Treasury Business and How to Look into It
Satian Tantanasarit
September 23, 2010
1
Nature of the market
• “Near” Perfect Competition
• Never sleep market
• High volatility
• Innovative and ever changing
• Sensitive to news
2
Role Play
• Intermediary
$
$
Buyer
• Investor
Seller
x
$
x
• Speculators
x
• The underlyings have extremely exposed to the
movement of the markets.
• Exposures are not limited to Market Risk (price
movement) but also Credit Risks (Default Risk)
and Liquidity Risk (Got Stuck)
• The major risk, therefore, is still market risk.
The Three Lines of Defenses Model
1st
2nd
3rd
Business
Risk Management
Audit
Manager
Compliance
Clients
Business Flow
Legal
Finance
external
Regulator
Auditor
Business management
BU are required to ensure that their engagement
of business activities comply with relevant laws of
regulation as well as business principles, practices
and related code of conduct.
BU are also responsible for managing compliance
risk of their day-to-day business activities and the
result of non compliance conduct.
Compliance
• Assist management to identify compliance
requirements and related risk via compliance
checklist.
• The list help BU in identifying activities to
mitigate the risk.
Audit
Provide management with independent; objective
assurance on the overall effectiveness of the
design and operation of internal controls.
Key considerations for financial product examinations
• Price movement (Out of Range?)
• Exposure (In line with Risk Appetite of organization?)
• Client knowledge (Do we understand our clients?
Do clients understand the market and underlying
they have undertaken?)
• Risk Mitigation (do BUs mitigate the risk? And How?)
Price Movement
• The initial price of the underlyings reflects the value
of it at any given time. Therefore the value of the
underlyings must be “mark to market”, ideally, at all
time. Practically, as often as possible.
• The range of price movement reflects the true value
of the underlyings in a specific period of time, e.g.
one day, one week, one month or one year. This is
to prevent the BUs from any intended “biding”
the value either for their own positions or facilitating
clients transaction.
Example
• A bought US$ 1,000,000 value spot at 32.30/US$.
Assume that US$/THB moved between 32.00-32.50
on that day, A intended to book the deal at a lower
exchange rate to avoid the overlimit exposure.
• What A did is called an off market rate deal.
• Rate reasonableness must be checked by an
independent party outside dealing room such as
Treasury Operations or Risk manager.
Exposure
• No need to randomly check an individual deals.
• Rather, check on how the Bank (clients) expose to
the price movement via Operational limits
(counterparty limit).
• Various types of Operational limits. Essentially, take
a look at Delta limits for foreign exchange and PV01
for interest rate.
• On the clients’ side, to certain institution, their
exposure should be periodically marked to market to
see the current exposure.
Client Knowledge
• To ascertain that clients have a knowledge and
understanding in the offered products BEFORE
entering with the Bank into the transactions.
• Clients Suitability check list.
• Can be one sided check list or properly signed
by clients.
Risk Mitigation
• Always ask the question “how do we hedge?”
• Randomly pick a number of deals to check and
learn hoe the Bank hedge that particular deal.
• Keep in mind that It is not a serious issue if the
traders do not hedge such exposure as long as it
is within limits.
• Work together with Risk Manager to consider if
such hedges (or unhedges) reasonable.
Example of Products Scrutinization
FX Spot and Forwards (two business days up to 360 days)
Price Movement :
(volatile to very volatile)
Take a look at off market rate reports.
Exposure :
Take a look at Delta limits held on
aggregate and individual limits and
PV01 limits.
Clients knowledge : No Clients Suitability required if up to
one year.
Risk mitigation :
may ask but not necessary.
FX options
Price Movement :
(very volatile)
Exposure :
Take a look at all the “Greek” limits
especially Delta hedges.
Clients knowledge : A must
Risk mitigation :
Discuss and ask the famous
question
Work together with market risk to
justify the hedges.
Bond, Interest Rate Swaps and Currency Swaps
Price Movement :
very volatile to extremely volatile.
Exposure :
Take a look at PV01 limits
Ask the Question of How liquid the
underlyings are?
Clients knowledge : A must
Risk mitigation :
important but not necessary
Treasury Operations
• Maintain a Check and Balance mechanism.
• Early warning person (watchdog) when front office
breaks the rules (intentionally or unintentionally)
• Accountable for settlement risk thru payment
instruction/money transfer (some selected
counterparties)
• Accountable for legal binding thru contract/
confirmation with counterparties (corp. clients in
particular)
Key Considerations
• Communication between Front and Back office (Effectives?)
• Process in handling the payment/ money transfer (Straight
through/ manual?)
• Contract/ Confirmation between Bank and Counterparty
(Especially Corporate Clients, # of overdue contract signing)
• Generate Reports reflecting the activities performed by
front office.
• Type of reports
• Who are the recipients of such report.
Transaction and Settlement Flows
FX Spot
5. ตกลงทาสัญญา
ลูกค้ า
1.2 แจ้ งทารายการ
ซือ้ /ขายเงิน
3. quote ราคาซือ้ /ขาย
7. Trader square position
กับ bank counterparty
FX Sales
4. แจ้ งราคาซือ้ /ขาย
ซึ่งบวกกาไรแล้ ว
6. Confirm ราคา
1.1 ส่ งเอกสารการโอน
10. แจ้ ง ref#
สาขา
2. ขอราคาต้ นทุน
IBO
11. แจ้ งรายการโอนเงิน rate & ref# พร้ อม fax เอกสาร
9. Input deal ในระบบ
Murex; TMO verify deal
Trader
Interbank
Counterparty
8. Input deal ในระบบ
Murex; TMO verify deal
TMO
SWIFT CONFIRM
Transaction and Settlement Flows
FX Forward
3. quote ราคาซือ้ /ขาย
ลูกค้ า
1. แจ้ งทารายการ
ซือ้ /ขายเงิน
FX Sales
2. ขอราคาต้ นทุน
7. Trader square position
กับ bank counterparty
Trader
4. แจ้ งราคาซือ้ /ขาย
ซึ่งบวกกาไรแล้ ว
5. ตกลงทาสัญญา
6. Confirm ราคา
9. Input deal ในระบบ
Murex; TMO verify deal
10.ส่ ง Fax Confirmation ในวันที่ทารายการ และส่ ง
Forward Contract สาหรั บ deal ที่มีอายุมากกว่ า spot
Interbank
Counterparty
8. Input deal ในระบบ
Murex; TMO verify deal
TMO
SWIFT CONFIRM
Transaction and Settlement Flows
IRS/CRS
5.1. ส่ ง Preliminary Confirmation
1. ขอราคา
ลูกค้ า
FPA /Inst.Sales
3. quote ราคา
2. ขอราคา
7. Trader square position
กับ bank counterparty
Trader
4. เสนอราคาซึ่ง
รวมกาไรแล้ ว
5. ตกลงทาสัญญา
6. Confirm ราคา
Interbank
Counterparty
8. Input deal ในระบบ
Murex, TMO verify deal
9. Input deal ในระบบ
Murex, TMO verify deal
TMO
10. ส่ ง Long Form Confirmation
SWIFT CONFIRM
Transaction and Settlement Flows
IRS/CRS (Fixing Date)
ลูกค้ า
FPA /Inst.Sales
Trader
1. Print rate source
เช่ น THBFIX
2. ส่ ง Payment Fixing Advice
TMO
Transaction and Settlement Flows
IRS/CRS (Settlement Date)
ลูกค้ า
FPA /Inst.Sales
1. รั บและส่ งมอบเงินตาม Payment Fixing Advice
Trader
TMO
Transaction and Settlement Flows
CAP
5.1. ส่ ง Preliminary Confirmation
ลูกค้ า
1. ขอราคา
4. เสนอราคาซึ่ง
รวมกาไรแล้ ว
FPA /Inst.Sales
5. ตกลงทาสัญญา
3. quote ราคา
2. ขอราคา
6. Confirm ราคา
7. Trader square position
กับ bank counterparty
Trader
Interbank
Counterparty
8. Input deal ในระบบ
Murex, TMO verify deal
9. Input deal ในระบบ
Murex, TMO verify deal
TMO
10. ส่ ง Long Form Confirmation
SWIFT CONFIRM
Transaction and Settlement Flows
CAP (Fixing Date)
ลูกค้ า
FPA /Inst.Sales
Trader
1. Print rate source
เช่ น THBFIX
3. ส่ ง Payment Fixing Advice
TMO
2. TMO input
Fixing Rate
Transaction and Settlement Flows
CAP (Settlement Date)
ลูกค้ า
FX Sales
1. รั บและส่ งมอบเงินตาม Payment Fixing Advice
•ถ้ า Fixing Rate สูงกว่ า Cap Rate ธนาคารจะจ่ ายส่ วนต่ างของดอกเบีย้ ให้ แก่ ลูกค้ า
•ถ้ า Fixing Rate ต่ากว่ า Cap Rate จะไม่ มีรายการ settlement
Trader
TMO