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Interbank Call Loan - Short-term money “Bank A borrows from Bank B” Coupon at 4.00%, yield @ 8.

00%
market which allows for large financial Premium / Discount on Bonds Cpn 1 : 2.00x[1/(1+0.08/2)^1 = 1.92
institutions, such as banks, mutual funds Value date: 2018 August 01 Cpn 2 : 2.00x[1/(1+0.08/2)^2 = 1.85
and corporations, to borrow and lend Amount: 50,000,000 Premium: is expense to the buyer and Par :100.00[1/(1+0.08/2)^2= 92.46
money at interbank rates. Rate: 6.375 income to the seller. When an investor “Price at discount = 96.23”
buys a bond at a premium, the buyer
The interbank rate is the rate of interest How much will be the settlement amount automatically deducts withholding tax Price vs Yield
charged on short-term loans made on the following business day? from the premium which represents an Basic Principle:
between banks. The interbank rate can income accruing to the seller. The yield moves inversely against price:
also refer to the price at which banks Bond Pricing 1. If yield goes up, the price goes down.
conduct wholesale foreign exchange Discount: is income to the buyer and 2. If yield goes down, the price goes up.
transactions in both the spot and forward Bonds are usually issued at price of the seller automatically deducts the
market. par(100.00). Thus, for an investment of withholding tax from the discount at time
Php 1MM, the investor will receive the of purchase.
Why do banks borrow/ lend? par value of Php 1MM at maturity plus
periodic interest collection, usually semi Bond Price
“Overnight Borrowing or Lending” annual (or twice a year), based on the
coupon interest rate.
Banks and other financial institutions
borrow or lend from other banks or Trading at the secondary market:
financial institutions primarily to At premium over par (>100.00)
meet reserve requirements or to correct At discount over par (<100.00)
liquidity position resulted from the days At par ( =100), coupon rate is = to yield.
heavy transaction on either withdrawals
or deposits respectively before the close Components of Bond Prices
of business. It is known as interbank Net Cost: Cost net of the applicable
transaction where bank may borrow or withholding tax (net dirty price).
lend with other bank or other financial Gross Cost: Book value of the bond
institution or with BSP. which may either be at premium over par
or at discount below par (gross dirty Example: Premium/Discount
“Overnight ( 1 to 3 days)” price).
Bond: price @ par of 100, coupon 4%
Interbank settlement will be calculated Tax on Premium/Discount p.a. semi-annual, yield 4% p.a.
on the basis of the current interbank rate Acquired Interest: Coupon interest 1/1/18 7/1/18 1/1/18
and the three days (3) if it falls on Friday. accruing to the seller which arise when l-------------------------l------------------------l
bonds are purchased in between coupon 2.00 2.04 From TREASURY TRANS AND
payment periods. - (minus) 2.00 x (1+0.04/2) ^1 PRODUCTS POWERPOINT.
• Example: Total Considerations: Net Cost + Net Example: Discount
Acquired interest, if any.
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TREASURY GROUP all times to meet the needs of its primary • Deals are evaluated as to the
Front Office (Dealing Room) business operations. • Workforce independent of the applicable risk.
Back Office (Support) dealing room’s personnel but
The Treasury department of a bank is adheres with policies and
TREASURY responsible for balancing and procedures authorized and
managing the daily cash flow and approved by the board
In Banking, Dealing room or Trading liquidity of funds within the bank. (authorized signatories, limit
room is headed by the bank’s The department also handles etc.);
Treasurer with the rank of SVP (Senior the bank's investments in securities, • Responsible for providing crucial
Vice President) who is a senior officer foreign exchange, asset / operations support to Treasury
and member of the board. Under his liability management and cash Front Office ( such as, inventory,  Exceptions are approved prior to
implementation.
supervision are VP’s (Vice President) instruments. position etc.);
who are overseeing different • Handles reportorial requirements
departments operating on financial Treasury back office functions of Treasury Group.
market transactions such as; Domestic undertaken by shared service or
unit which handles local market Php operations division. Oversight Critical Roles of Treasury Operations
domestic transactions, International unit of treasury activities by an officer usually
which handles different currencies (VP) Vice President independent of day-
transactions on local and International to-day activities. There should be an I. Origination
markets and the Financial derivatives effective segregation of key duties  Counterparty Limits
All deals are properly and completely
unit which handles Php and foreign including dealing, settlement, and recorded.  Trading within the bank lines
currencies derivative transactions. accounting/reconciliation. approved by the Board of
The dealing room is also often called Directors
front office and normally personnel “Without proper operations, the
inside the room are traders or dealers CONTROL SYSTEMS will not  Settlement Risk
with the rank of Managers up to VP. work and the bank may be o Counterparty fails at maturity
Each desk / unit in the front office has a exposed to unintended and date;
counterpart in the back office to unmanaged risks which o Bank pays, does not receive
complete, execute, each transaction. ultimately could result in losses” payment.
ATENEO – BAP II. Deal Recording o Settlement risk is 100% of
Treasury Position in the Corporate Deals are authorized principal.
Structure Treasury Operations Division  Done by traders and approved;
 Within the trading limits;  Pre-settlement Risk
The Treasury department occupies a A division in the bank responsible in the  Done at prevailing market rates o Counterparty fails before maturity
central role in the finances of the execution / processing, documentation  Phone conversations are date
modern corporation. It takes responsible and settlement of all the deals coming recorded. o set at 20% of the par value for
for the company’s liquidity—ensures that from the treasury dealing room. Accuracy fixed income/money market
a company has enough cash available at and timeliness is a primary consideration. o Set depending on the term of the
Operations Personnel III. Risk Monitoring deal for foreign exchange
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The possibility that the bank’s o Reportorial Requirements to the Cash Concentration (through sweeps or notional
counterparty will default on transaction regulators and to the various units pooling) to fund investments.
prior to settlement date. The bank’s of the bank / Reconciliation on Cash concentration is the transfer of
Treasury transactions’ GL
exposure is the replacement cost for the funds from diverse accounts into a All Functions Centralized – Pooled
accounts.
contract by having to source from the central account to improve the cash into concentration account
market. The limit is asumed as 20% of Transactions Processed, Monitored efficiency of cash management. manages investment and
the total outstanding FX contract. and Settled: Consolidation of cash into a single disbursements.
account allows a company to identify
 Off Market Limits  Dollar and Peso Interbank Call Loans excess cash available for short term Cash Pooling Concept
o Trading within the market rate investments.
 Sales and Purchase of Dollar and
and within the tolerance limit set A cluster of subsidiary bank accounts
by the Board of Directors Peso Government/Private Securities
Benefits of Cash Concentration and a concentration account. Funds
 Funds Transfer
physically flow from subsidiary accounts
IV.A. Processing. Deals are accurately  Foreign Currency Transaction
a. Elimination and aggregating idle cash is a physical sweeping. Cash balances
recorded.  Reportorial Requirements
from diverse accounts into interest movement only with the bank’s record
 Internal and external system
earning investment; is called notional pooling.
requirements
b.Improved investment return,
 Transfer of securities to the 3rd Party
aggregated cash can be allocated Physical Sweeping
Securities Custodian
to properly termed investment; Movement of cash from multiple bank
 Underwriting of Stocks c.Cost Effective account monitoring, accounts into a single concentration
minimizing manual review of account. Agreement to sweep all cash
subsidiary accounts; at the end of the day into concentration
Units in Treasury Operations d. Internal funding for debit balances, account.
Division: overdraft charges may be avoided.
 International Operations Zero-balance account - automatically
Department Cash Concentration Strategies transfers amounts usually within the
o Fixed Income (Dollar same bank. As per agreement, amount
Bonds,ROP’s) Complete Decentralization – used for reduced to zero.
o Foreign Exchange (Forwards, smaller balances, while centralized
Swaps & Spots) approach is used for large cash Constant balancing account –
 Money Market
balances. Predetermined minimum balanced
 Nostro Transfer
required. Sweeping takes effect when
 Domestic Operations Department
Fixed Income (Government Centralized Payments, Decentralized cash levels is above the required
Securities) Liquidity Management – all payables balance, and reverse back to subsidiary
o SDA for subsidiaries from local accounts. account when balance falls short.
o Money Market (interbank)
o RRP Centralized Liquidity, Decentralized Trigger balance – Excess funds
 Reports and Reconciliation From Treasury Front and Back Office Payments Management – centralized automatically flow to concentration
Department Powerpoint. cash into concentration account account.
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Cash Flow Forecasting (Cash Poor Quality Forecast
Frequency of Cash Transfers Overlay bank is an international Analysis)
banking group providing Cash pooling  Manual processes which may
lead to too much time spent on
Daily Basis or Notional pooling on a multi-national Cash flow forecasting is the process of
data gathering and collection
Intraday – cash balances are transferred company level. An overlay bank works predicting cash flow (daily, losing time analyzing position and
to concentration account before the end with local concentration banks in each weekly,monthly or as may be required effective management.
of the day banking transactions. country depending on the nature of the business)  Inconsistent assumptions.
End of day – cash balances are for the purpose of managing liquidity  Junior-level forecast
transferred to the concentration account "Overlay bank": The bank that provides needs and for investment control. An responsibility.
after all banking transactions have an additional layer of bank accounts accurate forecast provides the fund  Lack of incentives and
already been processed, thus will be within a country to facilitate transfers managers with the essential information accountability in business units.
valued the following day. between the operating local accounts needed for making sound investment
Impact of Poor Cash Forecast
and pooling structure accounts, with the decisions.
Cash Balances Transactions between aim of sweeping (notionally or effectively) Lack of Cash
subsidiary accounts will be reflected on the resulting balance cross-border into a A good cash flow forecast should • Loans cannot be serviced on time
each subsidiary account balance sheet in central liquidity pool. answer the following questions: • Suppliers cannot be paid on time
the form of outstanding loans, interest 1. How much cash is available? • Investors cannot receive dividends on
2. When will it become available? time
income allocation, interest expense Consists of two layers:
allocation. Tax jurisdictions and interest Lower layer – all in country banks for 3. How long will it be available?
Excessive Cash
rate play important considerations in the local cash transactions. • Lost opportunity to decide on higher
flow. Higher layer – networked regional banks How to do a Cash Flow Forecast? yielding investment
or even a single global bank that
Notional Pooling maintains a separate bank account for 1. Decide on the time period your Quality Cash Forecast
Process of calculating interest on the each country of the corporate entity. forecast should cover. Ability to determine how much will be
credit and debit transactions that 2. Review your accounting history for allocated for short medium and long term
occurred in the account without the previous and current investment.
actual transfer of funds. In this method, expenditures for the current and previous
Forecasting Procedures
subsidiary may have the privilege of to include the following: net cash
managing its daily cash and its liquidity flow balance, negative cash flow, and The following can be used to improve the
position. maturing securities that could be availability and quality of data:
recalled. a). Treasury workstations – Treasury
Cross Border Pooling 3. Create a simple, tracking your automation which integrates data into
A cross-border or multi-country cash revenue, expenditures and investments forecasting solution
pool is a cash management structure that 4. Use your daily bank report and daily b). Account structure – using a single
allows a company to concentrate the forecast to determine how much master account to collect all cash inflows and
outflows
cash it holds in different countries, across funds you need to be invested.
c). Statistical analysis – comparing
separate bank accounts, in one location. From Cash Concentration Recap
forecasts to the actual cash flow and
Powerpoint. identifying the behavior which may improve
Bank Overlay Structure the predictability of a forecast.
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4 Largest Custodian Banks in the World related tax withholding documents such as mutual funds, insurance companies, offices/branches all over the world providing
and foreign tax reclamation. foundations, endowments and other custodial service.
1. The Bank of New York Mellon investment pools. Standard Chartered Bank – (same with
2. JPMorgan Chase  administer voluntary and Deutsche Bank)
3. State Street Bank and Trust involuntary corporate action on
Company (12) Operational Risks Facing the Clearstream Banking – Handles
securities held such as stock Custodian: custodianship for all government and
4. Citigroup
dividends, stock splits, business 1. Headline Risk corporate issued bonds traded by banks in
combinations (mergers), tender 2. Contract Risks the Philippines and international market.
Custodial Service offers, bond calls, etc. 3. Regulatory Risk
A custodial service is when an entity or 4. System Integration Risk The Bureau of the Treasury (BTr) acts as
individual holds a client's property or money  provide information on the securities
5. Trading Risk principal custodian of the National
on their behalf. The custodian is responsible and their issuers such as annual
6. Data Management Risk Government (NG). It makes funds available
for the safety of the financial products. general meetings and related
7. Global Custody Risk for the various programs and projects of the
proxies
8. Foreign Exchange Risk government. It assists in the formulation of
A custodian bank, or simply custodian, is a 9. Security Risk policies on borrowing, investment and
 administer voluntary and
specialized financial institution responsible 10. Cash Management Risk capital market development, in managing
involuntary corporate action on
for safeguarding a firm's or individual's 11. Client Support Risk the cash resources, collecting taxes made by
securities held such as stock
financial assets and is not engaged in 12. Fee Risk NG and guarantee forward cover fees due
dividends, stock splits, business
"traditional" commercial or consumer/retail NG, and in controlling and servicing its public
combinations (mergers), tender
banking such as mortgage or personal What is a Mutual Fund Custodian? debt, both foreign or domestic.
offers, bond calls, etc.
lending, branch banking, personal A mutual fund custodian is a trust
accounts, automated teller machines (ATMs)  provide information on the securities company, bank or similar financial institution PDTC
and so forth. and their issuers such as annual responsible for holding and safeguarding the
general meetings and related securities owned within a mutual fund.  Incorporated in 1995, the Philippine
The role of a custodian in such a case would proxies Depository & Trust Corp. (PDTC)
be to: A custodian is a financial institution that was previously known as the
What is the difference between depository holds customers' securities for safekeeping Philippine Central Depository Inc.
 hold in safekeeping assets/securities and custodian? to minimize the risk of being stolen or lost. (PCD).
such A custodian holds securities and other  PDTC acts as depository, registry,
as stocks, bonds, commodities such In the financial world, the roles assets in electronic or physical form. and/or intermediary of participants
as preciousmetals and currency (ca of custodians and depositories are
sh), domestic and foreign for all kinds of securities or financial
increasingly overlapping to a point at which Local Custodian (Gov’t, GOCC, Foreign instruments and provides value-
 arrange settlement of any purchases the differences between the two are Banks) added services such as collateral
and sales and deliveries in/out of becoming quite subtle. The management for repurchase
such securities and currency main difference is that a depository has BTR – Bonds locally issued by the Philippine transactions. It is also a lending
larger oversight responsibilities for the assets government. agent and collateral manager for
held in comparison to the custodian. PDTC – Bonds, Shares of stocks locally, FX Securities Lending and Borrowing
 collect information on and income
( Traded foreign currencies in the local transactions and similar activities.
from such assets (dividends) in the How custodian banks make money? market)
case of stocks / equities
Deutsche Bank – Government and
and coupons (interest payments) in The business unit makes money by charging corporate issued foreign currency
the case of bonds) and administer a fee for serving as the custodian of financial denominated bonds in the securities market
assets on behalf of institutional investors in the Philippines. ( But with several
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 PDTC provides safekeeping and Insurance Companies Essentially, the negative externalities of Major Types of Life Insurance
settlement services for listed fixed an insurance company going bust are
income securities in the Philippine Nature of Insurance. The purpose of massive.  Level term means that the death benefit
Dealing and Exchange Corp. any insurance is to provide economic stays the same throughout the duration
(PDEx). This includes government protection against any losses that may be  A stock insurance company is a of the policy.
securities and corporate debt incurred due to chance events. publicly traded corporation owned by its
stockholders. However, a stock  Decreasing term means that the death
issues. PDTC supports both broker Insurance is a contract, represented by a
company can be owned by benefit drops, usually in one-year
level and investor level settlement policy, in which an individual or entity
other stock or mutual companies. The increments, over the course of the
for all PDEx-traded transactions. receives financial protection or
objective of a stock company is to make policy's term.
reimbursement against losses from
 It is under the dual oversight of the an insurance company. The company pools a profit for the stockholders. The
1. Life insurance is a contract
Securities and Exchange clients' risks to make payments more policyholders do not directly share in
between an insurer and a
Commission (SEC) and the Bangko affordable for the insured. the profits or losses of the company. policyholder in which the insurer
Sentral ng Pilipinas (BSP), guarantees payment of a death
considering the duality of its How Insurance Generates Income benefit to named beneficiaries upon
functions where it performs market the death of the insured.
services for securities engaged in The insurance company promises a
 Revenue from investments. To generate death benefit in consideration of the
the market as well as fiduciary revenue, insurance companies will payment of premium by the insured.
services while securities are at rest. invest a portion, insurance
companies can earn additional of the 2. Health insurance is a type
small amount of money earned from of insurance coverage that pays for
annual premiums. By taking medical and surgical expenses
this money and putting it in low-risk incurred by the insured. Health
investments on profits, which help insurance can reimburse the
improve their balance sheets and bottom insured for expenses incurred from
line illness or injury, or pay the care
provider directly.
 Underwriting Income. Some insurance
companies, depending on the year, can
make money from underwriting income. 3. Property insurance, casualty
For example, Insurer A collects insurance protects against loss
$10,000,000 in premiums for polices and/or damage of property.
issued or renewed in a given year. If The difference between the two is
that casualty insurance protects
Insurer A pays less than $10,000,000 in
your business premises from injuries
claims that year, they've made a profit. and crimes against it and property
insurance covers losses to your
 Reinsurance. Some companies in land, building and/or belongings.
the insurance sector engage
in reinsurance because they want to 4. General insurance or non-life
reduce risk. Reinsurance is insurance policies, including
basically insurance that insurance automobile and homeowners
policies, provide payments
companies buy to protect themselves
depending on the loss from a
From Depository Custodian Powerpoint. from excess losses due to high exposure. particular financial event.
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General insurance is typically Investment – Oriented products 10. Guaranteed cash value life partner doesn't receive any benefits
defined as any insurance that is not Products where the investment risk has been insurance is a cash account that after the spouse dies.
determined to be life insurance. shifted from the insurance company to the gradually builds over time as part of
a permanent life insurance policy.
policy holder.
Permanent life insurance insures
5. Liability insurance is a part of the you for an entire lifetime, so once the
general insurance system of risk Annuity - a fixed sum of money paid to policy goes into effect, the life
financing to protect the purchaser someone each year, typically for the rest of insurance company pays a death
(the "insured") from the risks their life. benefit no matter when you die.
of liabilities imposed by lawsuits  a form of insurance or investment
and similar claims. It protects the entitling the investor to a series of 11. Variable life insurance is a
insured in the event he or she is permanent life insurance
annual sums.
sued for claims that come within policy with an investment
the coverage of the insurance component. The policy has a cash
policy. Regulator of insurance companies in the value account, which is invested in a
philippines number of sub-accounts available in
6. Disability Insurance a program the policy. A sub-account acts
managed by the Social Security The Commission supervises and regulates similar to a mutual fund, except it's
Administration that insures a worker the operations of life and non-life only available within a variable life
in case of a mishap. Disability insurance policy.
companies, mutual benefit associations, and
insurance offers income protection
to individuals who become disabled trusts for charitable uses. It issues licenses to 12. Universal life insurance (often
for a long period of time, and as a insurance agents, general agents, resident shortened to UL) is a type of cash
result can no longer work during that agents, underwriters, brokers, adjusters and value life insurance, sold primarily
time period. actuaries. in the United States of America.
Under the terms of the policy, the
 a practice or arrangement by which a excess of premium payments above
7. Long Term Care the current cost of insurance is
(LTC) insurance is coverage that company or government agency
credited to the cash value of
provides nursing-home care, home- provides a guarantee of the policy.
health care, personal or adult compensation for specified loss,
day care for individuals above the damage, illness, or death in return for 13. Variable universal life
age of 65 or with a chronic or payment of a premium. insurance (often shortened to VUL)
disabling condition that needs  "many new borrowers take is a type of life insurance that builds
constant supervision. LTC a cash value. With a typical
out insurance Insurance Companies Investment
insurance offers more flexibility and whole life policy, the death benefit is
options than many public assistance against unemployment or sickness" Strategies
limited to the face amount specified
programs in the policy, and at endowment
9. Cash value life age, the face amount is all that is Fixed income has long been an attractive
8. A structured settlement is a insurance is permanent life paid out. asset class for insurance companies – they
negotiated financial insurance with a cash provide predictable cash flows that can be
or insurance arrangement through value savings component. The 14. Second-to-die insurance is a type easily used to match expected liability cash
which a claimant agrees to resolve a policyholder can use the cash of life insurance on two people
personal injury tort claim by receiving value for many purposes, such as a flows. In the current low rate environment,
(usually married) that provides
part or all of a settlement in the form source of loans, as a source of cash, benefits to the beneficiaries only however, the returns may be too small to
of periodic payments on an agreed or to pay policy premiums after the last surviving person on the enable insurers to meet minimum guaranteed
schedule, rather than as a lump sum. policy dies. This differs from regular returns. So many insurers are now
life insurance in that the surviving increasingly looking to take on additional
credit risk to increase their yields.
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