1. IMPLICATION OF COSO IN TREASURY FUNCTION
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BY: RAHUL MAGAN , CORPORATE TREASURER
EXL SERVICES (INDIA)
91-99899242978 , SKYPE ~ RAHUL5327
2. MODULE INDEXATION – PART ( A – F )
Evolution of Treasury Function ( Part A)
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Global Treasury Markets & Models ( Part C)
Treasury Theories ( Part D)
Forces Drive Treasury & Cash Management ( Part E )
Cash Flow Forecasting ( Part F )
Page No - 4
Page No - 12
Page No - 16
Page No - 23
Page No - 28
Treasury Function – Types & Responsibilities ( Part B) Page No - 6
3. MODULE INDEXATION – PART ( G – L )
Treasury Risk Management (Part G)
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Treasury Biggest Risks ( Part I)
Treasury Corporate Governance ( Part J)
Page No - 37
Page No - 54
Page No - 60
Treasury Management Systems ( Part H) Page No - 47
Citi Bank FX Survey ( Part K) Page No - 71
Glossary ( Part L) Page No - 81
4. MODULE 1 ( PART A) - EVOLUTION OF TREASURY FUNCTION – PART I
Evolution of Treasury Function :-The combined effects of ongoing global liquidity
constraints, turbulence in the Eurozone and a raft of regulatory change continue to cast a
shadow over treasury management. The need to address these challenges is fuelling the
corporate drive for a more strategic approach to treasury management, along with the
closer integration of the treasury function with other business units. As a result,
corporate treasury is becoming increasingly sophisticated and treasurers are making
their presence felt throughout their organizations and — in many cases — at board level.
Treasury & Technology :- Optimal treasury management has long been a question of
technology, as it is the key to improved cash visibility and best-practice transaction data
management. Technology is proving to be a vital tool in improving intercompany
integration, as well as streamlining reporting. As breaking down internal silos and
meeting regulatory reporting requirements become increasingly important, there are
many new trends centered on these concepts. These include the centralization of
payments — to improve connectivity between billing, accounts payable/receivable and
financial reporting — and virtual account solutions to reduce costs and simplify
structures.
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5. MODULE 1 ( PART A) - EVOLUTION OF TREASURY FUNCTION – PART II
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Evolution of Treasury Function
Global Liquidity
Crisis
Regulatory Changes
Technological
Advancements
Global Liquidity & FX Crisis :- The world is facing Global Liquidity and FX Crisis. Almost
all the Central banks of the world are facing Liquidity crisis and because of the same they
are signing “ Swaps Agreements “ with each other which would help them the flow of
liquidity in the system and also the flow of Foreign Exchange.
Regulatory Changes:- Today we are living in the world when there are millions of
regulatory changes covering Liquidity , Foreign Exchange and Reporting's. The prime
example regarding the same is Basel III , Volker Rule , ISDA & CSA agreements and FACTA
compliances.
Technological Advancements :- Well we are living in the world when Technology is
changing at fastest pace and because of the same Corporate Treasuries have to amend
their structures in terms of Liquidity management , FX management and Cash pooling
and netting.
6. MODULE 1 ( PART B ) - TREASURY AS A FUNCTION – TYPES & RESPONSIBILITIES
Treasury as a Function is divided into three parts – Front ,
Middle & Back Office
Treasury as a Strategic
Function
Treasury – Front Office
Treasury – Middle
Office
Treasury – Back Office
Treasury Front Office
covers FX exposure &
Investments exposures
of the Organization
within Onshore and
Offshore entities
Treasury Middle Office
covers Risk
Management Policies
of the Organization
which covers Hedging
& Investments policies
Treasury Back Office
covers documentation
pertaining to various
FX & Investments
deals in the
Organization
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7. TREASURY FUNCTION - FRONT OFFICE
Treasury Front Office is further divided into three parts – FX ,
Money Market & ISDA Agreements (including CSA Agreements )
Treasury Front Office
Foreign Exchange
Debt / Money Market
Investments
ISDA / CSA
Agreements
Foreign Exchange
covers receivables ,
payables , Buyers
credit , Supplier
Credit & Revolver
loans
Investments in debt &
Equity markets , FMP
, Certificate of
Deposits , G Sec &
Interest rate curves
ISDA , CSA ( Credit
Support Annex ) ,
ISDA master
Agreements ,
Schedule & Dodd
Frank Act
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8. TREASURY FUNCTION - MIDDLE OFFICE
Treasury Middle office is further divided into three parts –
Onshore Risk , Offshore Risk & SOX & CFO Compliance
Treasury Middle Office
Onshore Enterprise
Risk Management
Offshore Enterprise
Risk Management
Board Deck , SOX &
CFO controls
Onshore Risk
Management policies
covering compliance
of local central banks
like RBI
Onshore Risk
Management policies
covering compliance
of foreign central
banks like Fed, SEC,
FSA
Liaison with Sox and
CFO tracker covering
various controls.
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9. TREASURY FUNCTION – ONSHORE , NEAR SHORE & OFFSHORE RISK
MANAGEMENT
The following is the categorization of Treasury Onshore and
offshore Risk Management
Treasury Risk
Management
Onshore Enterprise
Risk Management
Near shore Enterprise
Risk Management
Offshore Enterprise
Risk Management
Onshore Risk
Management policies
covering compliance
of local central banks
like RBI
Near Shore Risk
management enables
organization not to be
dependent on Onshore
as well as Offshore Risk
entities to manage their
Treasury Risks.
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Off shore Risk
Management policies
covering compliance
of foreign central
banks like Fed, SEC,
FSA
10. STRATEGIC FUNCTIONS OF TREASURY MANAGEMENT
The following are the strategic functions of Treasury
Management are as follows:-
Treasury Management
Functions
Foreign Exchange
Management
Cash or Liquidity
Management
Financial Controls &
Reporting
Onshore & Offshore
Foreign Exchange
Risk Management ,
Hedging and Trading
Onshore and Offshore
Liquidity management
like Cash Pooling ,
Notional pooling and
cross currency
conversions and day
end investments
Management
Reporting , Board of
Directors , Board
Deck and Internal
Audit
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11. THE ROLE OF TREASURER & SCOPE
The Treasurer
Funding Management
Cash Management Investments
Management
Foreign Exchange Risk Management
Risk Management
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Single & Multiple
Banking
Relationships
M&A
Corporate relationships
Investor Relations
Taxation on Derivatives
12. MODULE 1 (PART C) - GLOBAL TREASURY MARKETS & MODELS- PART I
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13. GLOBAL TREASURY MARKETS & MODELS – PART II
Limited Roles to
Centralized
Treasuries
Decentralized
Treasuries
Across the Globe
Treasury -
Centralized
Across the Globe
Treasury – De
Centralized
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Best Global
Treasury
Model
2nd Best Global
Treasury Model
Worst
Treasury
Model
Manageable
Treasury
Model
14. GLOBAL TREASURY MARKETS & MODELS – PART II
Full Service Global :-Full service refers to Global Treasury that operates as one Treasury
for all the markets across the Globe. This models suites to Global Organizations like
Microsoft, Yahoo, Apple, HP, Facebook and Google. Centralized Treasury covers entire
functions like Foreign Exchange Risk Management , Cross Currency Risk Management,
Global Compliances and Reporting's , Cash & Cash equivalents and respective netting and
pooling.
Limited Service Global :-Here, each Treasury is a self contained local unit dictated purely
by the needs of the local business. Thus the Treasury management function is by and large
decentralized.
=======================================================================
Limited Service Global :-This model is different from Fill Service Global model in that the
range of services offered is limited. This could largely be due to the fact that certain
activities are kept outside the purview of Treasuries and handled directly by business units,
if only because of scale of these activities is not large enough to warrant the attention of
Central Treasuries.
Limited Service Local :-This model is akin to having virtually little or no Treasury
activities , beyond Cash & Liquidity management. These are various small decentralized
Treasuries where the concerned managers may also have other responsibilities in the
finance function.
=======================================================================
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15. ONSHORE TREASURY MARKETS – LOCATIONS & INSTRUMENTS
The following are the available offshore Treasury markets &
respective Treasury Derivatives they are offering to Corporate
Treasurers
Offshore Treasury
Markets
Singapore / Tokyo London NY
Singapore is termed
as amongst best
Offshore markets for
NDF & DF deals
covering Fwds,
Swaps & Options.
London is termed as
amongst best
Offshore markets for
NDF & DF deals
covering Fwds,
Swaps & Options.
NY is amongst best
Offshore markets for
NDF & DF deals
covering Fwds,
Swaps & Options.
Plain vanilla fwds,
Swaps , Options ,
Libor , Buyers
Credit hedging
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17. THEORIES OF TREASURY MANAGEMENT – LIQUIDITY MANAGEMENT
THEORY – PART I
Liquidity Management Theory: Liquidity management
theory suggest you how to manage the liquidity in an
organization. This theory would taught you to manage your
cash at Global level considering funding of various
International subsidiaries and respective requirements at the
end or beginning of the month.
Liquidity management theory works well in case of various
International subsidiaries across the world and managing the
cash requirement covering adhoc or regular requirements
which cover all three types of cash flows - Operating,
Investing & Financing expenses.
Liquidity management requires centralized Treasury in any
part of the world specially in Singapore, Australia or London.
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18. THEORIES OF TREASURY MANAGEMENT – LIQUIDITY MANAGEMENT
THEORY – PART II
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Full Service Global Treasury
Function
Inter Company Funding
Requirements
Parent Company
Subsidiary A
Subsidiary B
Subsidiary C
Subsidiary D
Subsidiary E
Subsidiary G
Subsidiary F
19. THEORIES OF TREASURY MANAGEMENT – TRAPPED CASH LIQUIDITY
THEORY – PART II
Trapped Cash Liquidity Theory: This theory would apply to
those organizations where in cost is in INR or PHP or any
other Asian currency however the final realization is in USD
terms. This theory would apply to all ITES or BPO
companies in India where in cost is in local Asian currency
however the final billing is in USD.
Under this theory only the cost part would get reimburse at
the end of the month to meet regular Operating , Investing &
Financing expenses and rest part would kept at US level
which is nothing but the Gross Margin for the company.
Trapped cash would happen when any legal entity would get
continuous cash and over the period of time accumulated a
huge amount of cash which they won’t be able to return to
their parent in case of any strategic M&A to be happen at
Foreign entity level.
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20. THEORIES OF TREASURY MANAGEMENT – TRAPPED CASH LIQUIDITY
THEORY – PART II
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Infosys
( Parent Company )
Funding to Infosys India Limited via
Inter Company Billing
Sudden Depreciation of USD/INR Sudden Appreciation of USD/INR
INR Cost would decrease due to
Translation and lead to Trapped Cash
in Indian entities
INR Cost would increase due to
Translation and not lead to Trapped
Cash in Indian entities
21. THEORIES OF TREASURY MANAGEMENT – ROLLING FOREIGN EXCHANGE
HEDGING PROGRAM – PART III
Rolling Foreign Exchange Hedging Program:- This theory
applies to those who are having Foreign Currency exposures
e.g. where in both cost and revenue are in different
currencies.
Under this theory organizations have to decide the hedging
structure of their receivables and payables. There are various
hedging structures available in the market and prominently
they are divided into two parts – Static & Dynamic Hedging
Majority of the organizations considering Dynamic hedging
considering the current volatility in the exchange rates
covering all Asian , G7 and SDR pairs.
Dynamic hedging strategy is required considering current
volatility and effects of revaluations in your books. The same
is required for both Cash Flow , Fair value & Net Investments
Hedges.
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22. THEORIES OF TREASURY MANAGEMENT – ROLLING FOREIGN EXCHANGE
HEDGING PROGRAM – PART III
Rolling Foreign Exchange Hedging Program:- This theory
applies to those who are having Foreign Currency exposures
e.g. where in both cost and revenue are in different
currencies.
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Rolling Foreign Exchange Hedging
Program
Monthly Rolling Hedging
Program
Yearly Rolling or Semi
Yearly Hedging Program
Quarterly Rolling
Hedging Program
Infosys ( 6 Months Rolling
Monthly Hedging Program)
TCS/Wipro/HCL ( Yearly
Rolling Hedging Program)
Cognizant , Capgemini
, Genpact & Accenture
24. FORCES DRIVING TREASURY CHANGES
Forces Trends Outcome
■ Rationalisation of bank relationships and account structures
■ Migration of treasury / financial functions into global treasury centres, in-house
banks, shared service centres, and payment factories
■ Focus on integrating transaction management, optimising cash / credit utilisation
globally
■ Centralisation of head office control, standardised processes / procedures
■ Centralised audit, regulatory, reporting and internal benchmarking through
transactional visibility (SOX, IAS39, FAS133, IFRS)
■ Focus on gaining visibility and control
■ Process / workflow automation to free resource time
■ Leveraging a single ERP platform to apply best practices for automation of
payables and receivables management in SSC or Payment Factory structure with
a single bank integration point
■ Format standardisation to increase STP and reduce errors / fraud
■ Trading partner integration for better working capital management
■ Real-time actionable information delivery for better decisions
StrategicTreasury
Holisticapproachesacrossenterprise
Globalization
Risk&
Control
Focus
Technology
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25. Automated Target Balancing tools will enable efficient concentration of
cash and funding of deficits
Same day value via cross border/cross regional Target Balancing
Intra day or next day via Multi Bank Target Balancing
Statement Files/Message Based Information downloaded to SAP for
daily accounting of funds movement
Domestic Bank(s)
MT920 Request for Statement (MT942)
Customer
Define TBA Rules
– Source A/C &
Target A/C
relationship
Intraday TBA
Processor
MT940 / MT950 End of Day Reporting
MT942 Ad hoc Intraday Report
Communication Methods
-Web-based reports
-Files
-XML Messages
MT101 Request for Transfer
MT103 – Funds Transfer (Concentrating to Target Account)
Target Account
MT101 Request for Transfer
MT103 – Funds Transfer (Funding Source Account)
MULTI-BANK TARGET BALANCING
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26. NOTIONAL POOLING
With notional pooling, the autonomy of the accounts is maintained, while
debit and credit balances are offset for interest purposes.
Bank
Account 1
+USD 1000
Bank
Account 3
+USD 1500
Bank
Account 2
-USD 2100
Bank
Account 4
-USD 500
Bank
Account 5
+USD 400
Without Notional Pooling
With Notional Pooling
Interest = + 40 - 126 + 60 - 30 + 16 = - USD 40
Bank Rates
Credit Interest = 4%, Debit Interest = 6%
Bank
Account 1
+USD 1000
Bank
Account 2
-USD 2100
Bank Rates
Credit Interest = 4%, Debit Interest = 6%
Bank
Net Position
+USD 300
Interest earned by pooling accounts = USD 300 x 4% = USD 12
Advantage to customer = USD 12 - (- USD 40) = USD 52
Bank
Account 3
+USD 1500
Bank
Account 4
-USD 500
Bank
Account 5
+USD 400
Single Currency Notional Pooling – Example.
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27. OPTIMIZATION – MULTI CURRENCY NOTIONAL POOLING
Optimizes short term (overnight) cash positions, by notionally pooling
balances with London bank , across eligible currencies
Fully automated process applies to full closing balances, so treasury can
focus on managing strategic hedging and structural positions
Flexibility to transact in any pooled currency, without FX conversion
Integrate with target balancing to maximize cash up streamed into pool
- EUR 40mn eqv.
+ EUR 20mn eqv. + EUR 60mn eqv.
Available Balance = EUR 40mn equivalent, in any pool CCY
London
x
Group
EUR
Sub D
EUR
Sub C
EUR
London
x
Group
LCY
Sub B
LCY
Sub A
LCY
London
Individual
Currency
Pools or TBAs
in London
Net Multi Currency
Pool Balances
(EUR Equiv)
Net Customer
Position
(EUR Equiv)
Cross Currency Balance Sheet Set-Off
x
Group
GBP
Sub F
GBP
Sub E
GBP
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29. LIQUIDITY MANAGEMENT IN TREASURIES – CASH FLOW FORECASTING
Cash Flow Forecasting: Cash flow forecasting is amongst
those techniques where in organization would forecast the
cash available at a future course of time. Cash flow
forecasting would happen at three levels :-
Cash flow from Operations
Cash flow from Investing
Cash flow from financing
Cash flow forecasting would cover all three forms of cash &
cash equivalents and subsequent forecasting.
The biggest objective of Cash flow forecasting is to mitigate
the effects of trapped cash and also create a financial model
which would be able to cover cash & cash equivalents till
next 30-90 days.
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30. CASH MANAGEMENT OBJECTIVES
Centralized Administrative, Treasury and Accounting
Functions for :-
distribution
invoicing
receivables
payables - domestic and foreign
credit and collections
FX dealing and Investments
information processing
analysis and reporting
Maintain optimum number of bank accounts
reduce number of banking relationships to optimum level
improve bargaining position and therefore pricing
reduce costs
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31. CASH FLOW FORECASTING : KINDS & SCHEMA
Cash Flow Forecasting : A cash flow forecast aims to predict a company’s future financial
liquidity over a specific period of time, using tried and tested financial models. While cash
normally refers to the liquid assets in a company’s bank account, the forecast which is cash
plus short-term investments minus short-term debt. The cash flow itself refers to the change
in the cash or treasury position from one period to the next.
Kinds of Cash Flow :
Cash Flow From Operations ( Operating Cash Flow ): The cash generated from the operations of
a company, generally defined as revenues less all operating expenses, but calculated through a
series of adjustments to net income. The OCF can be found on the statement of cash flows.
Cash Flow From Investing : An item on the cash flow statement that reports the aggregate change
in a company's cash position resulting from any gains (or losses) from investments in the financial
markets and operating subsidiaries, and changes resulting from amounts spent on investments in
capital assets such as plant and equipment.
Cash Flow From Financing : A category in the cash flow statement that accounts for external
activities such as issuing cash dividends, adding or changing loans, or issuing and selling more
stock
Opening Cash :
Add : Net Cash Flow from Operations ( Net Operating Cash Flow )
Add : Net Cash Flow from Investments ( Investments & Redemptions of Cash Flow / Capex )
Add : Net Cash Flow from Financing ( Financing Cash Flow like Loans / Payments & Others )
Closing Cash
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32. CASH FLOW FORECASTING : P&L FLOW
Operating /
Investing &
Financing
Cost
Cash Flow
from
Operations
Cash Flow
from
Investing
Cash Flow
from
Financing
Credit &
Cash sales
Gross Profits
Vs
Net Profits
Credit &
Cash sales
Interest
Earned / Paid
to Banks /
Corporate
Owners
Interest and
Corporate
Earnings
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33. CASH FLOW FORECASTING : IT & ITES COMPANIES SCENARIO
Opening Cash & Cash Equivalents ( A )
Cash Flow from Operations or Operating Cash is Cash flow from Outsourcing &
Transformation business. ( B )
Revenue earned from Outsourcing & Transformation business.
Non cash items like Depreciation & Amortization.
Accumulated Other Comprehensive Income ( Forex Gain/(Loss))
Change in Current Assets and Current Liabilities
Cash flow Hedging / Balance Sheet Hedging
Cash Flow from Investments is Cash earned on investments as well as cash spent on
Capex. ( C )
Business Acquisions
Purchase of Fixed Assets
Purchase of Short Term Investments
Cash flow from Financing is the Cash earned on Financing like Debt etc. ( D)
Payment of Capital Lease
Payment of Interest Payments
Closing Cash & Cash Equivalents ( A + B + C + D)
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34. Confidential
CASH FLOW FORECASTING : KINDS & SCHEMA - II
Current Availability of Information:
Revenue forecasting by FP&A ( Cash Flow from Operations(CFO))
Capex Information from FP&A ( Cash Flow from Investing(CFI))
AP Expenses by AP Team ( CFO)
Tax payments from Tax Team (CFO)
Cash Flow Hedging / Balance Sheet Hedging / Accrued Gain / ( Loss )
from Treasury ( CFO)
Desired Process: Desired process on Cash Flow Forecasting is to have information from all
stake holders like
Treasury / AP / AR / Capex / Taxation/ M&A for Hedging / Vendor & other
payments / Capital expenditures / Tax payments & M&A cash outflows .
Non cash items like Depreciation & Amortization from Accounting team.
DSO from AR Team as to understand and take the effect of the cash inflow like
Collections in various currencies.
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36. JUST DO IT
Like exercising, getting started
is the hardest part of cash flow
forecasting.
Like most of us, the hardest part
of exercising is not using the
equipment, it is getting to the
room to use the equipment.
Once we get to our exercise
room, using the equipment is
not that bad.
The same holds true for cash
flow forecasting.
Profit is an illusion, cashflow is fact
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38. TREASURY BANKING RELATIONSHIPS
Treasury Banking Relationships : Treasury Banking relationships refers to number of bank
accounts any Treasury maintains within or outside an organizations. Today majority of the
organizations are Global in nature and considering this fact they are having many Global
subsidiaries as well hence forth in that circumstances Treasuries are forced to keep number
of bank accounts in respective legal entities.
Types of Bank Accounts:-
Exchange Earner Foreign Currency Account (EEFC A/c ) : - These are the accounts where in
organizations are keeping Foreign Currency balances which are not only subject to revaluation but
also subject to foreign currency risk.
Local Currency Accounts : These are the accounts which are carrying local currency balances like
Indian Rupee, Philippines Peso, Chinese Yuan, Romanian RON, Czech Republic Koruna (CZK) and
lots others
Note: The concept of netting and pooling would come when Organizations are having many legal entities and to
manage these entities Organization would like to have numerous bank account relationships.
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39. TREASURY RISK MANAGEMENT
Risk exposure arising from business activities
Need to effectively manage because of
Potential business losses
Ensure business continuity
Wider and/or complex risk requires more prudent management
Risk appetite determines risk exposure
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Treasury risk can be divided into several parts:-
Commodity Risk
Counterparty Risk
Credit / Liquidity Risk
Foreign Exchange Risk
Interest Rate Risk
Sovereign Risk
Reputational risk & respective others
40. RISK MANAGEMENT – “WHAT IS?”
Optimize risk-reward trade-off rather than minimize/eliminate
risk.
Risk taking is inherent activity but
neither engage in business with unnecessary risk nor
absorb risk that can be transferred
Regulatory Case vs. Business Case
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Optimize risk-reward trade-off rather than minimize/eliminate
risk.
Risk taking is inherent activity but
neither engage in business with unnecessary risk nor
absorb risk that can be transferred
Regulatory Case vs. Business Case
41. BASIC PRINCIPLES FOR RISK MANAGEMENT – PART I
Board and senior Management oversight
“The overall responsibility of risk management vests in the
Board of Directors, which shall formulate policies in various
areas of operations of the bank. The senior management is,
interalia, responsible for devising risk management strategy
and well-defined policies and procedures for
mitigating/controlling risks, which should be duly approved by
the Board. The senior management is also responsible for the
dissemination, implementation, and compliance of
approved policies and procedures.”
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42. BASIC PRINCIPLES FOR RISK MANAGEMENT – PART II
Integration of Risk Management
“At operational level, risk assessment may be made on portfolio or
business line basis, however, at the top level the management need to
adopt a holistic approach in assessing and managing risk profile of the
bank.”
Business Line Accountability
“Irrespective of a separate risk review or management function
individuals heading various business lines or units are also accountable
for the risk they are taking.”
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Integration of Risk Management
American Geography Asian Geography European Geography
Integration of Risk Management combining
all Geographies across the world
43. BASIC PRINCIPLES FOR RISK MANAGEMENT – PART III
Risk Evaluation/Measurement
“Wherever possible risks should be quantitatively measured,
reported, and mitigated.”
Independent review
“The risk review function should be independent of those who
approve and take risk. The review should include, interalia,
stress tests exposing the portfolio to unanticipated
movements in key variables or major systemic shocks.”
Contingency planning
“Banks should have contingency plans for any unexpected or
worst case scenarios.”
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44. RISK MANAGEMENT ESSENTIALS & CREDIT RISK
• The individuals who take or manage risks clearly understand it.
• The organization’s Risk exposure is within the limits established by Board of
Directors.
• Risk taking Decisions are in line with the business strategy and objectives set
by BOD.
• The expected payoffs compensate for the risks taken
• Risk taking decisions are explicit and clear.
• Sufficient capital as a buffer is available to take risk.
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Board and Senior Management Oversight
BOD to approve credit risk strategy and other significant policies
SM to develop and establish credit risk policies & credit administration
procedures and guide staff
Setting up appropriate organization structure and specify duties/responsibilities
Credit management discipline
45. BENEFITS OF A ROBUST RISK MANAGEMENT FRAMEWORK
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47. MODULE 1 (PART H) –TREASURY MANAGEMENT SYSTEMS
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Treasury Management Systems – Oracle Treasury
48. TREASURY MANAGEMENT SYSTEMS (TMS)
48
Currency risk has been recognized as one of the major business risk as high volatility of
exchange rates has proved to impact the business profit and share holder’s equity in big way.
Increase in Hedge
Program
Monitoring
& Control
Automation
& Efficiency
49. TREASURY MANAGEMENT SYSTEMS - BUSINESS NEEDS
49
Increase in Size of Hedge
Program
Multiple Revenue - for
computation of
exposure
Multiple Currency
Exposure
Increase in Complexity
of Exposure
Complexity in Hedges Exposure
Treasury Management Systems (TMS)
50. KEY RISKS ASSOCIATED – TMS VS. MANUAL TREASURY FUNCTION
Manual / Excel based Computation of
Exposure
Manual/ / Excel based Computation of
Gain /Loss
Accounting & Hedge Effectiveness
testing
Manual process for multiple approvals
on chain mails
Manual Accrual of Interest / Other
Income / Recording MTM Gain Loss
Incorrect qualifying exposure for hedging.
No audit trail for transactions
Incorrect recording of gain/loss on
matured hedges, incorrect projected
income/loss for forecast / guidance to
street
Manual process for hedge effectiveness
testing and Incorrect US GAAP Accounting
No permanent repository for transactions
entered or approved. No audit trail for
transactions
Incorrect MTM recording of gain /loss /
Other Comprehensive Income, Incorrect
Income recording.
50
Manual Treasury Function Risks with Manual Treasury Function
51. KEY FEATURES OF ORACLE TREASURY MODULE… - PART I
51
Compatibility with Existing System (ERP)
Leverage existing Oracle 11i Implementation for faster Treasury Implementation
Standard Oracle Interface and Integration and availability of various Financial Transactions (
Revenue Forecast, Foreign currency balances etc.) into Treasury module.
Centralized access of Treasury related data across geographies and entities.
Automation @ Treasury FX
Automation of computation of exposure for cash flow and balance sheet hedging.
Rule based Parameters for defining exposure, report on foreign currency balances (eligible
for hedge) from multiple set of books of accounts.
Foreign Exchange deals recorded in ERP and availability of hedge book in ERP.
Automation of computation of Gain/Loss on matured and outstanding hedges and
generating accounting entries.
System based hedge recording with implementation of Maker Checker rule
52. KEY FEATURES OF ORACLE TREASURY MODULE…- PART II
52
Accounting @ FAS 133 / FAS 157 / FAS 95
Rule based hedge effectiveness testing in ERP and recording of gain / loss.
Accounting for outstanding hedges as USGAAP -FAS 133 in ERP .
Fair Valuation as per FAS 157 .
Cash Flow Statement as per FAS 95 .
Improvements @ Cash Management & FX
Consolidated cash and cash equivalent report including details of investment, restricted cash
and accrued interest.
Cash Management and forecasting for multiple subsidiaries.
Automation of Computation and recording of accrued interest on Investments
Digital Repository of Forex Transactions including Fwd Contracts & Money Mkts Deals.
53. RISKS ASSOCIATED WITH CURRENT PROCESS & IMPLICATION – HEDGING
PROCESS
Manual / Excel based computation of
exposure
Manual / Excel based computation of
Gain / Loss
Accounting & Hedge Effectiveness
Testing
Manual process for multiple approvals
on chain mails
Manual accrued Interest / Other
Comprehensive Income / Reporting of
M2M
Oracle Treasury Module will make the
process of Projected Revenue to Exposure
online and besides the same this module is
can run simulations as well.
Oracle Treasury Module will automatically
compute the gain / Loss on Off Balance
Sheet Exposure along with facility of tenor
filtering.
Oracle Treasury Module will incorporate all
features of FAS 133 and respective Hedge
Effectivity testing and fair valuation as per FAS
157.
Authorization of hedges in oracle.
Periodic Computation of AI on Term
Deposits /Money Mkts Investments / MF
Income.
53
Risks Mitigants with Oracle Treasury Module
55. TREASURY BIGGEST RISKS – LIQUIDITY & FUNDING RISK
Liquidity Risk:-Liquidity risk is the risk that the entity will not have sufficient funds
available to pay creditors and other debts. This includes the risk that loans may not be
available when the organization requires them or they will not be available for the required
term or at an acceptable cost. There is also a risk that bank credit lines may be terminated
if borrowers breach loan covenants. The organization may have to keep unused funding
sources in reserve for potential outlays such as future debt repayments, capital
expenditure, seasonal fluctuations, acquisitions and contingencies. Funding sources may
include equity issues (in all forms), debt, supplier finance and leasing.
=======================================================================
Biggest Question :- New funding needs to be included in the cash flow, is it committed or
uncommitted, and have the banks or other sources of funding been consulted and do they
have enough information to give at least approval in principle?
=======================================================================
Funding Risk:- Funding risk is most often faced by highly rated large-volume borrowers
who issue debt securities. These borrowers rely on liquidity of their securities (the degree
to which they are readily bought and sold in financial markets) to maintain prices, smooth
out price volatility and facilitate future issues. The risk is that for some reason investors
may judge the securities to be insufficiently attractive, with the result that prices may fall
and access to the market may become difficult.
=======================================================================
Biggest Question :- To what extent can or must the organization rely on its bankers and
shareholders to meet funding requirements instead?
=======================================================================
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56. TREASURY BIGGEST RISKS – INTEREST RATE RISK & FOREIGN EXCHANGE
RISK
Interest Rate Risk:-Interest rate risk is the risk that movements in variable interest rates will affect
financial performance by increasing interest expenses or reducing interest income. Changes in market
rates of interest may also affect fixed-rate securities where they are marked to market, in which case
the capital value of the securities will change. Management needs to use sensitivity analysis to predict
the impact on profit and loss of a given change in interest rates.
=======================================================================
Biggest Question :- Does the organization have any form of borrowing or similar commitments or
obligations that may be subject to a change in interest rates? (Include conventional borrowing, overdrafts,
debtor or creditor terms and discounts, other contracts, etc.)
=======================================================================
Foreign Exchange Risk:- Foreign exchange risk describes the risk of variation in the rate of exchange
used to convert foreign currency revenues and expenses and assets or liabilities to Australian dollars
=================================================================================
Biggest Questions :- transaction exposures resulting from normal operational business activities (trade
purchases and sales, short-term borrowing, etc.)
=================================================================================
Biggest Questions:- Translation exposures resulting from conversion of long-term foreign currency assets
and liabilities into Australian currency (equity investments, capital items, etc.)
=================================================================================
Biggest Questions:- Competitive exposures that may result (profitably or otherwise) from adopting a
different approach to managing foreign exchange exposures from that taken by the organization's
competitors
=================================================================================
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57. TREASURY BIGGEST RISKS – COMMODITY PRICE RISK & CREDIT RISK
Commodity Price Risk:-Commodity price risk is the risk that a change in the price of a commodity that is
a key input or output of a business will adversely affect financial performance. It should be noted that
many commodities have a foreign exchange component in their $A price – for example, oil, gold and
sugar.
===================================================================================
Biggest Question :- Does the organization rely significantly on specific commodities for inputs or outputs
whose prices are determined by the market?
Biggest Question :- Will price movements significantly affect profitability by increasing manufacturing costs or
reducing sales proceeds?
===================================================================================
Credit Risk:- Credit risk is the risk that another party in a transaction will not be able to meet its financial
obligations. The general term ‘credit risk’ may include:
Counterparty risk, which is the risk that the other party to a transaction will not meet its obligations as to
timing or amount of settlement
Country/political/sovereign risk associated with government directives and policies that may affect the
contractual performance of either party to the transaction, and that are generally beyond the direct control
of the counterparty
Settlement or delivery risk that may exist if there is a default in a single settlement or delivery, in which
case all other exposures or positions with that counterparty will be closed out, thus establishing claims for
transaction costs
===================================================================================
Biggest Question :- Has the organization entered into any significant financial transactions which, in
aggregate, amount to a material exposure to any one counterparty, especially in one currency or one country?
===================================================================================
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59. Confidential
TREASURY SERVICES – TYPES & MARKETS
Treasury Services – Bank/ Government Treasury :-
Maintenance of daily cash flow movement
Effective hedging of net FX exposures ( NCOP limits)
Pledging or taking G Sec securities considering repo and reverse with RBI
Appropriate watch on “ Interest Rate “ movement and SLR ratio
Liquidity management for bank central funding pool
Treasury Services – Corporate Treasury :-
Maintenance of daily cash flow movement
Effective hedging of net FX exposures ( Group entity wise)
“ Interest rate forecast “ desk to control investments in money market
Foreign exchange hedging – Onshore or Offshore Treasury markets
Onshore Treasury markets:- Onshore Treasury markets are local Treasury markets like all
corporates who are sitting in India would have India as Onshore Treasury markets. They have to
tap or refer when it comes to their FX , Investments or Money market investments and they are
also subject to RBI guidelines.
Offshore Treasury markets:- Offshore Treasury markets are foreign Treasury markets like all
corporates who are sitting in India would have Singapore, London , NY , Australia as Offshore
Treasury markets. They have to tap or refer when it comes to their FX , Investments or Money
market investments and they are also subject to respective guidelines.
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61. Confidential
TREASURY POLICY MANUAL
Treasury Policy Manual :- Treasury Policy manual is nothing but the stipulated guidelines
by an organization which would cover the following:-
Maintenance of daily cash flow movement
Effective hedging of net FX exposures ( Group entity wise)
“ Interest rate forecast “ desk to control investments in money market
Foreign exchange hedging – Onshore or Offshore Treasury markets
This would also cover SOX compliance , Internal Audit , International or Cross border
compliance like Dodd Frank Act , Volker's Act , Basel III for liquidity management , Bank a/c
management – Single or multiple banking relationship and respective others.
Treasury Policy Manual would also cover the following :-
Corporate Governance – Treasury Function & Models
Treasury Corporate Governance & Maturity
Risk management framework and Governance
Preventive and Preemptive Strategy – Financial Risk Management
Treasury Payment Systems
Internal Audit Scope of Treasury Function
FX & Other Treasury Risk Management Policy
H2H Implementations & CMS
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62. CORPORATE GOVERNANCE – TREASURY FUNCTION & MODELS
An appropriate balance between information overload and the
dearth of information is maintained.
Risk Approach
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63. Key factors Basics Developing Established Leading Class
Policies &
Procedures
Informal policies and
procedures not
documented.
High level policy statements
setting out central
treasury activities. Limited
documented
guidance on local treasury
activities and
incomplete procedure
documentation.
Well documented group
treasury policy and
procedures. Limited
policies and procedures
on treasury activities in
local business units.
Comprehensive policy
document for group
treasury and the
business units.
Governance Treasurer or group
FD responsible for all
aspects of treasury.
No compliance
monitoring
or internal audits.
Regular reporting to the board
on treasury
activities. Internal audits not
performed by
treasury experts. Minimal
compliance
reporting.
Treasury compliance
regularly monitored and
reported to the board
and/or the relevant
treasury/finance
committees. Regular
internal
audits using external
treasury sprecialists.
Treasury activities
monitored by and
treasury
strategy approved by
Board or board
subcommittee. Regular
internal audits by
treasury experts with
treasury self
assessments.
Structure Decentralized
treasury structure
with local
businesses
responsible for
managing their own
treasury activities.
Little/no interaction
between Group
Treasury and Group
companies.
Centrally managed funding with
businesses
responsible for managing local
treasury
activities. Some interaction
between Group
Treasury and Group companies.
Centralized treasury with
clear guidelines
governing any local
treasury operations.
Communication between
group treasury and
group companies on an
informal basis.
Centralized treasury
with all treasury
activity
managed by group
treasury (as far as
possible). Regular
dialogue between
group
treasury and business
units.
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TREASURY CORPORATE GOVERNANCE & MATURITY
64. ROBUST CONTROLS –RISK MANAGEMENT FRAMEWORK AND
GOVERNANCE
Typical controls Controls for a treasury VS Controls for spreadsheets and
systems environment manual systems environment
The risk management objectives must
match the organizational culture and the
board’s objectives.
Statement of treasury objectives in policy document and risk
appetite.
The board should adequately
communicate the organization's culture
and objectives to the staff.
Policy document available to staff.
The board must clearly understand the
risk management issues faced by the
organization.
The board has been involved through discussions in accepting
policy.
The board is responsible for the
execution of, and compliance with, the
internal controls. This may be delegated
to an audit or risk committee.
The board receives reports on treasury activities, including
compliance with policy. People with specialist skills may be
required to sit on this committee.
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65. PREVENTIVE AND PRE-EMPTIVE STRATEGY – FINANCIAL RISK
MANAGEMENT
Financial Risk Management:-
Strong market volatility, constant evolution of the international accounting standards
and increasing importance of financial reporting prompt companies to improve
regularly their financial risk knowledge and to optimize its management. In this
environment identification of risk drivers and exposures, definition of risk
management policy and implementation of appropriate management tools,
communication lines and reporting are the key means to enable effective financial risk
management.
Pre emptive Strategy :- When it comes to Pre emptive Strategy in Financial Risk
Management than it is to align your risk management policy with International
accounting standards. Treasuries should align their risk management policies with
International accounting standards and then realign their derivatives accounting
with both US GaaP and IFRS.
Preventive Strategy :- When it comes to Preventive strategy in Financial Risk
Management than it is to realign their derivatives valuation with International
accounting standards. Treasuries should align derivatives valuation and respective
discounting of the derivatives using either Libor or OIS.
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66. TO SET CLEAR DEFINED AND TRANSPARENT POLICIES AND GOVERNANCE
Corporate Governance & Disclosures:- Yet, most academic discussions about
transparency have nothing to do with corporate governance. The most commonly
discussed benefit of transparency is that it reduces asymmetric information, and hence
lowers the cost of trading the firm’s securities and the firm’s cost of capital. To offset
this benefit, commentators typically focus on the direct costs of disclosure, as well as
the competitive costs arising because the disclosure provides potentially useful
information to product-market rivals. While both of these factors are undoubtedly
important considerations in firms’ disclosure decisions, they are not particularly related
to corporate governance
Corporates should have transparent policies when it comes to Insider trading of firm
securities across the world in case they are listed at various platforms.
Corporates should have transparent policies when it comes to description of short term
debt in books of various subsidiaries. Risk managers should be void in using Repo 105
as to shift their short term debt as cash during release of financials and then reconvert
of cash into short term debt.
Corporates should have transparent policies in terms of capital usage like usage of
Foreign Currency loans , ECB, FCCB and conversion of debt into equity shares.
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67. TREASURY PAYMENT SYSTEMS
Treasury Payment Systems :- A payment system is a set of processes and
technologies that transfer monetary value from one entity or person to another.
Payments are typically made in exchange for the provision of goods, services, or to
satisfy a legal obligation. They can be made using a variety of methods such as cash,
checks, electronic payments and cards in a variety of currencies.
Most US banks are members of payment systems such as NYCE (New York Cash
Exchange), CHIPS (Clearing House Interbank Payment Systems) and Fed wire.
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68. SCOPE OF INTERNAL AUDIT - TREASURY FUNCTION
Treasury Internal Audit: Treasury Internal audit should cover all
three functions of Treasury from Front office till Back office. Treasury
Internal audit should also cover any TMS and linking of TMS with all
three functions of Treasury.
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69. FX AND OTHER TREASURY RISK MANAGEMENT POLICY
Treasury Front Office should take FX hedges w.r.t to defined
corporate policy. The corporate policy should be dynamic in nature
which should be align with the recent developments in the FX
markets across the world.
If Treasury front Office is taking FX hedges then all three types of
risk should be covered – FX Risk , Credit Risk and Market Risk. If
hedges are taken in the form of Options then all the five options
Greeks should be clearly defined in risk management policy.
Delta limit, Gamma limit, Vega limit, Theta limit, Rho limit. These
Options Greeks limits is applying to all those who are taking FX
hedges in Options.
Treasury Middle Office should realign corporate risk management
policy with respect to dynamic markets so that Treasury would be
able to cover all the three types of risks with all organizations.
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70. HOST TO HOST IMPLEMENTATION– MT940 & CMS
Treasury Bank balances : With the backdrop of multiple
subsidiaries across the world and having 100’s of accounts
Treasury should manage their day end cash & cash equivalents
using to ways
MT940
Under this all
balances and
payments will route
from one accounts
and at the end of the
day generation of MT
940 reports
confirming all
balances
Treasury CMS
Under this all
payments
processes will run
from defined chain
along with
respective
approval
mechanism in the
system.
Treasury
MT940 and
CMS are
linked with
each other
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71. MODULE 1 (PART K) – CITI BANK FX SURVEY & GLOBAL TREASURY MARKETS
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Citi Bank (India) FX Survey
72. HOLISTIC RISK MANAGEMENT FRAMEWORK – CITI BANK
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Source: Citi Bank FX Risk Management Survey
73. TREASURY RISK MANAGEMENT OBJECTIVES– CITI BANK
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Source: Citi Bank FX Risk Management Survey
74. TYPES OF HEDGING STRATEGIES – CITI BANK – PART I
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Source: Citi Bank FX Risk Management Survey
75. TYPES OF HEDGING INSTRUMENTS – CITI BANK – PART II
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Source: Citi Bank FX Risk Management Survey
77. BALANCED APPROACH TO HEDGING– CITI BANK – PART I
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Source: Citi Bank FX Risk Management Survey
78. BALANCED APPROACH TO HEDGING– CITI BANK – PART II
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Source: Citi Bank FX Risk Management Survey
79. TREASURY STRUCTURE & CURRENCY EVALUATION
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Source: Citi Bank FX Risk Management Survey
80. OVERHAUL OF HEDGE ACCOUNTING STANDARDS
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Source: Citi Bank FX Risk Management Survey
81. MODULE 1 ( PART L) - GLOSSARY
Treasury Front Office :-Treasury Front Office is the Office which deals with Banks ,
Financial Institutions, Credit Ratings Agencies and respective others on behalf of
Organization.
Treasury Middle Office :-Treasury Middle Office is the Office which makes Risk
Management Policies covering Foreign Exchange Risk Managements till Investments.
Foreign Exchange Risk Management :- Foreign Exchange Risk Management refers to
risks associated with fluctuations in pricing of Foreign Exchange as Organization exports
earnings is in Foreign Currency while cost is in local currency.
Corporate Investments Management :- Corporate Investments Management refers to
Investment Policy which allow Treasury Front Office to Invest surplus cash in approved
instruments.
ISDA Master Agreement :- The ISDA master agreement is the most commonly used
master service agreement for OTC derivative transactions internationally. It is part of a
framework of documents, designed to enable OTC derivatives to be documented fully and
flexibly. The framework consists of a master agreement, a schedule, confirmations,
definition booklets, and a credit support annex. The ISDA master agreement is published
by the International Swaps and Derivatives Association.
ISDA CSA/CSX Agreement :- ISDA CSA/CSX agreement refers to supporting agreement
which covers collateralized based hedging covering LTFX period.
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82. MODULE 1 ( PART L) - GLOSSARY
Certificate of Deposits (CD):-It is an Money market discounted instruments which can
be issued till 270 days in Indian market.
Fixed Maturity Plans (FMP) :-It is a form of Mutual Fund Investments under which
there is no disclosure of portfolio however there is an agreed rate of Interest between
AMC and investor however unwritten.
Onshore Enterprise Risk Management (ON-ERP) :- Onshore Risk Management refers
to all Risk Management techniques in local markets. All corporations in India would have
India as Onshore Treasury Market and Singapore as Offshore Treasury Market.
Offshore Enterprise Risk Management (OFF-ERP):- Offshore Risk Management refers
to all Risk Management techniques covering Foreign markets. All corporations in India
would have India as Onshore Treasury Market and Singapore as Offshore Treasury
Market.
Treasury Models :- Treasury models refers to various structures though which
Organizations would like to run their Treasury Function. Predominantly Treasury
Function can be Centralized or Decentralized.
Trapped Cash :- Trapped Cash refers to cash which left in Indian or Offshore
subsidiaries post Inter Company funding. This cash may move to parent entity however
subject to Dividend Taxation. Dividend taxation varies from country to country.
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83. MODULE 1 ( PART L) - GLOSSARY
Foreign Exchange Risk Management :-Foreign Exchange Risk Management refers to
set of techniques through which organization try and hedge their Foreign Currency
exposures via Onshore and Offshore Treasury Markets.
Cash Management & Pooling :-Cash Management refers to techniques to manage
excess liquidity in the system and this is done via pooling of free or surplus cash lying in
non Interest rate bearing accounts at end of the day.
Cash Flow Forecasting :- Cash Flow Forecasting refers to techniques through which
Organization try to forecast Cash for shorter period of time say 90 days. The same can be
done under Indian GaaP , US GaaP or IFRS. Cash Flow Forecasting is done via Direct or
Indirect method.
Cash Flow from Operations :- The cash generated from the operations of a company,
generally defined as revenues less all operating expenses, but calculated through a
series of adjustments to net income.
Cash Flow from Investing :- An item on the cash flow statement that reports the
aggregate change in a company's cash position resulting from any gains (or losses)
from investments in the financial markets and operating subsidiaries.
Cash Flow from Financing :- A category in the cash flow statement that accounts for
external activities such as issuing cash dividends, adding or changing loans, or issuing
and selling more stock.
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84. MODULE 1 ( PART L) - GLOSSARY
Treasury Transaction Risks:-Treasury Transaction Risks refers to change in the pricing
of cash flows due to variability in Foreign Exchange.
Treasury Translation Risks:-Treasury Translation Risks refers to conversion of local
currency into foreign currency. In Indian context Translation refers to conversion of
Indian Rupee into USD dollar.
Treasury Revaluation Risks:- Treasury Revaluation Risks refers to conversion of
Foreign Currency into Local currency. In Indian context Revaluation refers to conversion
of USD or Foreign Currency balances into Indian Rupee.
Treasury Onshore Debt Capital Markets:- Treasury Onshore Debt Capital Markets
refers to Onshore Debt Capital Markets. In Indian context Onshore Debt Capital Markets
refers to Indian markets and companies are allowed to invest in G Sec, Treasury Notes,
Treasury bonds , Certificate of Deposits , Commercial Papers and FMP.
Treasury Offshore Debt Capital Markets:- Treasury Offshore Debt Capital Markets
refers to Offshore Debt Capital Markets. In Indian context Offshore Debt Capital Markets
refers to Singapore, London, Australia and NY markets and companies are allowed to
invest in G Sec, Treasury Notes, Treasury bonds , Certificate of Deposits , Commercial
Papers and FMP and structured products.
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