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BFM MODULE - C
Chapter 19: INTRODUCTION TO TREASURY
MANAGEMENT (PART-I)
What we will study?

*What is Treasury Management?

*What is Integrated Treasury Management?

What is Treasury Management?

Conventionally, the Treasury function was confined
To funds management:
1-Maintaining adequate cash balances to meet day-
to-day requirements.
2-Deploying surplus funds generated from
operations.
3-Sourcing funds to bridge occasional gaps in cash
flow.
4-In the context of a bank, the Treasury is also
Responsible to meet the reserve requirements i.e.
CRR & SLR.
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CRR:Treasurywasresponsibl
eforhol
ding
mini
mum cashbalancesr equi
redasperCash
Reser
veRat i
o(CRR)withReserveBankofIndi
a.
SLR:Treasurywasresponsi
blef
orinvest
ingf
unds
i
nappr ovedsecuri
ti
estotheext
entrequi
redunder
Stat
utoryLiqui
dit
yRati
o(SLR).
Thus,
theTreasur
yfunct
ionwasessent
ial
lyl
iqui
dit
y
management.
Servi
ceCent
re:f
rom anor
gani
zat
ionalpoi
ntofv
iew,
Treasur
ywasconsi
deredasaser
vicecent
er.
Tr
easur
ydoesLi
qui
dit
yManagement
:
Todat
e,l
iqui
dit
ymanagementcont
inuest
obean
i
mport
antfunct
ionofTr
easur
y.
Howev er,owingt
oeconomicref
ormsand
deregulati
onofmarket
swhichbegani
nIndi
aint
he
90'
s, t
hescopeofTreasur
yhasexpanded
considerably
.
Tr
easur
yAsPr
ofi
tCent
re:
Tr
easur
yhassinceevolvedasaprofi
tcent
er,
wit
h
i
tsowntradi
ngandinvestmentact
ivi
ty.
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Treasur
yconnectst
hecor
eact
ivi
tyofabankwi
th
thefi
nanci
almarket
s:
Tr easuryconnect sthecoreactivi
tyofabank
(deposi ttakingandlendi
ng)wi ththefinancial
mar kets–whi chisalsotrueofthecor porate
treasur i
esinnon-bankingcompani es–by
cont inuouslyaccessingthemar ketsforlending,
bor rowing,invest
ingandt radi
nginf i
nancialassets.
Tr
easur
yManagi
ngMar
ketRi
sk:
Si
ncet reasur
yinteractwit
hmarket
s,managi
ng
marketr i
skfortheentir
ebankhasbecomean
i
ntegralpartofTreasury.
Treasur
y’sr
olei
nAsset
-Li
abi
li
tyManagement
(ALM):
TheTreasur yplay
sanact iveroleinAsset-Li
abil
i
ty
Management( ALM) ,andwithit
sconstantexposure
tomar ket
s, i
swellplacedtoadv iset
he
managementoft hebankf ortakingi
nternal
deci
sions,sayinpr oductpri
cingandstrategic
i
nvestment s.
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I
nvestmenti
nsecur
it
iesandf
orei
gnexchange
busi
ness:
Til
llat
e90's,thei
nvest
mentinsecuri
ti
esand
for
eignexchangebusinessconst
it
utedtwo
separatedepart
mentsinmostoftheIndi
anbanks.
Butthesetwofuncti
onshavenowbecomepar
tof
anintegrat
edTreasur
y,t
husaddi
nganew
di
mensi ontot
het r
easur
yacti
vi
ty.

Tr
easur
ydeal
swi
thshor
t-
ter
mfunds:
Treasuryessent
ial
lydeal
swithshor
t-t
ermf unds-
fl
ow( i
.e.wit
hlessthanoneyearmaturi
ty)
,wi t
hthe
excepti
onthataspartoftheSLRrequir
ement ,
i
nv est
mentinsomesecur i
ti
esisheldtomat uri
ty
exceedingoneyear.
Ri
skmanagementf
unct
ionoft
reasur
y:
Riskmanagementfunct
ion,
cover
stheunderly
ing
asset
sandliabi
li
ti
esacr
ossshort
,medium and
l
ong-t
erm matur
iti
es.
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ConceptofCur
rentaccountandCapi
talaccount
:
Thebalanceofpaymentsaccount,whichisa
stat
ementofalltr
ansact
ionsmadebet weena
countr
yandtheout si
deworl
d,consist
soft wo
accounts—currentandcapi
talaccount.
Whilethecur
rentaccountdealsmainl
ywithimpor
t
andexportofgoodsandser v
ices,t
hecapit
al
accountismadeupofcr oss-
bordermovementof
capit
albywayofinvestmentsandloans.
Currentaccountconverti
bil
it
yreferstothefreedom
toconv er
tyourrupeesintootherinter
nati
onally
acceptedcurrenci
esandv iceversawithoutany
rest
rict
ionswhenev ery
oumakepay ments.
Si
milar
ly,
capit
alaccountconver
ti
bil
it
ymeansthe
fr
eedom toconductinvest
menttr
ansact
ions
wit
houtanyconstrai
nts.
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FUNCTI
ONSOFI
NTEGRATEDTREASURY:
I
ntegrat
edTreasury
,inabankingset
-up,
ref
ersto
i
ntegrat
ionofmoneymar ket,
secur
it
iesmarketand
f
oreignexchangeoperat
ions.
I
ntegratedTreasury,
intheIndiancont ext,i
sthe
di
rectresul
tofreformsinthef inancialsector
,the
mostimpor t
antreformsbeingder egul
ationof
i
nterestrat
esandpar ti
alconver t
ibil
it
yofRupee.
Rupeei salreadyfreelyconv er
tibleoncur r
ent
account ,andtoal ar
geext ent,alsoconv ert
ibl
eon
capitalaccount,owingt omaj orrelaxationsallowed
byt heReser veBank,inthear eaoff oreigndi r
ect
i
nv estment( FDI)
,externalcommer cialborrowings
(ECB)andov erseasdirectinvestment( ODI ).
Bankshav eal
sobeenall
owedlar
geli
mits,
in
proport
iontothei
rnetwor
th,
forover
seas
borrowi
ngandi nv
estment
.
Bankshavegainedwi deraccesst oforei
gn
curr
encyfundsthroughtheiroff
-shoreoperati
ons,
NRIdeposit
s,resi
dentforeigncurrencyaccounts
suchasEEFCandf undsfrom externalcommercial
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bor
rowi
ngs(
ECB)
.
Theprocessofglobal
izat
ionhascont
ri
but
edt
o
i
ntegr
ationoft
reasuri
es.
Int
egratedTreasury
,therefore,i
sinaposit
iont o
operateacr
ossv ari
oussect orsandacrossthe
curr
encymar kets,
eitherinsearchofhi
gherr etur
ns,
orinordertomobili
zel owcostf undsf
orli
qui di
ty
needs.
Justascashfl
owi sacashf lowirrespecti
veofthe
curr
encyinwhichitisdenomi nat
ed, t
herisk
att
achedtomar ketoperat
ionsalsoneedsa
commonappr oachcutti
ngacr ossdiffer
entmarkets.
Whenweoper ateindi
ffer
entcurr
enciesanddeal
wi
thdiff
erentsegmentsofdebtandequi t
ymarket
s,
wegeneratecurr
encyandinter
estrateri
sksor
pr
iceri
sk,whichtoget
herisgener
allyref
erredt
oas
marketr
isk.
Itishenceimperat
ivethatInt
egrat
edTreasuryis
alsofull
yinvol
vedinri
skmanagement ,i
nparticul
ar,
managementofmar ketri
sk,oft
enusi
ngder i
vativ
e
products.
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BFM MODULE - C
Chapter 19: INTRODUCTION TO TREASURY
MANAGEMENT (PART-II)
What we will study?

*What is Merchant business?

*What are 3 distinctive roles of Treasury
Management?

Merchant Business:
Large corporate clients now prefer to deal with
Treasury directly, rather than through bank
Branches or through other functional departments.
The Treasury's transactions with customers are
Known as merchant business, as distinct from
bank's own trading and investment business.
Many corporate customers have their own treasury
departments, and they expect to receive an
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i
ntegr
atedservi
cef r
om thebank, i
nareassuchas
hedgi
ngexportreceivabl
es,r
aisingfor
eigncur
rency
l
oansandov er
seasi nvest
ment s.

Wemaynowr est
atet
hedr
ivi
ngf
orceofI
ntegr
ated
Tr
easur
yas:
1-
Int
egr
atedCashFl
owManagement
2-
Int
erestAr
bit
rage
3-
Accesst
ogl
obalr
esour
ces
4-
Cor
por
atedemandf
orhi
gh-
endser
vices,
and
5-
RiskManagement
Wemaysummar
izet
hef
unct
ionsofI
ntegr
ated
Tr
easur
yas:
1-
Meet
ingr
eser
ver
equi
rement
s(CRRandSLR)
2-
Globalcashmanagement
3-Ef
fi
cientmerchantser
vices,whi
chincludef
orei
gn
exchange(f
orex)andadvisoryser
vices
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4-
Opti
mi si
ngprof
itbyexpl
oit
ingmar
ket
oppor
tunit
iesi
n
For
exmar
ket
Moneymar
ket
Securi
ti
esmar
ket(
debt
,equi
tyandcr
edi
tder
ivat
ive
markets)
5-
Riskmanagement
,i.
e.,
managi
ngt
hemar
ketr
isk
oft
hebank/ent
it
y
6-
Assi
sti
ngbankmanagementi
nALM.
Treasuryact
ivi
tythusencompassesfund
management ,i
nvestment,f
orexoper
ati
ons,tr
ading
andriskmanagementser vi
cesinamulti
-cur
rency
envir
onment.

3di
sti
nctr
olesofTr
easur
y:
(
a)Li
qui
dit
yManagement
:
Treasur
yisresponsi
blef
ormanagi
ngshor
t-
term
fundsacrosscurr
enci
es,andal
sof
orcomply
ing
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wi
thr
eser
ver
equi
rement
s(CRRandSLR)
.
(
b)Pr
opr
iet
aryPosi
ti
ons:
Tr
easurymaytr
adeincurr
encies,secur
it
iesand
ot
herfi
nanci
ali
nstr
uments,i
ncludingderi
vat
ives,
in
or
dertocont
ri
butetoBank'
spr of
its.
(
C)Ri
skManagement
:
Treasurywil
lai
dManagementi nbri
dgingasset-
l
iabil
it
ymismatches( ALM),wil
lprov
ideder i
vati
ve
toolstomanagerisksincli
ent'
sbusiness,andwi l
l
alsomanager i
sksinherenti
nitsownpr opri
etar
y
positi
ons.

Themul t
ipl
erolesnecessitateTreasuryt
omanage
anALM Bookf orinter
nalriskmanagement ,a
MerchantBookf orcli
ent-
relat
edcur r
encyand
der
ivat
ivetr
ansact i
ons,andaTr adingBookfor
managingitspropri
etarypositi
ons.
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BFM MODULE - C
Chapter 19: INTRODUCTION TO TREASURY
MANAGEMENT (PART-III)
What we will study?
*How treasury work as a profit center?
*What are the sources of profit for treasury?

EVOLVINGROLEOFTREASURYASPROFIT
CENTRE:
By convention, Treasury was a service center,
primarily intended to attend the cash flow
requirements of the bank, and hence operated only in
money market
Merchant business was attended through the foreign
exchange department, while bank’s investment assets
were managed through a separate department.
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Thustherewereeff
ecti
v el
ythree“treasuri
es”
operat
inginthr
eedif
ferentmar kets,whichhave
beenintegr
atedandint
egratedt r
easurywas
for
med.
Thewiderscopeofintegr
atedtr
easuryhasoffer
ed
banksanopportuni
tytogenerat
esurpluses,
to
suppl
ementprofit
sfrom i
tscorebankingacti
vi
ty.

Treasurypr
ofi
tshav
ebecomeat
tract
ivef
ort
hree
reasons:
Fi
rst
:
Treasur
ylar
gel
yoperatesininter
-bankmarket
s
whichareal
mostfreeofcreditri
sk,andhence
requi
resver
yli
tt
lecapi
talall
ocati
on.
Second:
Thetr
easur
yacti
vit
yishighl
ylever
aged(mor
e
debt
sthanequi
ty)andhence,ther
etur
noncapi
tal
maybequit
ehigh.
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Thi
rd:
Oper
ati
onalcostsi
nTreasur
yarelowascompared
t
obranchbanking,
whetherr
etai
lorwhol
esal
e.
TheTreasur
yisrunbyaf ewspecial
istst
aff,
engagedinhi
gh-val
uetransact
ions,
pertransact
ion
si
zegeneral
lynotbeingbelowRs.50mi l
li
on(5Cr )
.
TheTreasur
yalsot
radesi
nnarr
owspr
eads,hence
prof
iti
sgenerat
edfr
om hi
ghvol
umesofbusiness.
Treasurypr
ofi
tsar
egener
atedf
rom t
hef
oll
owi
ng
sources:
Conv
ent
ionalSour
ces:
1-For
eignExchangeBusi
ness
2-MoneyMar
ketDeal
s
3-I
nvest
mentAct
ivi
ty
Cont
empor
arySour
cesofpr
ofi
t:
1-I
nter
estAr
bit
rage
2-Tr
adi
ng
3-Tr
easur
yPr
oduct
s
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1-
For
eignExchangeBusi
ness:
Buyi
ngandsel
li
ngf or
eigncurr
encytocust
omers
consti
tut
esamajorsourceofotheri
ncomefort
he
banks.
Thedi
ff
erencebet
weenbuyrat
e&sellr
atewhichi
s
knownas“spr
ead”-i
sthepr
ofi
tfort
hebank.
Thebanksbuyforei
gncur
rencyfr
om cust
omers
(mai
nlyexpor
ter
s)andsel
lthesameinint
er-
bank
market
.
Thebanksal
sosel
lfor
eigncurr
encytocustomers
(i
mport
ers)
,whi
chtheybuyfrom i
nter
-bankmarket
.
Banksgenerall
ydonotmaintai
nast ockoffor
eign
curr
encyforthepurposeofmerchantbusi
ness,as
i
tismoreconv eni
enttobuyandsellfr
om i
nter-
bankmarket.
OpenPosi
ti
on:
Anyr esidualposit
ionofabankattheendofday–
overboughtorov ersold–i
sknownasopenposi t
ion,
whichi nvolvesexchanger
isk,
asthev al
ueof
for
eigncur rencymaychangeov er
night(mayi
nfact,
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changefrom momenttomoment ,hencet
he
deal
ersarecaref
ultomaint
ainonlyalimi
ted
posit
ionduri
ngthedayti
meal so)
.
Concept
:
Tr
ansf
erPr
iceMechani
sm:
Thebasicfunctionofabankbr
anchistoaccept
deposi
tsforlendingsoever
ybranchi
sexpectedto
serv
easapr ofitcent
re.
Butpracti
call
yitmaynotbepossibl
ebecause
somebr ancheshavemorebusinessofdepositt
han
advancesandsomebr ancheshavemoreadv ances
thandeposit.
Asthismaynotr efl
ectat ruepict
ureandto
compensat ef
orthel ossthesebranchesarepaidin
theform ofHOinterestreceivabl
e.TheseBranches
wil
lshowapr ofi
tafteraddi ngHOI nt
erest
.
Li
kewi
se,f
ortheadvancesgiv
en,br
ancheshav
et o
payHOint
erestt
reat
ingitasmoneyborr
owedfrom
HO.
Suchbr
ancheshav
ingconcent
rat
ioni
nAdv
ances
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wil
lhavetopayHOfort
hef
undsdepl
oyedf
rom t
he
i
nterestear
nedbyt
hem.
Thei
rPr
ofi
taf
terHOi
nter
estwi
llcomedown.
Thi
siscal
ledt
heTr
ansf
erPr
iceMechani
sm.

2-
MoneyMar
ketDeal
s:
Conventi
onalbankingoperati
oninmoneymar
ket
wasconfinedtolendingsurplusf
undsand
bor
rowingfundswhenr equi
red.
Inter
estonfundslentinthemarketi
sasour ceof
i
ncome, butitcanhardlybecall
edprof
it-assuch
fundscomef rom deposit
s,wherei
nter
estcostis
highert
hanthei nt
erestearnedi
nmoneymar ket
.
Toov ercomethi
s,Bankscomeoutwi t
haTr ansfer
Prici
ngMechanism sothattheTreasurycomest o
knowt hecostofthefundswhichtheyrecei
vef r
om
branches.
Til
lfai
rl
yrecentl
y,bankswerecir
cumspecti
n
borrowi
ngfundsininter-
bankmarketonl
yfort
he
purposeoflendi
ngwi t
hapr of
it
.
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3-
Inv
est
mentAct
ivi
ty:
Bankshavealwaysbeeninvest
ingingov ernment
secur
iti
estosati
sfytheSLRrequi
rement ,but
other
wisewerenotv er
yact
iveininvest
ingi nnon-
governmentsecur
iti
es.
Incomefrom r
isk-
freei
nvestment
swasnot
consider
edtobesignif
icant
.
Bankshavealsobeeninvest
ingi
nstrategi
casset
s
–suchassubsidiaryandassoci
atecompanies–
whereret
urnsoninvestmentwereonlyof
secondar
yimportance.
Thedevelopmentofcorpor
atedebtmar keti
nfact
,
i
sarecentphenomenon, whichf
ollowedremovalof
RBIr
estri
ctionsonbankinv
estment s,
and
demater
iali
sati
onofsecuri
ti
esinthelate90'
s.
Cont
empor
arysour
cesofpr
ofi
t:(
nextl
ect
ure)
1-I
nter
estAr
bit
rage
2-Tr
adi
ng
3-Tr
easur
yPr
oduct
s
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BFM MODULE - C
Chapter 19: INTRODUCTION TO TREASURY
MANAGEMENT (PART-IV)
What we will study?
*What are contemporary sources of profit of
treasury?

Treasury profits are generated from the following

sources:
Conventional Sources:
1- Foreign Exchange Business
2- Money Market Deals
3- Investment Activity
Contemporary Sources of profit:
1- Interest Arbitrage
2- Trading
3- Treasury Products
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Cont
empor
arysour
cesofpr
ofi
t:
1-I
nter
estAr
bit
rage
2-Tr
adi
ng
3-Tr
easur
yPr
oduct
s
Buyi
ngandsel l
ingforei
gnexchangetocust
omer s
andinter
estoninvestmentsandmoneymar ket
l
ending,cont
inuestobet hepr
imarysour
ceof
i
ncomef orbanktreasuri
es.
Howev er,Treasur
ypr ofi
tsar eincreasi
ngl yderi
ved
from mar ketoperations,i
nv olvi
ngbuy ingand
selling,orborrowingandl ending,orinv esti
ngin
tradableasset s,t
akingapr oprietaryposi t
ion-not
wi t
ht heintenti
onofmeet i
ngcust omer
requi r
ement s,orformeet i
ngReser verequi r
ements
oft hebank, butonlytogener atepr ofi
ts.
Atthesametimet
her
angeofservicest
hebank
of
ferstocust
omer
shasalsowidenedwith
i
ntr
oducti
onofnewpr
oducts.
TheTreasuryprofi
tsari
semai
nlyf
rom t
hef
oll
owi
ng
cont
empor arysources:
 Joi
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I
nter
estAr
bit
rage:
TheTreasuryoperat
esacrossthecur
rencyand
secur
it
ymar kets;
henceiti
sinaposit
iontofind
wheretheinter
estdi
ffer
enti
alsar
einit
sfavour.
TheTreasur
ymaybor r
owinUSDandl endinRupee
i
nter
-bankmarket,
orvicever
sa,dependingonthe
domesti
candforeigni
nter
estrat
es.
Or,
theTreasurymayborr
owinmoneymar ketand
i
nvestshort
-t
ermfundincommer
cialpaperorT-
bi
ll
s.
Bankswi t
hgoodcr edi
tstanding,maybor rowlarge
amountsi nmoneymar ketandl endtootherbanks,
hi
ghlyratedcor
poratesandot herinsti
tut
ions,using
marketinstr
uments,atmar gi
nallyhi
gherrates.
Ast hefut
uresmarketconti
nuestodevelop,
Treasuryal
sohastheoppor t
unit
ytoarbitr
age
betweenOTC( ov
er-the-
counter
)andfutures
mar ket
s.
Tr
easur
ytodayusesavar
iet
yofmoneymarket
i
nstr
uments,
suchascommer ci
alpaper
,
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cer
ti
fi
catesofdeposi
t,t
reasur
ybi
ll
sandCBLOt
o
opt
imizeret
urnonfunds.

Tr
adi
ng:
Tradi
ngisaspeculat
iveacti
vi
ty,
wher eprofi
tsar
ise
outoffav
orablepr
icemov ementsduringthe
i
nterv
albetweenbuyingandsell
ing.
Curr
encyt
radi
ngsincelonghasbeenatthecor
eof
for
exdeal
ingact
ivi
tyi
nbankt r
easur
ies.
BanksholdingAD1(
Authori
zedDealer1)li
cense
ar
eper mit
tedbyRBIt
otradeincur
rencieswithi
n
pre-
setli
mits.
Treasurymaygol ong(buycurr
ency)orshort(sel
l
currency)oncurr
enci
est ogetprof
itf
rom exchange
ratemov ements.
Treasurymayal soswapcur r
enci
es,buy
ingand
sell
ingcurr
enciesatdif
ferentpoi
ntsofti
me,to
benefitf
rom changesinforwardrat
emov ements.
TheTr
easurymaytakesi
milarpr
opriet
aryposit
ion
i
nsecuri
ti
es,wher
e,i
narisi
ngmar ket,
securi
ti
es
 Joi
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areboughtandsol
dwi
thapr
ofi
twhent
hey
iel
ds
fal
l.
Bankt r
easur
iesarefair
lyaggressivei
nbuy i
ngand
sell
ingGovernmentsecurit
ies(G-sec)
,asthebanks
i
nanycaseneedt oholdapprovedsecurit
ies,i
n
excessoftheirSLRrequir
ement ,i
norderto
managet hei
rliqui
dit
y.
G-secsconsti
tutethemostliqui
dsegmentofdebt
mar ketandar
et r
adedonwhol esaledebtmar
ket
(WDM)ofNat ionalStockExchange.
Treasur
iesov
erthelastdecade,
hav
eal
sobecome
acti
veinequi
tymarkets.
Equit
ytradingi
shighl
yprofi
tableinri
singstock
markets,despi
tet
hev ol
ati
li
tyofequitypri
ces,as
I
ndianeconomyhasbeenwi tnessi
ngast eady
growth.
However,i
ntermsofv olume,banksparti
cipat
ioni
n
st
ockmar keti
sper i
pheral
,asRBIrestr
ict
sbanks'
di
rectandindi
rectexposuretocapi
talmarketsby
i
mposinglimit
s.
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Anotherar
eawhi
chi
salmostexclusi
vetobanki
ng
sect
oristr
adi
ngi
ncredi
tinst
ruments.
Theinstr
ument sav ai
lablei
nt hissegmentar e
securi
ti
zedcreditreceivabl
esandot herassets,
commonl yknownaspass- throughcer t
if
icates,
i
ssuedbyspeci alpurposev ehicles(
SPV)f orthe
speci
ficpurposeofsecur it
izati
on.
Whi l
etradingincurrenci
esandsecuri
ti
es,
Treasuriesareopent omarketr
isk,
orpriceri
sk,
wher etheymayi ncurlossi
fpri
ceofthecurrency
(exchanger at
e)orthesecuri
tymovesadv er
sely.
Inordertomini
mizesuchl
osses,bankt
reasuri
es
aresubjectt
ostri
ctr
iskmanagementcontr
ols.
Bankshavealsobeenpermitt
edtotr
adeinsomeof
thederi
vati
veproduct
s,andsomeofthelar
ger
bankshavebeenmar ketmakersi
nopti
onsand
i
nterestr
ateswaps.
Deri
vati
veshaveaddedtotherangeofpr
oducts
avai
labl
etotheTreasur
yfortr
ading,
aswellasri
sk
management.
 Joi
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Tr
easur
yPr
oduct
s:
Treasurysel
ls,i
naddit
iont
oforei
gnexchange
servi
ces,der
ivati
vesandst
ruct
uredpr
oductsto
corporat
ecustomers.
Largecorpor
ateshav
eanappet it
ef ornewpr oduct
s
i
nor dert
ohedgetheircur
rencyandi nterestrate
ri
sks,andatti
mes,al
sot oreducetheirinterest
costs.
Forinstance,
acompanymaybuyf rom t
heTr easur
y
aFor wardRateAgr eement(FRA)tofi
xinterestr
ate
forcommer cialpapertheyplant
oissueafter3
mont hs.
TheTr easur ymayofferacurr
encyswapt oa
corporatecust omertoconver
ttheirfloat
ingrat
e
USDl oani ntoRupeeloancarr
y i
ngfixedinter
est
rat
e,sot hatt hecust
omernol ongerhascur r
ency
ri
skori nterestrat
eri
sk.
Theratesoff
eredbyTreasuryf
orsuchproduct
s
al
way shaveabuil
t-i
nprofi
tmargi
n,or“
abuy -
sell
spr
ead' i
nbank’sf
avour.
 Join CAIIB WITH ASHOK on YouTube & App
BFM MODULE - C
Chapter 19: INTRODUCTION TO TREASURY
MANAGEMENT (PART-V)
What we will study?
*The Organization structure of Treasury.

ORGANIATION OF TREASURY:
The Treasury is organized either as a Department of
the bank, or as a Specialised Branch under direct
control of the bank’s head office.
In either case, the Treasury functions with a degree of
autonomy, with its own accounting system.
The branch status is preferred as the books of
accounts of Treasury can be maintained
independently (with its own P&L and GL accounts.)
On the other hand, the department from has the
advantage of easier coordination with related
department at head office (such as Central
 Joi
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Account
sandPl
anni
ngDepar
tment
s).
Treasuryasaspeci ali
zedbr anchenjoysan
additi
onaladv antage,ast heBranchcanactas
AuthorisedDeal erforforeignexchangebusiness
andcanpar ti
cipateinclearingandsettl
ement
systemsdi rectl
y,whileHeadOf fi
ceDepart
mentcan
onlyactt hr
oughabr anchf orit
sbusiness
operati
ons.
Wemayt her
eforeconcl
udethati
nthecont extof
i
ntegr
atedtr
easuryoper
ati
ons,aTreasuryBranch
shoul
dbetheprefer
redfor
m oforganisat
ion.
Whocanbeheadoft
reasur
y?
TheTreasuryi
sheadedbyaseni ormanagement
per
son–AGener alManager(GM) ,Chi
efTreasury
Off
icer(
CTO) ,
Vice-Presi
dentoranyotheroff
ici
al
wit
hasi mil
ardesignati
on.
Tr
easurybei
ngakeyact
ivit
yofthebank,
Headof
Tr
easuryshoul
dbeapersonwhowoul dr
epor
t
di
rectt
otheCFOorCEOoft hebank.
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TheTreasur
yissegr
egat
edi
ntot
hreemai
n
di
vi
sions:
TheDeal
ingRoom (
or,
FrontOf
fi
ce)
,
TheBackOf
fi
ce(
or,
Treasur
yAdmi
nist
rat
ion)and
TheMi
d-of
fi
ce(
orRi
skManagement
).

Deal
ingRoom orFr
ontOf
fi
ce:
Thedeal
ingr
oom i
sheadedbyChi
efDeal
er,
whoi
s
i
nchargeoft
hefr
ontoff
ice.
TheDealer
swor
kingunderhi
m,buyandsel
lint
he
market
s.
EachDealerspeci
ali
zesinoneoft hemarkets,i.
e.
for
eignexchange,moneymar ketorsecur
iti
es
market,
although,
inanintegrat
edtreasur
y,the
deal
ersaregenerall
yfamil
iarwithal
lthemar ket
s.
Dependingont hesi
zeofoperations,
theremaybe
dealersdedicat
edtomajorcurr
encies,ordeal
ers
speciali
zingonl
yinfor
wardmar ketsorderi
vat
ives.
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Iti
salsocommont ohav easeparatecor
por
ate
dealer
,excl
usi
velytoatt
endtomaj orcor
por
ate
customers/merchantbusi
ness.
I
nlargerbanks,
Treasur
ywi
llal
sohav
eanALM
desk,t
oexclusi
vel
ymanageBank'
sALM r
isks.
TheSecur
it
iesMar
keti
snor
mal
lydi
vi
dedi
ntot
wo
par
ts:
Pr
imar
yandsecondar
ymar
ket
s.
Thesecuri
ti
esdeal
erdeal
sonl
ywithsecondary
market,
i.
e.buyi
ngandsel
li
ngofsecur
it
iesalr
eady
avai
labl
einthemarket
.
Onbehalfofthebank,t
hedealermayalso
part
ici
pateinauct
ionofgovernmentsecur
it
iesand
T-bi
ll
s,conduct
edperi
odical
lybyRBI.

TheBackOf
fi
ceorTr
easur
yAdmi
nist
rat
ion:

Theback-
off
icei
sresponsibl
eforv
eri
fi
cati
onand
set
tl
ementthedeal
sconcludedbythedeal
ers.
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Thedealsarever
if
iedonthebasisofdealsl
ips
prepar
edbythedealer
sandal sofr
om t
he
confi
rmati
onrecei
vedfrom t
hecounter
parti
es.
Theback-off
iceconf i
rmst hedealsindependent
ly
wit
hthecount erpart
ies(banksandot her
i
nsti
tut
ions)ov erphoneandv er
if
iesthe
aut
henti
cityoft heconfi
rmationdocument .
TheBackoff
icet
akescar
eofallrelat
edbook-
keepi
ngandsubmissi
onofper
iodicalret
urnst
oRBI
.
Back-off
icealsomai ntai
nsNost r
oaccount s
(f
oreigncurrencyaccountswi t
hcorrespondent
banks),f
undingandsecur it
yaccount swithRBI
,and
Demataccount swi thdeposit
oryparti
cipant
sand
ensuresthatadequat emarginmoneyi sheldwit
h
Clear
ingCor porati
onofIndia(CCIL)forRupeeand
doll
arsettl
ement s.
Set
tl
ementi
sakeyfunct
ionofBack-of
fi
ce,
asall
pay
mentsandr
ecei
ptsmusttakeplaceonval
ue
dat
e.
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Anydelayinsettl
ementwouldnotonl yr
esulti
n
fi
nanci
allosstothebank,butdelay
si npaymentar
e
consi
deredasadef aul
tbythebank, sever
ely
aff
ecti
ngt hebank'
sreput
ation.
Iti
smandatorythatFr
ontoffi
ceandBackOff
ice
aretot
all
ysegregat
ed,repor
ti
ngtotwodi
ff
erent
managers.
TheMi
d-of
fi
ce(
RiskManagement
):
Ri
skmanagement ,Middl
eoffi
ce(Mid-
off
ice)i
s
cr
eatedexcl
usi
velytoprovi
deinf
ormati
ontothe
management(MIS)andtoimplementri
sk
managementsystems.
Mid-
off
icemonitorsexposur
eli
mitsandst
oploss
l
imit
sofTreasuryandreport
stothemanagement
onkeyparametersofperf
ormance.
Tr
ansferPr
ici
ngMechani
sm mayalsobe
i
mplementedthr
oughMid-
off
ice.
I
nsmal l
erbanks,Mid-of
ficemayalsofuncti
onas
ALM SupportGroup,asthebalancesheetri
sk
managementiscloselyconnectedtoTreasuryr
isk
 Joi
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management
.
AsperRBIguideli
nes, t
heMidOf f
iceshould
compri
seofexper t
sinmar ketri
skmanagement ,
economist
s,stati
sti
ciansandgeneralbankersand
maybefunctionall
yplaceddir
ectl
yundertheALCO.
TheMi dOf
ficeshoul
dalsobesepar
atedfr
om
Treasur
yDepartmentandshoul
dnotbeinvol
vedi
n
thedaytodaymanagementofTreasury
.
TheMidOf fi
ceshoul
dapprisethetopmanagement
/ALCO/Treasur
yaboutadherencetoprudent
ial
/ri
sk
parameter
sandalsoaggregatethetot
almarket
ri
skexposuresassumedbyt hebankatanypointof
ti
me.
Wheneverasui
tableofferi
sreceived,t
he
Depar
tmentwouldputupani nv
estmentproposal
andobtai
nappr
ov alatappropri
atelev
el.
Mini
mum mar ketabl
einvestmentbeingRs.5crore,
thei
nvestmentproposalsarescr
uti
nizedclosel
y
andaregeneral
lyconsider
edbyanI nvestment
Commi t
tee,bef
orethesanctioni
sobt ai
nedat
appr
opriat
elevel
.