Iswar Padhan

Agenda for the Session

1. Role & Rationale for Treasury

2. Need for a Well-organised treasury

3. Set up of a Good Treasury System

4. Various segments of Treasury

5. Functions of various segments


Banking Definition

Banking is defined as the business of
accepting of deposits for the purpose of
lending ..

Core activity, combined with the rapid growth of
modern day banking activities necessitates a
well organised Treasury.

4
Financial Intermediation & Risk Profile
Depositors /
Investors
Bank
Borrowers
[ Corporates /
Individuals ]
Risk Associated are:
Credit Risk
Liquidity Risk
Int. Rate Risk
Forex Risk
Operational Risk

ALM mainly deals with liquidity, Int Rate & Forex Risks
Objectives:
Earn Profit
Enhance Value of Equity
5
Risk Profile
Credit Risk : All risks related to a borrower/
counterparty not fulfilling his obligations on time
Liquidity Risk : All risks arising out of the banks
inability to meet financial commitments when
due
Interest Rate Risk :Risk of loss in the banks NII
or Economic Value of Capital arising out of
changes in the level of interest rates
Currency Risk : Risk of loss due to changes in
forex rates
Operational Risk: Risk of loss due to failure in
system / deficiencies in process and procedures

Banking: Regulatory Requirements
Connected with Treasury

Statutory Pre-emption :
a) Cash Reserve Ratio 4% of NDTL
b) Statutory Liquidity Ratio 23% of DTL

ALM Guidelines :
a) Liquidity Gap Limits
b) Interest Rate Risk Limits

Capital Adequacy Guidelines :
a) Basel II Guidelines
b) Basel III Guidelines

Authorised Dealership :
a) Forex Services to Merchant
b) FX Interbank Dealing


Management of Statutory Pre-emption (CRR & SLR)

CRR Requirement :
CRR requirement : Daily average of 4% of NDTL to be maintained in
the RBI account on fortnightly basis with individual days minimum
at 95% of the CRR requirement

Issues & Challenges :
a) Zero return on CRR balance, hence avoid excess
b) Regulatory penalty in case of default in CRR maintenance

SLR Requirement :
23% of DTL on fortnightly basis to be maintained mainly in the form
of SLR eligible Central, State Govt & other approved securities

Issues & Challenges :
To optimize the balance between liquidity, return and risk



Money Market Operations

RBI Liquidity Supports :
Liquidity Adjustment Facility (LAF) : Repo, Reverse Repo, MSF
Open Market Operation
Refinance
FC INR Swap facility
Lender of last resort

Money Market Products :
Call / Notice / CBLO
Market Repo
Term Money
Certificate of Deposits
Short term investments
TBs, CP, CD, MFs


Investment Operations

Objectives:
Regulatory compliance for SLR
Liquidity Management
Maximise Return on Investments
Make trading income
Manage risk credit, liquidity, interest rate, operational

Investment Products :
Risk Free Securities TBs and G-Secs
Bank , FI and PSU securities CP, CD, Bonds & Equity
Corporate Debts CP, Bonds and Equity

Issues & Concerns:
Underdeveloped Debt Market
Underdeveloped derivatives market for hedging
Migration to IFRS


Investment Guidelines

Classification:
3 Categories HFT, AFS & HTM
HFT & AFS treated as trading
Defeasance period of 90 days for HFT
HTM is treated as permanent limit on HTM

Valuation & MTM Provisioning:
Fixed income securities valuation as per FIMMDA Price / rates
Equity as per exchange price
HFT valuation on monthly
AFS valuation on quarterly
HTM valuation for MIS and RBI reporting
MTM loss on HFT & AFS to be provided

Shifting between Categories :
Shifting to / from HTM permitted once in a year , at beginning
Shifting from HFT to AFS in exceptional situation
Shifting from AFS to HFT with ALCO approval


Investment Risk Management & Control

Policy and Monitoring Framework:
Board approved Investment Policy and Framework
Segregation of book into banking and trading
Segregation of functions into dealing, back office and mid office
Board approved limit structure: Book Size, Duration, Loss Limit
Dealing in secured and recorded platform
Policy with dealings through brokers
Dealer-level control and monitoring
On-line, end-of-the day and periodic monitoring and reporting
Overall supervision and control by ALCO





FOREX MANAGEMENT

Forex Regulation
FEMA Act 1999
FEMA Guidelines by RBI
FEDAI Rules & Regulations
Banks Act as Authorissed Dealer (AD)
FX Brokers and Money Changers act as limited AD

FOREX Transactions
All FX remittances to be routed through Authorised Dealers
RBI based on FEMA sets rules, regulations and limits on FX
transactions

Nature of FX Market
Closely regulated by RBI
Rupee is market determined , RBI regulates to control volatility
Rupee is not fully convertible



FOREX OPERATIONS OF BANKS

Forex Services
To provide services to exporters, importers and remittance
facilities to resident & non-residents
To channelise foreign currency funds in deposits, borrowings
and investments to meet foreign currency needs on the
domestic market
To manage assets and liabilities in the various currencies and
time buckets
Provide foreign currency risk management products and
services to clients
Undertaking Trading in forex market
To raise Capital in Foreign Currency




Forex Accounts / Terms / Products
Forex Accounts
Nostro Accounts
Vostro Accounts
Loro Account

FOREX Quotations
Direct quote USD / INR
Indirect Quote CHF / INR through USD / CHF & USD / INR
Bid (Buy) & Offer (Sell)

Forex Transactions
Cash, Tom & Spot
Forward / Swap
Non-deliverable Forward (NDF)

FX Rates
Interbank Rates
Domestic Currency Rate & Cross Currency Rate
Merchant Rates
TT & Bills Rates

FOREX MARKET: Objective & Players
Objectives:
Remittance
Hedge
Arbitrage
Trading / Speculation

Major Players :

Corporates
Banks
FIIs
Hedge Funds
Pension Funds
Central Banks
Resident / Non-resident Individuals


SPECIAL FEATURES OF FX MARKET IN INDIA

MANAGED FLOAT
FLOW DRIVEN
TRADE FLOWS
CAPITAL FLOWS
OPTIONS HEDGING
REER / RBI
MONTH END SYNDROME
GLOBAL DOLLAR VALUE
IMPACT OF US DATA RELEASE
INFLUENCE OF NDF MARKET


Derivative Market

A contract whose price depends on the price of the
underlying instrument like :
a) Foreign Currency
b) Interest rate
c) Equity
d) Index
e) Commodity etc

Products Traded : Options , Currency Swaps ,
Interest rate Swaps, FRA , Range accruals, Futures,
etc..


Forex Risk Management & Control

Policy and Monitoring Framework:
Board approved Policy and Framework
Segregation of functions into dealing, back office and mid office
Segregation of dealing into inter-bank and merchant desks
Client Appropriateness & Suitability for Derivatives
Board approved limit structure:
Net Open Overnight Open Position (NOOP)
Day Light Open Position
Aggregate Gap Limit (AGL)
Dealer & Book wise Loss limit
Credit Risk Limit Structure for Clients (LER)
Dealing in secured and recorded platform
Policy with dealings through brokers
Dealer-level control and monitoring
Month-end valuation as per FEDAI rates
On-line, end-of-the day and periodic monitoring and reporting
Overall supervision and control by ALCO
Concurrent Audit of regular day-to-day activity





Need for Treasury in Banks

1. Maintenance of CRR and SLR
2. Judicious Funds Management
3. Quoting of Rates for Forex transactions
4. Management of Nostro Funds
5. Structuring and Selling of Derivatives
6. Proprietary Trading
7. Contribute Profit as a Profit Centre



Broad Classification of Treasury

1. Front Office - To Strike Deals

2. Mid Office - Risk Management Policies,
Monitoring, MIS etc.

3. Back Office - Settlement and Accounting


TREASURY
FX Sales
Product
Structuring
FX Interbank
Money Market Equities
SLR & Non-SLR
Commodities, Bullion, Metals,

Money Market Desk

1. Maintenance of CRR and SLR
2. Investment of Surplus funds -
Call / Notice Money , Mutual Funds , USD/INR Swaps,
Commercial Papers, Certificate of Deposit, T Bills , G Secs ,
3. Raising Short Term Funds
Call / Notice Money , USD/INR Swaps, Term Money,
MIBOR Linked Deposits,
4. Quoting rates for Bulk Deposits
5. Monitoring of Maturity of Bulk Deposits
6. Keeping track of outflow on account of loan disbursement
7. Maintenance of RBI balances in various centres
8. Proprietary Trading

Forex Sales Desk

1. Preparation of Card rates
2. Quoting of rates Export , Import , Remittances
3. Booking of forward contracts
4. Acceptance and monitoring of Customer Orders
5. Apprising customers of currency movements and
views on various currencies
6. Structuring and Sale of Derivative products
7. Always on the look out for new business
opportunities


FX Interbank Desk

1. Providing liquidity in the market by quoting in
USD/INR Spot , Forward and Cross Currency
2. Running proprietary trading position
3. Enabling cover operation for deals done by Sales
and Derivatives Desk
4. Management of Nostro Balances
5. Providing information on market developments and
currency views



Product Structuring Desk

1. Covering of Deals concluded by Sales desk in
interbank market
2. Structuring and pricing of new derivative products
3. Running USD/INR Option Book
4. Running Interest Rate Swap Book
5. Interact with Other banks in India and abroad to
devise new products

Derivative Products

Exchange Rate products
USD / INR options
Cross currency options

Put Options, Call Options
European , American

Interest Rate Products
Interest Rate Swaps
Currency Swaps Principal , coupon

Thank YOU
Wish You All Good Luck