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.
Financial Intermediation & Risk Profile
Objectives:
•Earn Profit
•Enhance Value of Equity
Depositors /
Investors
Risk Associated are:
•Credit Risk
•Liquidity Risk
•Int. Rate Risk
•Forex Risk
•Operational Risk
Bank
ALM mainly deals with liquidity, Int Rate & Forex Risks
Borrowers
[ Corporates /
Individuals ]
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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 bank’s
inability to meet financial commitments when
due
Interest Rate Risk :Risk of loss in the bank’s 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
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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 day’s 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
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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
FX Sales
Product
Structuring
FX Interbank
TREASURY
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.
2.
3.
4.
5.
Preparation of Card rates
Quoting of rates Export , Import , Remittances
Booking of forward contracts
Acceptance and monitoring of Customer Orders
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