Treasury.ppt with detailed version of swift

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Contents
© 2012 Capgemini - Internal use only. All rights reserved
Treasury Overview
1. Introduction
2. Functions of a Treasury
3. Treasury Products
1

Introduction
Historically, Treasurers have been responsible for:
• managing cash and market risk
• ensuring that the company has access to sufficient sources of funding
• effective utilization of funds
However, this role has expanded in recent years. The transformation has been driven by:
• changes in information and communication technologies
• increased mandates around regulatory compliance
• emergence of a truly global economy
Today, in addition to the traditional tasks, Treasurers are responsible for:
• handling foreign exchange
• Investment management
• trading in bonds, currencies, financial derivatives
2

Interfaces to Treasury Management System
3
Treasury
Management
Accounting
system
Payments
Compliance
MIS
Cash & Liquidity
Management
Risk
Management
Trade
Finance
Cards

Contents
Treasury Overview
1. Introduction
2.a. Money Markets
2.b. Foreign Exchange
2.c. Asset Liability Management
4

• A Bank’s Treasury provides services externally to customers and internally to the
Management
• Externally it provides quotes, cover and advisory services for the banks’ customers.
• Internally it manages the short term and long term funds of the bank, to reduce risks
and increase profits
• It covers Maturity, Interest Rate, Liquidity and Currency Risks
• It is also responsible for Asset-Liability management, all trading /position related risks,
and “reserve” management.
Functions of a Treasury
© 2012 Capgemini - Internal use only. All rights reserved.
5
Call Money Borrowing
Interbank Loan / Funding
CRR Ratio
Interest Rate SWAP
Interbank Deals/ Interbank
Forex
Cross Currency SWAP
Spot / Forward Booking
Sheet / Dealer Rate
Exotic Currency Trading
Deposit Rate
Overnight Float
Money Markets / Fixed
Income
Foreign Exchange &
Derivatives
Asset Liability
Management

Contents
Treasury Overview
1. Introduction
2.a. Money Markets
6

• Treasury helps banks raise money by participating in the global foreign exchange,
securities, and money markets
• Money market is defined as the global financial market for short-term borrowing and
lending
• It is a place for large corporations, bank-institutions and governments to manage their
short-term cash needs
• The trading includes simple products like:
 Call Money Borrowing
 Interbank Loan / Funding
 CRR Ratio
 Interest Rate SWAP
Money Markets
7

• The Call Money Borrowing refers to the market for extremely short period loans; say
one day to fourteen days.
• These loans are repayable on demand at the option of either the lender or the borrower.
• These loans are given to brokers and dealers in stock exchange.
• Similarly, banks with ‘surplus’ lend to other banks with ‘deficit funds’ in the call money
market. Thus, it provides an equilibrating mechanism for evening out short term
surpluses and deficits.
• Moreover, commercial bank can quickly borrow from the call market to meet their
statutory liquidity requirements. They can also maximize their profits easily by investing
their surplus funds in the call market during the period when call rates are high and
volatile.
Call Money Borrowing
8

• The interbank lending market is a market in which banks extend loans to one another
for a specified term. Most interbank loans are for maturities of one week or less, the
majority being overnight. Such loans are made at the interbank rate (also called the
overnight rate if the term of the loan is overnight).
• Banks are required to hold an adequate amount of liquid assets, such as cash, to
manage any potential bank runs by clients. If a bank cannot meet these liquidity
requirements, it will need to borrow money in the interbank market to cover the shortfall.
Some banks, on the other hand, have excess liquid assets above and beyond the
liquidity requirements. These banks will lend money in the interbank market, receiving
interest on the assets.
• The interbank rate is the rate of interest charged on short-term loans between banks.
• The interest rate charged depends on the availability of money in the market, on
prevailing rates and on the specific terms of the contract, such as term length.
Interbank Loan / Funding
9

Role of interbank lending in the financial system
• To support the fractional reserve banking model
• A source of funds for banks
• Funding liquidity risk
• Longer-term trends in banks' sources of funds
• Benchmarks for short-term lending rates
• Monetary policy transmission
Interbank Loan / Funding continued...
10

• It is a bank regulation that sets the minimum reserves each bank must hold by way of
customer deposits and notes
• These deposits are designed to satisfy cash withdrawal demands of customers
• Deposits are normally in the form of currency stored in a bank vault or with the central
bank like the RBI
• CRR is also called the Liquidity Ratio as it seeks to control money supply in the
economy
Effects on money supply:
• CRR is used as a tool in monetary policy, influencing the country’s economy, borrowing
and interest rates
• CRR works like brakes on the economy’s money supply
• CRR requirements affect the potential of the banking system to create higher or lower
money supply
CRR Ratio
11

CRR and liquidity:
• For e.g. say…the CRR is pegged by RBI at 10%. if a bank receives Rs. 100 as deposit,
then they can lend Rs. 90 as a loan and will have to keep the balance Rs. 10 in
customer’s deposit account
• Now, the borrower who has received Rs. 90 as a loan will deposit the same in his bank
• The borrower’s bank will now lend out Rs. 81 (Rs. 90 X 90%) and keep Rs. 9 in his
deposit account
• As this process continues, the banking system can expand the initial deposit of Rs.100
into a maximum of Rs. 1000 (Rs. 100 + Rs. 90 + Rs. 81….=Rs. 1000)
• The higher the cash reserve (CRR) required, the lower the money available for lending
• Every time the borrowed money comes into a deposit account of a customer, the bank
has to compulsorily keep a part of it as reserves
• This reduces credit expansion by controlling the amount of money that goes out by way
of loans
• Hence central banks in the world increase the requirement of cash reserves whenever
they feel the need to control money supply
CRR Ratio continued...
12

Interest Rate SWAP
13
• An agreement between two parties where one stream of future interest payments is
exchanged for another based on a specified principal amount
• Interest rate swaps often exchange a fixed payment for a floating payment that
is linked to an interest rate (most often the LIBOR)
• One company wants to receive a payment with a variable interest rate, while the
other wants to limit future risk by receiving a fixed-rate payment instead
• A company will typically use interest rate swaps to limit or manage exposure to
fluctuations in interest rates, or to obtain a marginally lower interest rate than it
would have been able to get without the swap
• The gain one party receives through the swap will be equal to the loss of the other
party. While they are neutralizing their risk, in a way, one of them is going to lose
some money
• Both the parties need to agree on 2 main issues:
 Length of the SWAP. Establish a start date and a maturity date for the swap,
and know that both parties will be bound to all of the terms of the agreement
until the contract expires
 Terms of the SWAP. Be clear about the terms under which you’re exchanging
interest rates

Interest Rate SWAP continued…
14
To illustrate how a swap may work, let’s look further into an example:
• ABC Company and XYZ Company enter into one-year interest rate swap with a
nominal value of $1 million
• ABC offers XYZ a fixed annual rate of 5% in exchange for a rate of LIBOR plus 1%,
since both parties believe that LIBOR will be roughly 4%
• At the end of the year, ABC will pay XYZ $50,000 (5% of $1 million)
• If the LIBOR rate is trading at 4.75%, XYZ then will have to pay ABC Company
$57,500 (5.75% of $1 million, because of the agreement to pay LIBOR plus 1%)
• Therefore, the value of the swap to ABC and XYZ is the difference between what
they receive and spend
• Since LIBOR ended up higher than both companies thought, ABC won out with a
gain of $7,500, while XYZ realizes a loss of $7,500. Generally, only the net payment
will be made
• When XYZ pays $7,500 to ABC, both companies avoid the cost and complexities of
each company paying the full $50,000 and $57,500.

Contents
Treasury Overview
1. Introduction
2.a. Money Markets
15

• Treasury helps banks determine the FX rates based on current market trends and
bank’s internal requirements
• The foreign exchange (also known as currency, FOREX or FX) market is defined as the
trading of one currency for another
• The various participants who deal in Foreign Exchange are commercial banks, central
banks, currency speculators, multinational corporations and governments
 Interbank Deals/ Interbank Forex
 Cross Currency SWAP
 Spot / Forward Booking
 Sheet / Dealer Rate
 Exotic Currency Trading
Foreign Exchange
16

• The interbank forex market is a financial system of currency trading among the world’s
largest banks and financial institutions
• This currency exchange takes place directly among banks or via electronic brokering
platforms, such as Electronic Brokering Services (EBS) and Reuters Dealing 3000
Matching
• Both these platforms offer trading in the major currency pairs. Trading in cross
currency pairs is typically not supported by these platforms
• The major currency pairs primarily traded on these systems are:
Interbank Deals / Interbank Forex
17
EBS
EUR/USD
USD/JPY
EUR/JPY
EUR/CHF
USD/CHF
Reuters
GBP/USD
EUR/GBP
USD/CAD
AUD/USD
NZD/USD

Interbank Deals / Interbank Forex continued…
18
Who Determines the Interbank Forex Rates?
• FX Rate is majorly determined by the market. Additionally, banks can decide their
rate based on market trend
• However, given stiff competition and a large number of players in the market, the
prices determined by different banks do not vary significantly
• The factors considered by banks to determine forex prices include:
Volume available at the current price level
Current economic and political environment
Their opinion on the prospects of various currency pairs
Their inventory levels

Cross Currency SWAP
19
• An agreement between two parties to exchange interest payments and principal on
loans denominated in two different currencies for a specified term
• In a cross currency swap, a loan's interest payments and principal in one currency
would be exchanged for an equally valued loan and interest payments in a different
currency
• It is similar to an Interest Rate Swap but where each leg of the swap is
denominated in a different currency. A Cross Currency Swap therefore has two
principal amounts, one for each currency
• With an Interest Rate Swap there is no exchange of principal at either the start or
end of the transaction as both principal amounts are the same and therefore net out
• For a Cross Currency Swap it is essential that the parties agree to exchange
principal amounts at maturity. The exchange of principal at the start is optional
• The product is particularly useful if a firm has taken a loan in dollars and receives a
lot of foreign currency from abroad. The firm can then use this foreign currency to
repay its loan

Cross Currency SWAP continued…
20
To illustrate how a swap may work, let’s look further into an example:
• The firm has a loan in dollars which was arranged 3 years ago and which is
currently on a floating-rate basis
• In the 3 years since then, the business has grown and is now exporting into Europe
and receiving foreign currency from France
• Managing the risk on the foreign exchange and interest-rate risk on the loan are 2
problems with the firm
• A Cross-Currency Interest-Rate Swap can solve both of these problems at once
• The firm has borrowed $1 million which the firm will repay over 3 years. The firm
decides to do a Cross-Currency Interest-Rate Swap with a bank
• The French Franc and dollar exchange rate is 5 Francs to one Dollar. Under the
terms of the swap, banks will do a foreign exchange deal that day so that the firm
sells to the bank 1 Million Dollars and banks sell to the firm 5 million French Francs

Cross Currency SWAP continued…
21
• Bank will pay the firm a floating interest rate on the $1 million for 3 years, in return
the bank will pay a fixed (or floating) interest rate on the French Franc loan of 5
million for 3 years
• At the end of the swap period, the firm will pay the bank 5 million Francs back and
the bank will pay $1 million in dollars back to the firm
• In doing this the firm creates a French Franc loan and it can use the French Francs
from its exports to pay off the loan
• This gets rid of the problem of managing its foreign exchange risk. And if the firm
chooses a fixed interest rate on the French Franc loan it can also get rid of any
possible interest-rate risk

Spot Currency/Forward Currency
22
Spot Currency
• A foreign exchange spot transaction, also known as FX spot, is an agreement between
two parties to buy one currency against selling another currency at an agreed price for
settlement on the spot date (the spot date of a transaction is the normal settlement day
when the transaction is done today).
• The exchange rate at which the transaction is done is called the spot exchange rate.
• The standard settlement timeframe for foreign exchange spot transactions is T + 2 days;
i.e., two business days from the trade date.
• A notable exception is the USD/CAD currency pair, which settles at T + 1.
Forward Currency/Contract
• A transaction which has settlement after the spot date is called a forward or a forward
contract.
• A FX forward is a contract to buy or sell a stated amount of a given currency at a specific
price on an agreed date or range of dates in the future.
• The contract is binding on both the parties.
• Banks will provide forward FX quotes on more or less any currency pair.

Sheet Rate/Dealer Rate
23
Sheet Rate
• This is usually a sheet with FX conversion rate with reference to base currency of the
publishing Bank’s country.
• The sheet rate is an indicative rate of permissible currencies and usually applied for
transactions below a specified amount limit. This limit is decided as per internal policy of
Banks.
• The sheet rate is published by Bank at the beginning of business day . However, Bank
may revise the sheet rate intraday, as and when, Bank desires.
Dealer Rate
• This rate is provided by Dealers at the request of operation.
• Usually for transactions above specified limit or for relationship customers, operation
may ask for special rate from dealers.
• When dealers rate is provided operation ignores the sheet rates. For dealers rate a deal
is booked for every bid/ask.

Exotic Currency Trading
What is an Exotic Currency?
• A foreign exchange term for a thinly traded currency.
• Exotic currencies are illiquid, lack market depth and trade at low volumes.
• Examples of exotic currencies include the Thai baht, Uruguay peso or Iraqi dinar.
What is Treasury role?
• Treasury publishes daily foreign exchange rates and it decides what all currencies bank
will deal in.
• It also decides what exotic currencies it will deal in and what will be the buying/selling
rate for them.
• Trading an exotic currency can be expensive, as the bid-ask spread is usually large.
24

Contents
Treasury Overview
1. Introduction
2.a. Money Markets
25

• Banks face several risks such as the liquidity risk, interest rate risk, credit risk and
operational risk
• Asset liability management (ALM) is a strategic management tool to manage interest
rate risk and liquidity risk faced by banks, other financial services companies and
corporations
• Treasury of a bank manages the risks of asset liability mismatch by matching the
assets and liabilities according to the maturity pattern or the matching the duration, by
hedging and by securitization
 Deposit Rate
 Overnight Float
Asset Liability Management
26

• Deposit Rate refers to the amount of money paid out in interest by a bank or financial
institution on cash deposits.
• Banks pay deposit rates on savings and other investment Accounts.
Example:
When a person deposits money into a bank, that bank will in turn use the money to loan out
to other customers for a fee. This fee is called a loan interest rate. The money deposited
into the bank as savings gives the bank confidence that the money will be under
management for an extended period of time; the bank will give the depositor a rate for use
of his money. This is called a deposit rate and is the amount earned on money in a
deposited account.
Deposit rates
27

Overnight Float
28
• Large deposit held by a financial institution for a very short time; when done
regularly, bank makes large profit from interest it earns on these deposits
• In banking and finance, the term float refers to the temporary inaccuracy of a bank
balance in an account that occurs due to the period between when a check is
deposited and when the issuing bank acknowledges that deposit
• During this latent period, both banks claim ownership of the funds
• In case of electronic payment, although banks may receive funds electronically
soon after a deposit is made, the funds are not available for use by the account
holder until the next day
• This money, called negative float, may be invested by the bank overnight to
generate revenue for the bank
• Although the Check Clearing for the 21st Century Act sped up the processing of
checks, it did not speed up the process of the bank making the deposited funds
available

Contents
Treasury Overview
1. Introduction
29

Overview of Treasury Management System
30
Copyright ©2012 Capgemini. All rights reserved.
• A Treasury Management System is a term for a treasury-
oriented system or software package that specializes in
automation of manual tasks for managing cash flows.
• Treasury Management System allows a company to
communicate with financial institutions to manage cash,
transactions, forecasts, FX and investments and debt.
• Corporate Treasurers can efficiently respond to financial
needs of company by proper selection and implementation
of a Treasury Management System.
• To remain competitive companies need to ensure optimal
use of treasury technology such as Treasury Management
System.
• Three major business benefits from a well-defined
Treasury Management System:
 Enterprise – wide visibility of cash
 Financial Risk Management
 Treasury Efficiency

Understanding of Treasury Products
31
• In today’s global financial market where interest
rate tend to vary so often or widely, there is a
growing demand from corporations, institutions
and high net-worth individuals for hedging risks
associated with interest rates, currency,
commodities, equity as well as other risks.
Banks offer financial products to manage such
risks, capitalize cash flow and minimize debt
financing.
• Treasury products meet the demands of
liquidity, cash flow management and interest
rate fluctuations and yields higher income and
capital growth.
• Treasury products mitigate business risks.
Aim : To “evaluate, quantify and manage financial risks into
definable future cash flows with certainty along with responsibility and accountability.

Different Categories of Treasury Products
32
Treasury
Management
Systems
Banking
Front office
and Middle
office
Deal
Capture
Cash Flow
Corporate
Debt
Manageme
nt
Treasury
Analytics
Systems
Corporate
finances

Commonly Used Treasury Products
33
Sungard Ambit Treasury Management System
 Provides a centralized front-to-back office solution with straight through processing for cash,
liquidity and risk management.
 Using this solution, banks can forecast both known and projected cash flows based on real-
time data. Transparency is improved with real time risk and regulatory reporting.
 It provides real-time connectivity with Streamlined Processing Capabilities and a
sophisticated deal capture,pricing,Investment accounting and real time portfolio
management.
 It has comprehensive accounting tools that accepts data from any back office application,
increase processing efficiency, reduce operating errors and mitigate operational risk.
 It provides real time liquidity management and Cash flow modeling. Organization's cash can
be viewed from a single screen; information is up-to-date and is matched and reconciled on
a real time basis.

34
Finacle Treasury Solution
 Finacle is an integrated front, middle and back office treasury solution that covers the entire
deal lifecycle for trading and capital market products.
 Unique features of Finacle Treasury Solution
• Fast and Efficient Front-to-Back office processing
 Provides Straight through processing and reduced operational costs.
 Transparent and interactive service delivery to customers.
• Wide Range of Asset Classes
 Supports Foreign exchange, money markets, fixed income, equities, derivatives, structured
products, credit derivatives and commodities.
• Greater Flexibility
 Easy configuration of new products and processes.
 Reporting tools.
• Collaboration and Co-creation
 Customizable User Interface
 Dashboard streamlined for optimal workflow control.

35
Spectrum Treasury
 Spectrum Treasury provides a complete solution for managing foreign exchange, fixed
income, equity and derivative contracts.
 Spectrum Treasury provides a high performance solution to facilitate substantial daily trading
volumes and open positions.
 Upon trade execution positions are instantly updated in Spectrum to provide real-time data
to all traders across a network.
 Provides a functional web-portal which can be easily integrated into any technical
environment.
 Provides full support for SWIFT and Continuous Linked Settlement and real time limit
monitoring for counterparties,traders,countries and currencies.
 Straight through processing with User-defined workflows and provides real time
position,P&L,cashflow,risk management and hedging blotters.

Question Bank
36
1. Which of the below is not treasures responsibility–
1. Managing cash and market risk
2. Effective utilization of funds
3. Investment management
4. Accounting management

Question Bank
37
2. Which of the below is not interfacing with TMS–
1. MIS
2. RISK management
3. Schemes
4. Cash & liquidity management

Question Bank
38
3. Exotic Currency Trading is treasury function which belongs to Asset Liability
Management
1. TRUE
2. FALSE

4. Call Money Borrowing refers to the market for extremely short period loans. This
loan period generally is –
1. Less than 15 Days
2. One Month
3. Three Month
4. Less than 7 Days
Question Bank
39

5. Most interbank loans are for maturities of -
1. Three Month
2. One week or less, the majority being overnight
3. One Month
4. Less than 7 Days
Question Bank
40

6. In interbank loan, interest rate charged are high & fixed. They are not dependant on
the availability of money in the market since the loan period is very short.
1. TRUE
2. FALSE
Question Bank
41

7. CRR works like brakes on the economy’s money supply
1. TRUE
2. FALSE
Question Bank
42

8. Which of the below is not trading related product?
1. Cross Currency SWAP
2. Spot / Forward Booking
3. Term Deposit
4. Exotic Currency Trading
Question Bank
43

9. FX Rate is majorly determined by-
1. Central banks of countries
2. World Bank
3. The market trends
4. SWISS bank
Question Bank
44

10. ALM is a tool to manage interest rate risk and liquidity risk faced by banks.
1. TRUE
2. FALSE
Question Bank
45

11. Which of the below is not business benefits from a well-defined Treasury
Management System:
1. Enterprise – wide visibility of cash
2. Higher dealer rates
3. Financial Risk Management
4. Treasury Efficiency
Question Bank
46

12. Which of the below is not a TMS product -
1. Sungard Ambit Treasury Management System
2. Finacle Treasury Solution
3. Funtech Global payplus Treasury Management System
4. Spectrum Treasury
Question Bank
47

13. A transaction which has settlement after the spot date is called -
1. Forward contract
2. Spot contract
3. Future Contract
4. Dealer contract
Question Bank
48

14. . A Cross Currency Swap has two principal amounts, one for each currency
1. TRUE
2. FALSE
Question Bank
49

15. The sheet rate is published by Bank at beginning (1st) of every Month.
1. TRUE
2. FALSE
Question Bank
50

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