TREASURY MANAGEMENT funding needs, and use this

information to  correctly invest

SESSION 1 excess funds, as well as be prepared
for  additional borrowings or capital
TREASURY MANAGEMENT raises.
 Treasury generally refers to the  The department must also
funds and revenue at the  disposal of safeguard existing assets, which 
the bank and day-to-day management calls for the prudent investment of
of the  same. funds, while guarding  against
excessive losses on interest rates and
 The treasury acts as the custodian foreign  exchange positions.
of cash and other liquid  assets.  The treasurer needs to monitor the
internal processes and  decisions that
 The art of managing, within the cause changes in working capital
acceptable level of risk, the  and  profitability, while also
consolidated fund of the bank maintaining key relationships with 
optimally and profitably is  called investors and lenders.
Treasury Management.  ROLE OF TREASURY
DEPARTMENT
 It is the window through which  Cash Forecasting
banks raise funds or place funds for
 Working Capital Management
its
operations.  Cash Management
 Investment Management
INTRODUCTION  Treasury Risk Management
 Traditionally, the role of treasury  Management Advice
in banks was limited to  ensuring the  Credit Rating Agency Relations
maintenance of RBI stipulated norms  Bank Relationships
o CRR  Fund Raising
o SLR  Credit Granting
 Activity in  Other Activities
foreign exchange was
confined to CASH FORECASTING
meeting  merchants and
customers requirements for:  The accounting staff generally
o Imports handles the receipt and  disbursement
of cash, but the treasury staff needs
o Exports to compile  this information from all
o Remittances subsidiaries into short - range and 
o Deposits long - range cash forecasts.
 The treasury department  These forecasts are needed for
is responsible for a investment purposes, so the  treasury
company’s staff can plan to use investment
liquidity. vehicles that are of  the correct
 The treasurer must monitor current duration to match scheduled cash
and projected cash flows  and special outflows.
  The staff also uses the forecasts to
determine when more  cash is
needed, so that it can plan to acquire
funds either  through the use of debt
or equity.
 Cash forecasting is also needed at
the individual currency
level, which the treasury staff
uses to plan hedging its 
operations.
WORKING CAPITAL MANAGEMENT
 A key component of cash
forecasting and cash availability  is
working capital, which involves
changes in the levels of  current
assets and current liabilities in
response to a  company’s general
level of sales and various internal 
policies.
 The treasurer should be aware of
working capital levels  and trends,
and advise management on the
impact of  proposed policy changes
on working capital levels.
CASH MANAGEMENT
 The treasury staff uses the
information it obtained from  its cash
forecasting and working capital
management  activities to ensure that
sufficient cash is available for  exchange for their  investment in the
operational needs.
 The efficiency of this area is
significantly improved by  the use of
cash pooling systems.
8
INVESTMENT MANAGEMENT
 The treasury staff is responsible for
the proper  investment of excess
funds.
 The maximum return on
investment of these funds is  rarely
the primary goal.
 Instead, it is much more important
to not put funds at  risk, and also to
match the maturity dates of
investments  with a company’s
projected cash needs.
9
TREASURY RISK MANAGEMENT
 The interest rates that a company
pays on its debt  obligations may
vary directly with market rates,
which  present a problem if market
rates are rising.
 A company’s foreign exchange
positions could also be  at risk if
exchange rates suddenly worsen.
 In both cases, the treasury staff 
can create risk  management
strategies and implement hedging
tactics  to mitigate the company’s
risk.
MANAGEMENT ADVICE
 The treasury staff monitors market
conditions constantly,  and therefore
is an excellent in - house resource for
the  management team should they
want to know about  interest rates
that the company is likely to pay on
new  debt offerings, the availability
of debt, and probable  terms that
equity investors will want in
company
CREDIT RATING AGENCY
RELATIONS
 When a company issues
marketable debt, it is likely that  a
credit rating agency will review the
company’s  financial condition and
assign a credit rating to the debt.
 The treasury staff responds to
information requests from  the credit
agency’s review team and provides it
 with  additional information over
time.
12
BANK RELATIONSHIPS
 The treasurer meets with the
representatives of any bank  that the
company uses to discuss the
company’s financial  condition, the
bank’s fee structure, any debt
granted to  the company by the bank,
and other services such as  foreign
exchange transactions, hedges, wire
transfers,  custodial services, cash
pooling, and so forth.
 A long - term and open relationship
can lead to some  degree of bank
cooperation if a company is having 
financial difficulties, and may
sometimes lead to modest  reductions
in bank fees.
FUND RAISING
 A key function is for the treasurer
to maintain excellent  relations with
the investment community for fund -
raising  purposes.
 This community is composed of
the sell side, which are  those brokers
and investment bankers who sell the 
company’s debt and equity offerings
to the buy side,  which are the
investors, pension funds, and other 
sources of cash, who buy the
company’s debt and  equity.
 While all funds ultimately come
from the buy side, the  sell side is
invaluable for its contacts with the
buy side,  and therefore is frequently
worth the cost of its substantial fees
associated with fund raising.
CREDIT GRANTING
 The granting of credit to customers
can lie within the  purview of the
treasury department, or may be
handed  off to the accounting staff.
 This task is useful for the treasury
staff to manage,  since it allows the
treasurer some control over the 
amount of working capital locked up
in accounts  receivable.
15 OTHER ACTIVITIES
 If a company engages in mergers
and acquisitions on a  regular basis,
then the treasury staff  should have 
expertise in integrating the treasury
systems of  acquirees into those of
the company.
 For larger organizations, this may
require a core team of  acquisition
integration experts.
 Another activity is the maintenance
of all types of  insurance on behalf of
the company.
 This chore may be given to the
treasury staff on the  grounds that it
already handles a considerable
amount  of risk management through
its hedging activities, so this
represents a further
centralization of risk
management activities.
OBJECTIVES OF THE TREASURY
 To take advantage of the attractive
trading and arbitrage
opportunities in the bond and forex
markets.
 To deploy and invest the deposit
liabilities, internal generation  and
cash flows from maturing assets for
maximum return on a  current and
forward basis consistent with the
bank’s risk  policies/appetite.
 To fund the balance sheet on
current and forward basis as  cheaply
 as possible taking into account the accounting, in  both the domestic and
marginal impact of  these actions. foreign exchange markets.
 To effectively manage the forex  As follows:
assets and liabilities of the
bank. o Front–Office: Dealing –
Risk Taking
 To manage and contain the
o Mid–Office: Risk
treasury risks of the bank within  the
approved and prudential norms of the Management and Management
bank and regulatory authorities. Information
o Back–Office:
OBJECTIVES OF THE TREASURY Confirmations, Settlements,
(CONTD..) Accounting and 
Reconciliation
 To assess, advise and manage the
financial risks  associated with the 20
non-treasury assets and liabilities of  STRUCTURE OF AN
the bank. INTEGRATED TREASURY
 To adopt the best practices in
dealing, clearing,  settlement and risk
 The dealers
management in treasury operations. and traders
 To maintain statutory reserves –
CRR and SLR – as constitute the
mandated by RBI on current and
forward planning basis. front office. In 
 To deploy profitably and without
comprising liquidity the  clearing
the course of

surpluses of the bank.
To identify and borrow on the best
their buying and
terms from the market
to meet the clearing deficits of the
selling
bank. transactions,
18
OBJECTIVES OF THE TREASURY
they  are the first
(CONTD..) point of interface
 To offer comprehensive with the other
value-added  treasury and related
services to the bank’s customers. participants  in
 To act as a profit center for the
bank. the market
ORGANIZATIONAL STRUCTURE (dealers of other
 It should facilitate the handling of
banks, brokers
all market operations  from dealing
to settlement, custody and
and  customers).
The treasury department is manned by the  The dealers
front office,  mid office, back office and
the audit group. In some  cases the audit and traders
group forms a part of the middle office
only. constitute the
The dealers and traders constitute the
front office. In  the course of their buying front office. In 
and selling transactions, they  are the first
point of interface with the other the course of
participants  in the market (dealers of other
banks, brokers and  customers). their buying and
They report to their department heads.
They also  interact amongst themselves to selling
exploit arbitrage  opportunities.
transactions,
 The dealers
they  are the first
and traders
point of interface
constitute the
with the other
front office. In 
participants  in
the course of
the market
their buying and
(dealers of other
selling
banks, brokers
transactions,
and  customers)
they  are the first
 They report to
point of interface
their department
with the other
heads. They
participants  in
also  interact
the market
amongst
(dealers of other
themselves to
banks, brokers
exploit arbitrage 
and  customers).
opportunities
 The treasury (dealers of other
department is banks, brokers
manned by the and  custome
front office,  mid  They report to
office, back their department
office and the heads. They
audit group. In also  interact
some  cases the amongst
audit group themselves to
forms a part of exploit arbitrage 
the middle office opportunities

only They report to their department
heads. They also  interact amongst

 The dealers themselves to exploit arbitrage 

opportuni

and traders STRUCTURE OF AN INTEGRATED

TREASURY

constitute the  A mid office set up, independent of

front office. In  the treasury unit,  responsible for risk
monitoring, measurement analysis
the course of and  reports directly to the Top
management for control.
their buying and  This unit provides risk assessment
selling to Asset Liability  Committee
(ALCO) and is responsible for daily
transactions, tracking of  risk exposures,
individually as well as collectively.
they  are the first  The back office undertakes
point of interface accounting, settlement
reconciliation operations.
and 

with the other  The audit group independently

participants  in inspects/audits daily  operations in
the treasury department to ensure
the market adherence to  internal/regulatory
systems and procedures.
 participants  in the market (dealers
 They report to their department of other banks, brokers and 
heads. They also  interact amongst customers).
themselves to exploit arbitrage   The dealers and traders constitute
opportunities. the front office. In  the course of
 The dealers and traders constitute their buying and selling
the front office. In  the course of transactions, they  are the first
their buying and selling point of interface with the other
transactions, they  are the first participants  in the market (dealers
point of interface with the other of other banks, brokers and 
participants  in the market (dealers customers).
of other banks, brokers and   The dealers and traders constitute
customers). the front office. In  the course of
 The dealers and traders constitute their buying and selling
the front office. In  the course of transactions, they  are the first
their buying and selling point of interface with the other
transactions, they  are the first participants  in the market (dealers
point of interface with the other of other banks, brokers and 
participants  in the market (dealers customers).
of other banks, brokers and   The treasury department is manned
customers). by the front office,  mid office, back
 The dealers and traders constitute office and the audit group. In some 
the front office. In  the course of cases the audit group forms a part of
their buying and selling the middle office  only.
transactions, they  are the first  The dealers and traders constitute
point of interface with the other the front office. In  the course of their
participants  in the market (dealers buying and selling transactions, they 
of other banks, brokers and  are the first point of interface with
customers). the other participants  in the market
 The dealers and traders constitute (dealers of other banks, brokers and 
the front office. In  the course of customers).
their buying and selling
transactions, they  are the first
point of interface with the other
participants  in the market (dealers STRUCTURE OF AN
of other banks, brokers and  INTEGRATED
customers). TREASURY
 The dealers and traders constitute
the front office. In  the course of
their buying and selling
transactions, they  are the first  They report to their department
point of interface with the other heads. They also  interact amongst
participants  in the market (dealers themselves to exploit arbitrage 
of other banks, brokers and  opportunities  
customers).  The dealers and traders constitute
 The dealers and traders constitute the front office. In  the course of their
the front office. In  the course of buying and selling transactions, they 
their buying and selling are the first point of interface with
transactions, they  are the first the other participants  in the market
point of interface with the other
 (dealers of other banks, brokers and  themselves to exploit arbitrage 
customers). opportunities
 They report to their department  The dealers and traders constitute
heads. They also  interact amongst the front office. In  the course of their
themselves to exploit arbitrage  buying and selling transactions, they 
opportunities are the first point of interface with
 The dealers and traders constitute the other participants  in the market
the front office. In  the course of their (dealers of other banks, brokers and 
buying and selling transactions, they  customers).
are the first point of interface with ADVANTAGES OF INTEGRATING
the other participants  in the market TREASURY OPERATIONS
(dealers of other banks, brokers and 
customers).
 Is to improve
 The treasury department is manned portfolio profitability,
by the front office,  mid office, back
office and the audit group. In some  risk insulation and
cases the audit group forms a part of
the middle office   only.The treasury
also to  synergize
department is manned by the front banking assets with
office,  mid office, back office and
the audit group. In some  cases the trading assets.
audit group forms a part of the
middle office An integrated treasury
 This is achieved
acts as a centre of arbitrage and through efficient
hedging  activitie
 It seeks to maximise its currency utilization of funds,
portfolio and free transfer of  funds
from one currency to another so as to
cost effective 
remain a proactive  profit centre. sourcing of liability,
 The dealers and traders constitute proper transfer
the front office. In  the course of their
buying and selling transactions, they  pricing, availing
are the first point of interface with
the other participants  in the market arbitrage 
(dealers of other banks, brokers and 
customers).
opportunities, online
 Is to improve and offline exchange
portfolio of information
profitability, risk between  the money
insulation and also and forex dealers,
to  synergize single window service
banking assets with to customers, 
trading assets effective MIS,
 They report to their department improved internal
heads. They also  interact amongst
 control, minimization also to  synergize
of risks and  better banking assets with
regulatory trading asse
compliance.  This is achieved
 Is to improve through efficient
portfolio profitability, utilization of funds,
risk insulation and cost effective 
also to  synergize sourcing of liability,
banking assets with proper transfer
trading assets. pricing, availing
Is to improve portfolio profitability, risk arbitrage 
insulation and also to  synergize banking
assets with trading assets. opportunities, online
This is achieved through efficient
and offline exchange
utilization of funds, cost effective  of information
sourcing of liability, proper transfer
pricing, availing arbitrage  opportunities, between  the money
online and offline exchange of information
between  the money and forex dealers,
and forex dealers,
single window service to customers,  single window service
effective MIS, improved internal control,
minimization of risks and  better to customers, 
regulatory compliance.
effective MIS,
 It seeks to maximise improved internal
its currency portfolio control, minimization
and free transfer of  of risks and  better
funds from one regulatory
currency to another so compliance.
as to remain a An integrated treasury acts as a centre of
arbitrage and hedging  activities.
proactive  profit
centre.  It seeks to maximise
 Is to improve its currency portfolio
portfolio profitability, and free transfer of 
risk insulation and funds from one
 currency to another so
as to remain a
proactive  profit centr
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.
 Is to improve
portfolio profitability,
risk insulation and
also to  synergize
banking assets with
trading asset
 This is achieved
through efficient
utilization of funds,
cost effective  has the responsibility to  manage the
sourcing of liability,
proper transfer
pricing, availing
arbitrage 
opportunities, online
and offline exchange
of information
between  the money
of risks and  better
regulatory comp
 An integrated treasury acts as a
centre of arbitrage and hedging 
activities.
FRONT-OFFICE FUNCTIONS
 It has a responsibility to manage
investment and market risks in
accordance with instructions received
from bank’s ALCO.
 It is undertaken through the dealing
room which acts as the  bank’s
interface to international and
domestic financial  markets.
 The dealing room is the center for
market and risk  management
activities in the bank.
 It is the clearing house for risk and
treasury risks taken in all areas of the
bank.
 In view of this, control over the
activities of the treasury and  its staff
are critical to ensure that the bank is
protected from  undue market risk.
25
MID-OFFICE FUNCTIONS
 Responsible for onsite risk
measurement, monitoring  and
management reporting.

and forex dealers,  Limit setting and

exposures in
monitoring
relation
single window service to  limits.
to customers,   Assessing likely market
movements based on
effective MIS, internal
improved internal assessments and external/internal
research.
control, minimization
  Evolving hedging strategies for  Reconciliation of nostro / other
assets and liabilities. accounts.
 Interacting with bank’s Risk  Monitoring approved exposure and
management department on  liquidity position limits.
and market risk.
 Accounting
 Monitoring open currency FUNCTIONS OF A TREASURER
positions.
 Ensuring strict compliance with the
 Calculating and reporting VAR. statutory  requirements of
maintaining the stipulated CRR and 
26 SLR.
MID-OFFICE FUNCTIONS (CONTD..)  Liquidating management by:
 Stress testing and back testing of o Ensuring the
investment and trading  portfolios. optimum utilization
of residual
 Risk-return analysis. resources
 Marking open positions through investments.
to market to assess o Raising the additional
unrealized  gain and losses. resources required for meeting
credit  demands at optimal
BACK-OFFICE FUNCTIONS cost.
o Managing market and
 Deal slip verification.
liquidity risks in the
 Generation and dispatch of transactions.
interbank confirmations.
 Monitoring receipt of 30
confirmations from counterpart  BASIC TREASURY FUNCTIONS
banks.
DOMESTIC OPERATIONS
 Monitoring receipt of  Maintenance of statutory 
confirmations of forward contracts. reserves
 Effecting / receiving payments.  Managing liquidity
 Settlement through CCIL.  Profitability deployment of
reserves
 Monitoring receipt of forex funds
in interbank contracts.  Trading and arbitrate
 Statutory reports to the RBI.  Hedge and cover
operations
28 BACK-OFFICE FUNCTIONS  Mid/Back –
(CONTD..) Office  function(s)
 Management of nostro funds-to FOREX OPERATIONS
advise latest funds  position to enable  Extending cover to foreign 
the F/O to take the decision for the  exchange trade  transactions
surplus/short fall of funds.
 Funding and managing
 forex assets and liabilities  Ensure use of funds complies with
conditions set by  funding bodies
 Providing hedge to forex  risks
proprietary and for its  constituents  Ensure fundraising and sales
complies with relevant  legislation
 Trading and Arbitrage
and is bound by effective financial
 Mid/Back Office functions systems  and controls
 Ensure effective monitoring and
reporting
29 RESPONSIBILITIES OF A
TREASURER FINANCIAL PLANNING AND
BUDGETING
 General financial oversight
 Funding, fundraising and sales  Prepare and present budgets for
new or ongoing work
 Financial planning and budgeting
 Advise on financial
 Financial reporting implications of strategic
 Banking, book-keeping and record- and  operational plans
keeping  Presentrevised financial
 Control of fixed assets and stock forecasts based on
actual  spend.
32 35
GENERAL FINANCIAL OVERSIGHT
FINANCIAL REPORTING
 Oversee and present
 Presentregular reports on the
budgets, accounts and
organization's financial  position
financial  statements to the
management committee  Prepare accounts for audit and
liaising with the auditor,  as required
 Liaise with designated staff about
financial matters  Present accounts at the AGM
 Ensure that appropriate  Advise on the
financial systems and organization's reserves and
controls  are in place investment  policy.
 Ensure that record-keeping
36
and meet the
BANKING, BOOK-KEEPING AND
accounts conditions of funders or
RECORD- KEEPING
statutory bodies
 Ensure compliance with relevant  Manage bank accounts
legislation.
 Set up appropriate
systems for book-
FUNDING, FUNDRAISING AND keeping,  payments, lodgments &
SALES petty cash
 Ensure everyone handling money
 Advise on the organization's
keeps proper records  and
fundraising strategy
documentation
  They report to their department
CONTROL OF FIXED ASSETS AND heads. They also  interact amongst
STOCK themselves to exploit arbitrage 
opportunities.
 Ensure proper records are kept
 Ensure required insurances are in
place.

RISK MANAGEMENT

 One of the major responsibility is

to manage the risks  arising out of
the financial transactions entered into
by  the treasury.
 It has to manage the liquidity risk
and price risk in  addition to the
counterparty risk and issuer risk.
 There should be a well-defined
contingency liquidity  plan, term
structure for interest rate limits,
maximum  cumulative overflow
limits, factor sensitivities, etc.
 These limits should be monitored
by an independent risk  manager, and
the reports highlighting these limits,
their  usage and excesses, if any,
should be generated by an 
independent system, monitored and
managed by technology and
operations.
 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
 They report to their department
heads. They also  interact amongst
themselves to exploit arbitrage 
opportunitie