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Integrated Treasury Management
Dipesh Kumar

Treasury Management
 Treasury generally refers to the funds and revenue at the
disposal of the bank and day-to-day management of the
same.
 The treasury acts as the custodian of cash and other liquid
assets.
 The art of managing, within the acceptable level of risk, the
consolidated fund of the bank optimally and profitably is
called Treasury Management.
 It is the window through which banks raise funds or place
funds for its operations.

Functions of an integrated treasury
 Reserve Management and Investment
 Liquidity and Funds Management
 Asset-Liability Management
 Risk Management
 Transfer Pricing
 Derivatives Trading
 Arbitrage
 Capital Adequacy

Structure of an integrated treasury
 The treasury department is manned by the front
office, mid office, back office and the audit group.
In some cases the audit group forms a part of the
middle office only.
 The dealers and traders constitute the front office.
In the course of their buying and selling
transactions, they are the first point of interface
with the other participants in the market (dealers of
other banks, brokers and customers).
 They report to their department heads. They also
interact amongst themselves to exploit arbitrage
opportunities.

 A mid office set up, independent of the treasury unit,
responsible for risk monitoring, measurement analysis
and reports directly to the Top management for control.
 This unit provides risk assessment to Asset Liability
Committee (ALCO) and is responsible for daily tracking
of risk exposures, individually as well as collectively.
 The back office undertakes accounting, settlement and
reconciliation operations.
 The audit group independently inspects/audits daily
operations in the treasury department to ensure
adherence to internal/regulatory systems and
procedures.

Advantages of integrating treasury operations
 Is to improve portfolio profitability, risk insulation and also to
synergise banking assets with trading assets.
 This is achieved through efficient utilisation of funds, cost
effective sourcing of liability, proper transfer pricing, availing
arbitrage opportunities, online and offline exchange of
information between the money and forex dealers, single
window service to customers, effective MIS, improved internal
control, minimisation of risks and better regulatory
compliance.
 An integrated treasury acts as a centre of arbitrage and
hedging activities.
 It seeks to maximise its currency portfolio and free transfer of
funds from one currency to another so as to remain a
proactive profit centre.

The Dealing Room
 The Treasury has a responsibility to manage market risk in
accordance with instructions received from the bank’s ALCO.
 This is undertaken through the Dealing Room which acts as
the bank’s interface to domestic and international financial
markets.
 it is the clearing house for such risk and has the responsibility
to manage the market risk taken in all areas of the bank, on
behalf of customers, and on behalf of the bank, within the
policies and limits prescribed by the Board and RMC.
 For this reason significant authority is given to the Treasurer,
and the Dealing Room staff to commit the bank to market
risk.
 Thus controls over the activities of these staff are critical to
ensure that the bank is protected from undue market risk.

The Middle Office
 The duties and responsibilities of the Middle Office vary from
bank to bank.
 Middle Office is a relatively new concept in the risk
management structure, not all banks will have formal Middle
Office structures.
 Middle Offices are in place primarily to provide market risk
monitoring, evaluation and reporting for ALCO and Treasury.
 The Middle Office is the first line of review of dealing activities
and it provides timely assessment of dealing activities and
consolidated market risk exposures of the bank.

The Middle Office
 The Middle Office must report to ALCO independent of the
Treasury. It is inappropriate that any access to Middle Office
systems is given to Treasury staff.
 As the Middle Office is the primary source for market risk
analysis in the bank, it is essential that “segregation of duty”
principles are clearly maintained.
 Middle Office provides key market risk analysis to Dealing
Room management and ALCO, its reporting line to the ALCO
Secretariat must be separate from Treasury to ensure
independent risk evaluation.

The Back Office
 The key controls over market risk activities, and
particularly over Dealing Room activities, are exercised by
the Back Office.
 It is critical that both a clear segregation of duties and
reporting lines are maintained between Dealing Room staff
and Back Office staff, as well as clearly defined physical
and systems access between the two areas.
 The Back Office and Middle Office, where present, are
also entrusted with the responsibility of ensuring the
timeliness and completeness of data in regard to market
risk activities and providing ALCO and management with
verified reports from the bank’s books as defined in bank
policy and procedures.
 Key controls performed in this area are :

The Back Office
 Key controls performed in this area are
 The control over confirmations both inward and outward.
 All confirmations must be verified by Back Office staff for consistency with
Dealing Room forms and reports. Any follow up of discrepancies between
the two (including confirmations received where no dealer’s record is
provided) must be performed independently by the Back Office in a timely
manner.
 Confirmations must under no circumstances be sent out by or received by
the dealing area.
 The control over dealing accounts, vostros and nostros must also be
timely, accurate and discrepancies followed up independently and in a
timely manner.
 Revaluations and marking-to-market risk exposures, where required by
policy and RBI directives, must be carried out by the Back Office, for bank
records, from rates received independent of the Dealing Room.

The Back Office
 Monitoring and reporting of risk limits and usage including open
positions, product usage, counterparty settlement, overall limits
and portfolio limits are the responsibility of the Back Office or
Middle Office, where in place.
 Reporting prompt resolution of exceptions and excesses are vital
responsibilities of the Back and Middle Offices and key control
considerations.
 Control over payments systems, particularly those related to
Dealing Room activities is the responsibility of the Back Office.
Under no circumstances should staff with access and/or
authority to the Dealing Room or dealing mechanism have any
authority, responsibility or access to bank payment systems.

Risk Management Techniques
 VAR Model- Estimated maximum potential loss of
a portfolio
 Back Testing - Method of examining whether the
VAR numbers being produced reasonably reflect
reality
 Stress Testing- overcome the shortfall of VAR
models, manage risk better in more volatile and less
liquid markets

Financial
Markets
Credit
Market
Money
Market
Forex
Market
Debt
Market
Capital
Market
 Indian Money Markets

Money Market
 Market for short-term requirement and deployment
of funds - overnight to one year
 In products which are close substitutes for money
 The instruments should be marketable, liquid and
bearing low-risk facilitates Asset-Liability
Management in banks
 Enables banks to reduce cost of liquidity by
deploying their short-term surpluses

RBI as Regulator of Money Market
The statutory powers of RBI as regulator of money market are derived from
 The RBI Act, 1934 which states that it is one of the objectives of RBI to
develop the money market; and
 To ensure stability in short-term interest rates
 To minimise default risk
 To achieve balanced development of various segments of money
market
 Pressure on the banking system during times of liquidity crunch
or
Ease in the banking system during times of liquidity surplus is first felt in
this market

Money Market - Important
Instruments
 Call and Notice Money
 Treasury Bills
 Commercial Papers (CPs)
 Certificates of Deposit (CDs)
 Repurchase Agreements (Repos)
 Collateralised Borrowing & Lending Obligation (CBLO)

Call and Notice Money
 Maturity - Call - Overnight
- Notice - 2 to 14 days
 Uncollateralised
 Participants
- Scheduled Commercial Banks (SCBs),
Co-operative Banks and Primary Dealers
(PDs)

Call and Notice Money…
 Limits on call / notice money exposure are
monitored on a daily / fortnightly basis
 Compulsory reporting of all call money transactions
on NDS platform within 15 minutes of deal
 NDS-Call launched from Sept. 18, 2006
 Screen-based negotiated quote-driven system for
all dealings in call / notice / term money markets
 Membership is open to all market participants

Call and Notice Money…
 NDS and RTGS Membership essential
 Dealing is optional – more than 50% share at
present
 Likely to lead to better price and volume discovery
 Call money rates are normally expected to be
within the corridor set by the repo and
reverse repo rates

Treasury Bills
 Are instruments of short-term borrowings of Govt.
 Are Promissory Notes issued at a discount and redeemed at par
 Serves as a bench mark for short-term securities
 Maturity - 91, 182 and 364 days
(14 day bills discontinued since May 2001)
 Issued through auction by RBI (1992)
 Maintained in the form of SGL entries

Treasury Bills…
 Demand for T-Bills inversely related to call rates
 Supply adjusted taking into account demand conditions and
short-term needs of Govt.
 Repo transactions permitted in all T-Bills
 All issuance of T-Bills (including under MSS & LAF) run online on
PDO-NDS system
 Minimum amount – Rs. 25,000 and in multiples of Rs. 25,000

Treasury Bills…
 91 day
- Auctions on Wednesdays
- Notified amount Rs. 500 crore (Rs. 1500 crore under MSS)
- Multiple Price based Auction
 182 day
- Auctions on Wednesdays preceding non-reporting Fridays
 364 day
- Auctions on alternate Wednesdays

Commercial Papers
 Introduced in 1990
 Issued by corporates, PDs and select all-India FIs (within the
umbrella limit)
 Subject to eligibility criteria
 Unsecured in the form of a promissory note – subject to stamp
duty
 Maturity - 7 days (Min.) to 1 year (Max.)
 Minimum size of issues – Rs. 5 lakh and in multiples of Rs. 5
lakh
 Investors - Individuals, banks, corporate bodies including
unincorporated bodies, NRIs, FIIs
 FIMMDA, in consultation with market players, depositories and
RBI, prepares related guidelines

Commercial Papers…
 Should not be underwritten or co-accepted
 Credit enhancement can be provided by banks / FIs
while non-banks can provide guarantee support
 Only Scheduled banks can act as IPAs for issuance
of CP. Responsibility of IPA to report CP
transactions on NDS within 2 days and to RBI within
3 days
 Data on CP issuance made available on RBI’s
website since July 2005

Commercial Papers…
 Banks, FIs and PDs can make investments /
hold CPs only in demat form (October 2001
onwards)
 Eligibility –
- TNW of Rs. 4 crore + as per latest ABS
- Working capital limit sanctioned by banks /
FIs
- Borrowal A/c classified as Standard
- Rating requirement – Minimum P-2

Certificates of Deposit
 Introduced in 1989
 Are securitised, tradable term deposits issued
in ‘demat’ form or as a UP Note (effective
June 2002)
 Maturity - Banks - 7 days (Min.) to 1 year
(Max.)
 Minimum size of issues – Rs. 1 lakh and in
multiples of Rs. 1 lakh (from June 2002)

Certificates of Deposit…
 Can be issued on floating rate basis if the
compilation is objective, transparent and
market-based
 Issued by Commercial banks (except RRBs)
and select FIs
 SCBs can issue without any ceiling on quantum or
interest rate
 FIs within umbrella ceiling (100% of NOF)

 FIs can issue for periods not less than 1 year
and not exceeding 3 years
 Investors – Individuals, Corporates, Trusts,
NRIs (on non-repatriable basis)
 Provides an avenue for investment at better
rate in the banking sector
 FIMMDA has issued standardised procedure,
documentation and operational guidelines for
issue of CDs (June 2002)

 CDs are high cost liabilities, subject to stamp duty
 Some of the top rated banks are getting their CDs
rated, though not mandatory
 Presently, greater demand because of –
- issuance of guidelines on investments by banks in
non-SLR debt securities
- reduction in stamp duty on CDs w.e.f. March 2004
- no TDS

ban on premature closure of CDs
- no loans or buy back of CDs
- greater opportunity for secondary market
trading (transferability period withdrawn)
- MFs are turning to CDs market because
SEBI has prohibited them from placing funds
with banks as deposits

Repos
 Are Re-purchase Agreements or Ready Forward Contracts
 Where the parties agree to sell and buy back the same security
at an agreed price at a future date
 Is a combination of security trading (purchase / sale) and money
market (lending / borrowing) operations
 All Government securities are eligible
 Repos are governed by SCRA, 1956
 All transactions are to be effected in Mumbai through SGL A/c -
DVP III system (w.e.f. April 2004)

Repos…
 Banks & PDs can undertake both Repos and Reverse Repos
 Non-bank entities (Insurance Companies, MFs, FIs) with Current
A/c and SGL A/c can undertake Repos
 All G-Sec. transactions (both outright and repos) are
compulsorily settled through CCIL
 Advantages
 Facilitates investment of surplus cash
 Borrowers can raise funds at better rates
 Collateralised
 Convenient for adjusting SLR / CRR positions simultaneously

Inter-bank Repos
 Since 1999
 Banks, Mutual Funds and FIs were main
participants (PDs can also participate)
 Non-scheduled UCBs and listed companies
with gilt accounts with SCBs allowed to
participate – subject to eligibility criteria and
safeguards
 Electronic trading platform CROMS

LAF Repos
 Since 2000
 Has emerged as the principal operating
instrument of monetary policy to moderate
daily liquidity in the banking system
 Repo - Injection of liquidity by the Central
Bank against eligible collateral
 Reverse Repo - Absorption of liquidity by the
Central Bank against eligible collateral

LAF Repos…
 W.e.f. April 2004, RBI conducts only
overnight fixed rate repo and reverse repo at
Mumbai
 Repo Rate – 6.00%
Reverse Repo Rate – 5.00%
 Decisions on LAF are aided by a daily
liquidity forecasting exercise
 Minimum bid – Rs. 5 crores & in multiples of
Rs. 5 crore

LAF Repos…
 All eligible transferable GOI dated Secs / T-Bills
 Bids submitted electronically through NDS by 10.30
am
 Introduction of second LAF from November 28,
2005
 RBI, subject to variations in liquidity, announces
every Friday the possibility and quantum of MSS
issuances (t-bills and dated securities) for the
succeeding week

LAF Repos…
 To restore LAF as a facility for equilibrating very
short-term mismatches
 To modulate liquidity absorption through reverse
repo auctions

Collateralised Borrowing &
Lending Obligation (CBLO)
 Operationalised as a money market instrument by
CCIL from January 2003 - 155 members
 Anonymous, order driven, electronic trading and
online matching facilitating price discovery and
transparency
 Maturity – 1 day (Min.) to 1 year (Max.)
 Collateralised

CBLO…
 CCIL is the Central Counter Party providing
guaranteed settlement
 Banks, FIs, Insurers, MFs, PDs, NBFCs,
PFs, Corporates, etc., can be members
 Borrowers are public & private sector banks,
PDs
 Lenders are mutual funds, insurance
companies, public & private sector banks
 Low costs compared to Call money

CBLO…
 Provides CBLO holders an exit option before
maturity
 RBI effects automated value-free transfer of
securities between market participants and
CCIL
 Transactions in CBLO are exempted from
maintenance of average CRR
 Unencumbered CBLO in CSGL with CCIL
eligible for SLR

Money Market Mutual Funds
 Detailed scheme announced in April 1992
 Purpose – To provide additional short-term avenue to investors and to
bring money market instruments within the reach of individual investors
 Regulated by SEBI but RBI clearance is required before being
registered by SEBI
 Minimum lock-in period – 15 days
 Permitted to invest in rated corporate bonds and debentures with
residual maturity of upto one year.
 Cheque writing facility extended to MMMFs (only for self-withdrawals,
no deposit)

Corporate & PSU Debt
 Debentures
 Issued by Financial Institutions / corporates /
foreign banks / private sector banks
 Bonds
 Issued by FI’s / PSUs / Nationalised banks
(PSUs are defined where Central Govt.
holding is above 51%)

Corporate Debt….
 Fixed rate non convertible in nature
 Secured debentures / bonds with or without put
call options
 Credit Rating essential
 Subordinated bonds by banks for Tier II (Upper
& Lower) capital & Perputual Bonds
 Floating rate bonds linked to INBMK & MIBOR
 Deep discount, zero coupon, step up coupon
 Tax free PSU bonds

Corporate Debt
 Pricing, typically, at a relevant spread over
GOI securities
 Primarily, wholesale in nature
 Main market participants for trading &
investment avenue include Banks, PDs, FIs,
Insurance Cos., PFs, MFs, etc.
 Trading more liquid in shorter tenor papers
 Trading more liquid in higher rated papers

Corporate Debt
 The interest payment is as per the
Information Memorandum
 The principal redemption dates & schedule is
as per the Information Memorandum
 The day count basis & floating rate
benchmark (in case of a floating rate bond) is

Corporate Debt
 Minimum amount of Bonds / Debentures are
 The settlement of Bonds / Debentures is
compulsorily in a demat mode
 Over The Counter Market
 NSE - WDM
 Trade disclosure system and not trading system,
though it has electronic match making ability

Trading System
 Counterparties known when concluding the
deal
 Brokers are the intermediaries, but do not take
part in settlement process
 Brokers have to also report all the transactions
to the unified corporate bond platform of the
BSE

Settlement Mechanisms
 Trades typically done on same day, T+1, T+2
 Securities only in demat form
 Settlement can be through either High Value
cheque or RTGS or normal clearing cheque.
RBI cheques cannot be issued for settlement
of Bonds / Debentures
 Settlement on DVP basis

Corporate Debt - Quoting
System
 Pricing, typically, at a relevant spread over
GOI securities
 Quotes & deals done on an annualised yield
basis. Price is derived from the agreed yields
 Primarily, wholesale in nature
 No transfer stamp duty for secondary market
transfer
 Day count convention is typically A/365

Market Participants
 Commercial Banks
 Primary Dealers
 Provident Funds
 Mutual Funds
 Insurance Companies
 FI
 FII’s

CRR / SLR Maintenance &
Reporting
 Maintenance of CRR u/s 42(2) of RBI Act
1934
 Maintenance of SLR u/s 24 of BR Act 1949
 Maintenance of CRR/SLR on NDTL of
Second Preceding Fortnight
 Reporting of CRR as per Form A return on
fortnight basis
 Reporting of SLR as per Form VIII Return on
fortnightly basis

Foreign Exchange Markets
 Forex business:
 International Trade Finance
 Export / Import payment settlements
 Export / Import finance
 Capital Movements
 Profit seeking capital
 Portfolio diversification
 Travel and Tour and others
 Foreign travelling
 Education
 Health, etc

Forex business
 Foreign Exchange Market
 Buying / selling foreign exchange
 Hedging exposures through derivatives
 Speculation trading
 Exchange Rate Risk
 Fast changing exchange rates
 Unpredictable
 Source of “Exchange Rate Risk”

24 hour Market
 Global Market 5 days in a week
 Day opens at Tokyo and Sydney
 Day closes at Los Angeles trading
 Before closing at Los Angeles, Sydney opens
up for the next day

Forex setup at Banks
 Forex Centers (Category B Branches)
 All those branches who handle export-import
business (customer-related)
 Merchant Market
 Dealing Room
 Positions covering
 Interbank market

Forex Market
 Interbank Forex Market
 Merchant Market
 Interbank Market
 Market Maker
 Market Taker
 Operations
 Cover operations
 trading

Inter-bank Forex Market
 Interbank market is only among ADs
 Opens at 9.00 am and closes by 5.00 pm
 It is a wholesale market with a certain
minimum lot size
 Banks and licensed financial institutions
participate in the interbank market.

Merchant Forex Market
 Market where Merchants (exporters,
importers and others) sell and buy Forex from
ADs
 It is also a retail market
 no lot size restrictions
 Rates in merchant market will be with a profit
margin over interbank rates

International conventions
 International forex markets the currency are
represented by three letter notations followed
by “SWIFT”
 Quoting pairs most often use USD as base
currency
 Exceptions: GBP, EUR, NZD, AUD

Direct and Indirect
 Direct: number of home currency units per
one unit of foreign currency
 Ex: 46.50 number of rupees per one USD
 Indirect: number of foreign currency units per
one unit of home currency
 Ex: 0.0215 number of USD per one INR
(inverse of direct quote)

Bid and Ask
1.3725 / 35
market maker is willing to buy market maker is willing to sell
market take can buymarket take can sell

Settlement
 Spot Market is the predominant market
 Spot – contract today and settlement on the
second working day
 ‘ready transaction’ or ‘cash transaction –
settlement is on the very day (Cash today)
 Value tomorrow

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