for investment and organizational
decision-making. It will help you to create a clear structure and is a means of internal and external
communications. Basically, it serves as a framework to capitalize on previous investments as well as to
facilitate necessary developments.
The treasury's strategy and targets usually aim to satisfy management expectations of having
flexible, reliable and low-cost funding, financial risk control and efficient processing with minimized
operational risk. From these targets the goals for the supporting organisation and systems platform can be
derived and defined to achieve synergies and higher process efficiency, including straight-through
processing (STP). The treasury then benefits from economies of scale, reduced vulnerability by decreasing
the dependence on key staff and higher availability and performance.
Five Principal Building Blocks:

The IT strategy is developed using five principal building blocks: business requirements; system
platform; components; IT organization; and support organization.
Figure 1: The Five Building Blocks to a Successful Treasury IT Strategy
28
Mapping the Business Requirements:

Mapping of the present set up, expectations and demands is essential. Not only those within
the treasury, but also those units with business interfaces to the treasury. Often, it is also advisable to make
use of 'know-how' from outside the group, from banks and other information providers, on possible
solutions. A clear overview of the present set up will also prove helpful when deciding how to implement
the new platform.
System Platform Options:

Once you have determined what the business requirements are, it is necessary to develop a system
platform or infrastructural solution, which will best achieve these requirements. For example, what
alternatives are available? What is the group's IT policy on system platforms? What factors will influence
the choice? There are a number of factors that will determine the final decision. The geographical location of
the treasury will determine the required IT capabilities, as will the financial markets that need to be covered.
How 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 requirements when making a
decision. Internal reporting issues and statutory demands should be considered. Other influencing factors
include application types, the group technical infrastructure and overall integration requirements, and the
business and technical support options available.
To determine the platform options demands technical expertise 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.
Choosing Components:
Components 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 have 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 level description of components with a rough list of their
pros and cons. A more in-depth analysis and recommendation of components is usually performed when the
IT strategy is implemented.
IT Organisation:
A system platform created, implemented and supported, based on the treasury's business
requirements, will prove to be a strong foundation to facilitate the fulfillment of business targets and help
to fatten the bottom line. Therefore, many treasuries choose to devote resources to manage and further
develop the system platform once it has been implemented. A dedicated treasury IT manager is becoming
more common and their role is to manage the treasury's system environment. This is highly complex and
consists of far more components than in other business units, usually with higher demands on availability
and performance.
Support Organisation:
The support organisation, which essentially supports the treasury's system platform, consists of a
number of application and hardware providers, internal IT support and treasury IT supports, among others.
To find a manageable mix and a workable management organisation, while avoiding dependency on key
personnel, can often prove difficult. The design of the support organisation is crucial in order to achieve
expected synergies, increased efficiencies and cost control.
Procedures for quality assurance (QA), for example, system documentation, maintenance and
support logs and segregation of duties, further strengthen the chances of a successful platform
implementation and smooth operations.
29
DEVELOPING THE STRATEGY DOCUMENT

Having developed the IT strategy using the five building blocks (see Figure 1), the strategy is then
documented in the strategy document. There are several ways to achieve this and the following model serves
as a framework.
Figure 2: Steps To Developing And Presenting The Treasury IT Strategy
Analysing the findings from the five building blocks will lay the foundation for the strategy. All
treasury internal factors and treasury external factors, as well as the present treasury platform, are mapped
and described (see Figure 2). With this information it is possible to agree on a long-term vision statement
that may typically contain expressions such as "scalable", "global", "secure" and "high availability". Avoid
words like "benchmark" and "best-of-breed", since interpretations can vary. Be as precise as possible and
strive to make the visions timeless.
With the vision statement agreed the next step is to perform a S.W.O.T analysis from the treasury's
perspective. Discuss the strengths and weaknesses of the treasury operations and the opportunities and
threats emanating from outside the treasury group. At this stage any issues affecting the strategy will be
confronted by the organisation.
With the vision clear and the S.W.O.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
"streamlining technical interfacing using middleware", "24-hour operations", "contingency and recovery
planning", "accessibility via the internet.
With the strategy clearly set out, details of the targets and actions are documented. This is very much
hands-on and divides tasks among members of the project group, which includes the users, internal IT,
support and third parties.
Finally, it is important to be aware of the critical success factors when moving forward. Initially, it is
essential to get commitment from senior management as well as from the users. Make comparisons between
the cost of investment against the operational and financial risk and/or the group's financial net. With these
factors secure, make realistic time plans ensuring that there is enough time in reserve for contingency. When
implementing, do so using a step-by-step approach. Above all, be consistent and stay within the strategic
framework.
30
Increasing Treasury Efficiency in an e-trading Environment

In recent years, many large- and medium-sized companies have implemented or upgraded their
treasury management systems (TMS). However, these systems are not yet to provide the fully integrated,
efficient solution required for a seamless combination of liquidity management, transaction execution,
settlement and reporting. Yet, electronic trading platforms are now maturing to the point that they can help
companies to make headway in overall efficiency and controls. This requires standards for integration that
can be realized with an effective co-operation of system providers, trading platforms, corporate clients and
their banks.
Drive for Integration:

With the development of XML-based real-time interfaces, reliable and relatively low-cost
connections can be established between systems with different strengths in functionality. As a result,
companies can realise efficient system support for their varying operations by implementing a limited set of
well-designed interfaces. This avoids the eternal search for one system that covers all functionality needs for
a longer period of time and its corresponding costly implementation. With the introduction of electronic
trading via the Internet, this process is being accelerated. Both companies and their banks have an interest in
realising low-cost integration across organisational boundaries to better trade execution, settlement and
controls.
Foreign Exchange Trading Platforms:

With the proper functionality, the recently emerging internet-based trading platforms allow banks to
benefit from integration between themselves and their banks and to share best practices in trading and
settlement processes without lengthy and costly implementation processes. Such improvements can be
continuous as long as the platforms continue to develop new functionality, which requires sufficient fair
competition between the platforms. In this context, in 2000, Shell made an equity investment in Currenex,
an operational, independent, multi-bank internet-based foreign exchange (FX) service, and announced its
active support of the platform's development.
Developments in the internet and improvements in banks' IT infrastructures have propelled these
platforms. For more than a decade, banks have gathered experience in electronic trading of financial
instruments via specialized trading platforms such as EBS and Reuters, which were designed for use in
inter-bank markets. While banks have been trading electronically with each other for several years, they
have been reluctant to execute transactions with clients by any other means than over the telephone.
However, three years ago, due to market pressure and the need to improve internal efficiencies, several
banks moved to provide proprietary trading solutions to a limited group of clients. This required significant
efforts on behalf of those banks to realise the internal integration and centralisation of credit management,
pricing, trade execution and settlement operations. These banks have effectively created a backbone for the
multi-bank electronic trading. Not all banks are fully prepared technically, as yet for such electronic trading.
To ensure sufficient openness and competitiveness in the FX market, as well as other markets the trading
platforms may cover in the future, it is important these platforms, such as Atriax, FXall and Currenex, not
only support multiple technical infrastructures but also partly manual processes on the banking side.
Improvements in Trade Execution:

Trade execution and straight-through processing (STP) has been greatly improved by electronic
trading. In markets with frequently changing prices, such as FX and short-term cash markets, the best price
for a particular transaction cannot be discovered easily over the phone. Differences 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 liquidity offering that matches the needs of the company. Multi-bank electronic trading can
significantly improve trade execution, as long as the banks provide multiple price discovery mechanisms,
which are designed to find the best price in a variety of circumstances. For instance, smaller transactions can
be served with a reversed auction process but larger ones usually require a string of targeted transactions or
management of orders. Prime brokerage-type models should be added to allow companies to transact with
31
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 providing access to the liquidity of any
specific bank connected to the platform. Price discovery should also be supported by publishing on the
platform unfiltered indicative market prices from multiple sources that are independently involved in the
markets, such as inter-dealer brokers or inter-bank trading platforms.
Better Efficiency:
Apart from improved trade execution, the multi-bank trading platforms can boost operational
efficiency through streamlining internal processes around the transaction execution. This streamlining start
with the first level of integration through uploads of deals to be executed to the platform and deal capture of
executed deals in the TMS. This allows for a more efficient process for both clients and their banks but does
not provide seamless STP. First, trades do not only consist of single deals that will never be altered or
amended. Full STP requires, for instance, support for: 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 require the TMS to provide fully authorised and
verified deals to the trading platform. However, with the potential use of multiple trading platforms or
trading practices, this would require a fully functional, real-time interface with, in the background, real-time
data collection by the TMS. As an alternative, the TMS could with regular intervals provide in between
trading rounds, say the restrictions within which the trading platform controls and updates the trading
position until the next upload of data.
Processing of settlements can also be done in two ways; via 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 via the trading
platform directly and providing the status of settlement to the TMS after each step in the process for
monitoring and accounting purposes. Different solutions can suit different needs, but it also indicates that a
pragmatic approach does not necessarily lead to multiple standards.
As long as platforms and TMS providers can come to an agreement on the limited options and define
the data to be provided to or from a particular system, along with the protocols for the controlled exchange
of that data, various solutions can be implemented rapidly without large investments by workstation
providers or their clients.
Internal Transactions:
The internal liquidity management of companies can also be improved with the use of electronic
trading platforms. Transactions of FX, loans and deposits between a treasury and its subsidiaries are similar
to those with external counterparties. Therefore, trading platforms can provide value by allowing internal
trades to be executed via the same platform. It requires thorough netting and aggregation mechanisms, as
well as the ability for routing of these transactions through different treasury companies, for these platforms
to add value to existing internal trading processes.
At Shell, three operational models are supported. The preferred option is the automated zero
balancing of accounts between subsidiaries and central treasury. Second best is an automated transaction
execution of FX, loans and deposits between subsidiaries and central treasury. The third model enables
subsidiaries to operate through one single platform transactions with the central treasury whenever possible
and the remainder with local banks when required. Since a single platform is being used, this allows
centralised settlement of both external and internal transactions with the direct involvement of the trading
platform.
Co-operation With Banks:

There is an urgent need to improve the confirmation process with counterparty banks and standardise
the settlement of transactions with the involvement of several settlement banks. Confirmations can be
effectively dealt with by the trading platforms without the manual interference of a treasury's and banks'
32
back offices as long as the post-trade events previously described are dealt with. Discussions are continuing
with banks to accept the legality of confirmations registered by the electronic trading platforms.
Processing of payments and receipts requires improved interfaces between TMS and EFT systems or
between e-trading platforms and such EFT systems. A multi-bank solution with well-designed interfaces that
do not require limited manual controls is one good option. In October, 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 provided by the banks for corporates to be part of Swift via
bank-administered closed user groups is a positive step. The involvement 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.
Setting Standards For Integration:

Co-operation between TMS providers, trading platforms and their users is crucial in defining and
implementing the best way to integrate trading platforms with existing TMSs. Such co-operation will allow
all participants to rapidly reap the benefits of STP or realise greater operational efficiency, improved
controls and reduced error rates by connecting activities via the systems that support them. It is this and the
ability to accelerate the proliferation of best practices throughout the market, which drove Shell to form
Twist (the Treasury Workstation Integration Standards Team).
Twist is a coalition that brings together representatives from treasury departments, large banks,
leading providers of treasury workstation solutions and exchange trading platforms, which are driving
standards for electronic FX dealing and settlement among all participants of the FX market. The
organisation is open to all treasury providers and platforms.
Initially, Twist focused on two main areas of functionality: producing a standard for uploading trades
to be executed from supporting systems to a trading platform and for capturing FX trading details from a
trading platform in internal treasury management systems. The group launched the first version of the
treasury system interface standard in May 2001, followed by a second in September, which covers trade and
settlement confirmation, new trades, collections of trades, amendments, cancellations, allocations, rolls,
aggregations, and split settlements. Several Twist members are already using interfaces based on this
standard. The FpML FX Products Working Group has been working with Twist to incorporate the Twist
specifications into its own standards.
Ensuring Benefits:
Electronic trading and integration can improve the efficiency of treasury operations considerably. A
proactive approach, however, is required to align all the interests of corporates, providers and banks. By
driving the adoption of industry wide best practices at this early stage of the eFX market, fragmentation can
be prevented, thus avoiding the development of multiple standards among providers or dominant market
standards that do not suit all the different needs. Addressing the concerns of each party involved ensures that
operational standards developed within, for example, Twist will benefit all and will help drive the efficiency
and growth of the global FX market or other markets to be addressed in the future.
33
TREASURINET AN IDOL SOFTWARE

INTRODUCTION:
Like every other staff department Corporate Treasury departments see themselves confronted with
the challenge to exchange information with their operating companies in the most efficient way. Both
management and the operating companies expect to be bothered as little as possible and to receive
consolidated information back as quickly as possible. However, to fulfill these expectations Treasury
Departments nowadays are confronted with a heavy workload requiring a great deal of manual work. This is
caused by:
Consolidation of all required information that is delivered in different formats and exported from various
applications (spreadsheet, plain text, ERP exports, etc)
Distribution of Treasury information between operating companies and Corporate Treasury via all sorts of
communication channels (fax, phone, email)
The approach to Treasury Technology is that it should enable your organization to make the
transformation from existing operations based on various stand-alone applications to an integrated Treasury
Management solution, which allows Banks to operate and communicate according to best practices. To
achieve this Getronics Consulting found a solution in an application called TreasurInet.
What is TreasurInet?
TreasurInet is a complete web-based TMS with all required functionality. The integrated input
application can also be placed on top of your existing TMS, ensuring automatic Treasury information flow
throughout the entire company in a web-enabled environment. The entire system uses browser-based
software designed to enable entities to achieve the benefits of an integrated Treasury solution without the
cost of running a dedicated system themselves.
Among the functionality of TreasurInet is Inter Company Netting, Transaction Registration

(payments, deals, etc.), Cash flow Forecasting and In-house Banking. All data is processed directly on-line
and TreasurInet ensures that transactions are processed throughout their life in a controlled and secure
manner. As a result, management information can be provided timely and accurately.
The TreasurInet database is an organizations primary record of its Treasury activities. The
management information generated by TreasurInet provides an accurate and comprehensive view of the
current financial position and any financial risks arising from its Treasury dealings.
TreasurInet functionality:
Netting:
Netting 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 providing training and support to users at subsidiaries can place a
heavy burden on small Treasury departments. Running the netting can involve handling multiple input
formats, manual processing of data and time -consuming reporting requirements. When using TreasurInet,
netting participants will use a template designed by Corporate Treasury, have direct access to their own data
and take responsibility for maintaining it. This gives participants control & autonomy and reduces the
administrative burden at the Treasury department. The use of templates also minimizes the chance for errors
and misunderstandings at the Treasury department.
Cash Forecasting:
The cash forecasting tool based on the template provided by Corporate Treasury allows the operating
companies to submit their forecasts in the underlying base currency, thus avoiding time-consuming and error
34
prone manual conversions. The consolidated cash forecast gives the Treasury department an overview of the
local cash surpluses or shortages, which makes optimal liquidity management achievable.
Transactions:
Besides payments (internal and external) the transaction module supports a variety of deal types e.g.
loans, deposits, FX and derivates. Examples of the processes executed by the application once a transaction
has been input are validation, limit checks, calculating interest settlements, updating the General Ledger,
production of payment instructions or EFT messages.
Management information and reporting:

As every mature Treasury Management System, TreasurInet provides extensive management
information e.g.
A cash balance summary with deal flows and cash movements (forecast and actual)
A list of daily payments and receipts, forecast and actual, at any date (future or historic)
A report of counterparty limits, exposure and availability
An analysis of all loans & draw downs and investments by counterparty and deal type
A summary of annual interest for the financial year showing average balances, average interest rates
and interest amount by counterparty and deal type.
A maturity profile analysis for future periods showing various comparatives fixed versus floating,
debt versus investments, etc.
A cash position summary showing current balances including net future changes
A gap analysis report for assets and liabilities
A four-year interest forecast
Apart from a large number of standard reports that are already available, your reporting requirements
can be customized on demand by TreasuryNet or by using a third party reporting tool. Any report produced
by TreaurInet can be directed to the printer or directly to an Excel spreadsheet, Word or Email.
TreasurInet access:
Users access the application via a web browser on their Intranet or via 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, Windows regional settings and so forth. The use of the Internet centralizes the
distribution, implementation and maintenances of the software.
35
FUTURE OF TREASURY TECHNOLOGY

Over the last ten to fifteen years corporate treasury management systems (CTMS) have developed
from sophisticated spreadsheets, through simple proprietary bank-provided cash management applications,
to increasingly complex and capable networked treasury management systems. Although there are still some
treasuries around today that are content with a spreadsheet package, the further treasury systems evolve, the
more treasurers require a wider range of sophistication in their systems.
The demands for treasury functions to become more effective is the main driving force for the
evolution of treasury systems. On the other hand, the availability of advanced technology in treasury
systems drives the evolution of treasuries themselves. As technology develops, so there is the ability for
systems to become more advanced; with this advanced technology available, treasuries are then forced to
look at ways to increase the cost effectiveness of their functions. Similarly, the greater the need to cut costs
within a treasury function, the greater need to provide lower cost treasury operations through treasury
systems - lower cost in terms of direct costs, time and potentially resources.
Using sophisticated networked treasury systems operating over local area networks and even wide
area networks, it is now possible to operate across the globe using the Internet. For some time it has been
possible to run treasury centres across one or two international locations using leased lines from
telecommunications companies. However, this has always been both extremely costly and rife with technical
problems.
With the introduction of "web-enabled" and Internet-capable treasury systems, it is now possible to
construct efficient, cost-effective global treasury systems that combine powerful analytical, processing,
administrative and reporting functions. Therefore, it can be sensible to have one central head office for a
multinational organisation. As a result, many organisations are now considering radically changing the way
in which they organize their treasuries, as it is no longer necessary to maintain and operate several disparate
treasury functions. In-house banks and shared service centers have now become easier to set up and
administer through treasury management systems.
Another technological advance that is currently having an impact on treasury management is straight
through processing or STP, which as its name implies, means that information required 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 created? However, only five or six years ago,
corporate treasury management systems that supported some areas of a treasury operation, in fact created
additional manual work in others. Typical areas requiring additional manipulation of data included writing
reports or configuring export files that were imported into another system in order that the end result,
wherever that turned out, would satisfy the internal requirements of the treasury.
Many corporate treasury management systems have now evolved to the point where much of this
type of manual intervention is becoming redundant. But will this evolution stop? Which systems will make
other systems redundant? Certainly Enterprise Resource Planning (ERP) systems have been created to do
exactly that, but to date they lack the depth of functionality of the CTMSs. The key to evolution for the
CTMS must be integration - vendors of complementary systems (for example, electronic dealing systems,
payments systems, matching systems, and accounting systems) need to extend their co-operations. It would
certainly make life easier for the Treasurer.
As with all organisms, evolution is gradual. Some treasuries still run on spreadsheets, others use
leading-edge technology. The Internet is only just becoming a viable and secure option for many different
kinds of financial systems even 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. Corporate treasury systems will only advance in accordance with the
requirements of the treasury marketplace - attempts by CTMS vendors to second-guess the needs of the
36
market most often lead to redundant developments. Systems must be developed by CTMS vendors, in
conjunction with their customers, with new technology providing the means to improve treasury operations.
The role of treasury will change and evolve, but there is no danger of it becoming extinct. What may
change within the next three to five years is likely to be the efficiency of the internal functions of a treasury.
This will be brought about by greater automation of manually intensive tasks and integration of third party
applications enabled by corporate treasury management systems. Typical areas that will be improved by this
include deal management, specifically deal capture and deal and cash flow maintenance; and in the back
office, specifically payments, confirmations, cash management, reconciliation, forecasting, revaluation and
accounting.
As systems evolve, they are developed to perform simple manual tasks, freeing treasurers to focus on
more demanding analytical tasks. Deal capture from electronic trading systems is one of the latest advances
in CTMS. Corporate treasury systems are now embracing predominantly electronic FX transfer via the
"web". This means that it is possible to capture trades without re-keying data. Will this then spur automatic
confirmation and payments directly from the initial trade capture?
When everything is automated within a secure environment, there should no longer be a need for
verification and authorization of confirmations and payments, but electronic trading systems (FX, securities,
equities etc.) introduced into financial institutions have not replaced all human traders. However, numbers
are reduced, certainly, as productivity has been significantly enhanced. Conversely, consider the treasury
function in less advanced countries and organizations - they may perform similar functions, but there is
lower productivity due to greater reliance on manual operations.
Treasury management systems have now reached maturity in terms of the range of functions they
provide - do not expect any radically new developments. Further developments are likely to be incremental
and will either assimilate functions currently performed by other systems or involve the improvement of
integration with other systems, both inside and outside the target organisation. However, the blurring of the
boundaries of the integral parts of a treasury will continue. As automation and integration takes a grip on
systems, so there will be less need for the intermediate steps of manual intervention - 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 major role for the treasurer. But precisely how long this evolution takes
might require the foresight of Nostradamus.
How will this new technology in integration and automation affect what investment is required?
Treasurers are often concerned about the investments they make in technology, insofar as it is hard to predict
how things will move and which investments will become obsolete quickly, as opposed to those that will
endure and lend themselves to enhancement. Substantial investment 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 CIO, the answer is to let
someone else take the risk, like an application service provider (ASP).
An ASP will enable a treasury department to predict costs more accurately and effectively rent a
system rather than make one-off license payments for both the systems' software and the required hardware.
More and more companies are outsourcing their IT departments. Others remain concerned about the security
and robustness of an ASP and, where global treasuries are concerned, whether data can be stored in other
countries.
As an alternative or a natural progression from an ASP, a treasury department may choose to opt for
an OSP, Outsourced Solution Provider, which rents the hardware and treasury management software. Many
outsourcing centers already exist within the corporate treasury market and by selecting one of these,
effectively, the whole treasury operation can then be rented. Taking this route will give peace of mind to
those treasurers that are concerned about keeping abreast of continually evolving software, leaving the risk
to an 'expert' who is better prepared and able to take it on. But will this arrangement create an inflexible
37
treasury? Will the treasury operation become a tradable function? Perhaps it may lead to yet another
acronym: TSP - Treasury Service Provider!
In whatever direction technology allows treasury operations to evolve, it is fairly clear that nothing
happens overnight. There is never a "big bang" evolution of treasury systems, more a gradual move towards
a more cost effective and controllable function, using today's technologies. It's a race for the vendors to
compete in and for the corporate treasuries to evaluate the results carefully before making any drastic
decisions.
What treasurers need to do is to ensure that they have a complete understanding of the role of the
treasury function and how that function is expected to evolve in line with future developments of their
organisation. Remember that systems are developed as solutions to problems (existing or potential future).
The problems or opportunities must first be identified.
38
QUESTIONNAIRE
BANK DETAILS:
NAME OF BANK : PUNJAB NATIONAL BANK.

BRANCH : Deccan gymkhana
CITY : PUNE.
PERSON INCHARGE: Mrs. Bina Narula

(Internal Senior Auditor)
PURPOSE OF QUESTIONNAIRE: Project work of T.Y.B.Com (Banking & Insurance)
Topic: INTEGRATED TREASURY IN BANKS (STRUCTURE & MECHANICS)
Is Integrated Treasury really necessary for Banks? Why?

A. Yes, because it increases the speed of transactions & also improves efficiency.
Q. Is there Integrated Treasury Management System in your bank?

A. Yes, since past one & a half year.
Q. Is Forex Treasury going to get a boost due to this system? How?

A. Yes, because it ensures fast transactions & it is also confidential.
Q. How the Money Market Transactions are going to get affected trough Integrated Treasury?
A. The Treasurers will have direct contact with the dealers, which will enable them to be in touch with the
market.
Q. Is there a need for a specialized knowledge to conduct audit of Integrated Treasury?

A. Yes, the auditor must be aware of the software that the bank is using which is only possible when he is
aware of the computerized audit
Q. How this system has improved the security of Transaction?

A. This system requires special knowledge & skill to run any process & also there are many passwords to
enter the system, which are kept confidential.
Q. What are the Initiatives of Integrated Treasury?

A. Real Time Gross Settlement (RTGS), Centralised Fund Management System(CFMS), Negotiated
Dealing System(NDS).
Q. What are the basic things that you look for in software?
A. The Software must be user friendly along with it the software must be secure, easy to operate.
Q. Does this system allow to be more efficient and cut cost?

A. Yes, it is less expensive & more efficient.
Q. How will this system reshape the Banking Industry?

A. It will enable different banks to create contact at no time & one can also know about the liquidity
position & also about the requirements of the banks
Q. Will Integrated Treasury System flourish in India?

A. Yes, it has great future because ours is an open economy & we are prone to adopt new things that are
advantageous to us.
39
LET'S SUM UP
Treasury Department is directly or indirectly involved in day-to-day business of the Bank and it is
involved in the day-to-day asset liability management of the bank. Treasury will be able to, through various
techniques, manage risks through its various operations bring down the cost of funds and also improve the
margins. Reserves Management, Investment Management, Liquidity (both short term and long term)
Management, are the other major functions of the Treasury Management.
It is certain that major international corporates are seeing real added value 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. Major corporates can see real value in being able to
merge their treasury centers into a single, central database, allowing for more accurate and quicker analysis
of the group's finances. New technology that brings about greater functionality and flexibility in structuring
treasury operations means that it is now possible to redefine the scope of a bank's treasury requirements to
better suit each bank's business.
Treasury handles very sensitive and very important function of the Bank. Hence it has been set up in
specific structure for smooth but transparent operations. As technology develops, so there is the ability for
systems to become more advanced; with this advanced technology available, treasuries are then forced to
look at ways to increase the cost effectiveness of their functions.
Thus making the Treasury centralised will lead to betterment of Banking Industry & will one day
form a Single Banking system all over the world.
40

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Integrated Treasury (Structure & Mechanics)

NEED OF INTEGRATION OF THE BANK

FUNCTIONS OF INTEGRATED TREASURY

Reserve management & Investment:

Funds & Liquidity Management:

Asset Liability Management & Term Money:

A BIRD'S VIEW OF TREASURY OPERATIONS

BACK OFFICE OPERATIONS:

Brokers contract conforms to the Deal brokered.

Brokered deals are entered in the NSE trade

No Bankers Receipt (BR) is issued wherever SGL facility is available.

SGL received is lodged immediately

ACCOUNTING, MONITORING & REPORTING:

Review of the portfolio, follow up of periodical interest collection on investments / redemptions,

ATTRIBUTES OF GOOD TREASURY PERSONNEL

TREASURY CENTRALISED OR DECENTRALISED?

2. As the Reserve management is a vital function of the Treasury, it is advantageous/prudent to have a

STRUCTURE OF INTEGRATED TREASURY

Middle Office Back Office

Derivatives Money Market

TOP, MIDDLE & BACK OFFICE MANAGEMENT

The management of Integrated Treasury is divided in the following way:

AUDIT APPROACH CHANGE:

EDP CONTROLS (AAS 29):

LONG FORM AUDIT REPORT:

Adherence to investment policy and compliance to RBI guidelines

System of monitoring income from investments.

SLR/CRR requirement-system of ensuring compliance

Review of vostro accounts

Claims arising out of delayed settlement of Inter bank funds

Borrowings outside India

FOREX OPERATIONS BASICS:

PLAYERS IN THE FOREIGN EXCHANGE MARKET:

ii) Corporate Customers / clients:

iii) Reserve Bank of India:

HOW THE FOREX DEAL TAKES PLACE:

What are swaps?

SHORT TERM INSTRUMENTS (MONEY MARKET INSTRUMENTS):

Call Money Market:

Certificate of Deposits (CDs):

Commercial Paper (CP):

FUNDS & LIQUIDITY MANAGEMENT

Present and anticipated asset quality.

Information that management should consider in liquidity planning includes:

Contingencies that may affect a banks liquidity include:

MEANING OF RISK IN BANKING OPERATIONS:

RELATIONSHIP WITH OTHER FINANCIAL RISKS:

BUILDING A SUCCESSFUL TREASURY IT STRATEGY

Five Principal Building Blocks:

Figure 1: The Five Building Blocks to a Successful Treasury IT Strategy

Mapping the Business Requirements:

System Platform Options:

DEVELOPING THE STRATEGY DOCUMENT

Figure 2: Steps To Developing And Presenting The Treasury IT Strategy

Increasing Treasury Efficiency in an e-trading Environment

Drive for Integration:

Foreign Exchange Trading Platforms:

Improvements in Trade Execution:

Co-operation With Banks:

Setting Standards For Integration:

TREASURINET AN IDOL SOFTWARE

Among the functionality of TreasurInet is Inter Company Netting, Transaction Registration

Management information and reporting: