Integrated Treasury Structure and Mechanism
Introduction
Treasury refers to the fund or revenue at the disposal of a commercial bank and the day to day management of the same. The treasury manager and the treasury unit acts as the custodian of cash and other liquid assets. The art of managing the funds and the revenues of the bank optimally and profitably with low level of risk is called Treasury management . Treasury Management is fast emerging as a specialization in many companies and its accounting function is being de-linked from the finance managing the treasury profit center successfully. Treasury management is function. Highly focused knowledge of capital markets, money markets, instruments and investment avenues, treasury and risk management and related areas, has become essential for defined as "The management of the liquidity of the business to ensure that the right amount of funds in the right currency is in the right place at the right time". However, the definition is further extended as it does not incorporate the commercial or active element and therefore, the second definition states that, "The management of liquidity should be undertaken in such a way as to
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Integrated Treasury Structure and Mechanism
maximize yields and minimize costs subject to security, liquidity, interest and currency risk constraints".
Functions of Treasury Management
Following are some of the functions of the Treasury Management” ? Cash & Liquidity management ? Risk exposure management ? Asset & liability management ? Maintenance of statutory reserve requirements ? Control & development of dealing operations ? Funding of investment in subsidiaries & affiliates ? Control of investment portfolio ? Capital debt raising & loan stock administration
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Responsibility of the sensible use of bank’s name
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Integrated Treasury Structure and Mechanism
What is Integrated Treasury?
“An integrated treasury system offers several significant benefits in managing public funds more effectively and efficiently” In earlier times, the bank’s forex dealing room used to manage the foreign dealings mainly arising out of merchant and subsequent cover operations in inter-bank market. The domestic treasury, investment operations were independent of forex dealings of a bank. Treasury also undertook investment in both Government and non-government securities. The need for integration of forex dealing and domestic treasury operation aroused in setting of interest rate deregulation, liberalization, Development of forex market, Introduction of derivative products, technological advancement etc. The integrated treasury performs the traditional roles of forex dealings room and treasury unit In era of high profile corporate failures and increasing volatility in financial markets, management of financial risk and
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Integrated Treasury Structure and Mechanism
strategic cash are gaining prime focus for a corporates to survive. Unlike the past, the changes in treasury management arena are increasing at a rapid pace. Financial professionals now have the opportunity and tools to mange corporate liquidity. This has come as a boon due to advancements in technology and liberalization process across the globe in financial environment. In addition, the desire to rapidly adopt technological advancements has led the companies to migrate from the existing to a new innovative platform. In general terms and from the perspective of commercial banking treasury refers to the fund and revenue at the possession of the bank and day to day management of the same. Idle funds are usually source of loss, real or opportunate and thereby need to be managed, invested and deployed with intent to improve profitability. There is no profit or reward without risk. Thus, treasury operations seek to maximize profit and earning by investing available funds at an acceptable level of risks. Returns and risks both need to be managed. If we have a look at the balance sheet of commercial banks, we see that investment / deposit ratio has by far overtaken credit / deposit ratio. Interest income / investments have overtaken interest income from loans / advances. The special feature of such portfolio
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Integrated Treasury Structure and Mechanism
is that more than 85 % of it is invested in government securities. The reasons for such developments appear to be as under: ? Poor credit off-take coupled with high increase in Non Performing Assets ? Bank’s reluctance to cut down the size of their balance sheet ? Government’s aggressive role in lowering cost of debt, resulting in high inventory profit to commercial banks.
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Capital adequacy requirements. In this context, treasury operations are becoming more
important to the banks and a need for integration both horizontal and vertical has come to the attention of the corporates. The basic purpose of integration is to improve portfolio profitability risk insulation and also to synergize banking assets with trading assets. In horizontal integration, dealing / trading rooms engaged in the same trading activity are brought under same policy, hierarchy, technological and accounting platform, while in vertical integration, all existing and diverse trading and arbitrage activities are brought under control with one common pool of funding and contribution. Since 1990s, the prime movers of financial intermediaries and services have been the policies of globalization and reform. All players and regulators had been actively participating only with variation of the degree of participation, to globalize the economy.
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Integrated Treasury Structure and Mechanism
With growing forex reserves, Indian banks and financial institutions have no alternative but to be directly affected by global happenings and trades. This is where integrated treasury operation has emerged as a basic tool for key financial performance. Banks in India now have the option and opportunity to conduct treasury operations in numerous ways. Domestic and cross-border markets are now available to banks virtually for 24 hours, 365 days a year. However, opportunities in trading activities are also full of risk. Chain reaction of risk-failures in integrated treasury operations could be sweeping. To meet the challenges, along with guidance from regulating authorities, banks are arming themselves with clear policies, organizational structure, training of staff and technological initiatives to manage their participation with maximum success. We look into some such aspects here under. Reserve Bank of India The Reserve Bank of India has taken a large number of decisions bringing reforms to banking activities. Systematic deregulations of interest rate and frequent cuts in Banks / CRR and SLR rate, liquidity manipulation by RBI through open market operations have been quite significant for many banks. RBI proposes to modernize settlement and dealing environment, which would definitely help to deepen the debt and forex markets.
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Integrated Treasury Structure and Mechanism
Forex Trade As mentioned earlier, with advent of globalization and reforms, forex dealings / trading rooms have emerged as centers of arbitrage and hedging activities. Integrated treasury operations seek to maximize the currency portfolio and free transfer of funds from one currency to another in order to remain a proactive profit center. Merchant purchase / sales, proprietary trading / currency swaps / correspondent banking are some of the traditional activities of forex dealings room. Clear guidelines from Reserve Bank of India and bank’s policies are available regarding open-position day light limit, overnight limit. Treasury operations now maintain their own profit and loss measurement, undertake exposures. As financial markets all over the world are full of uncertainty and volatility, it is imperative that treasury operations are conducted after taking into account the matching of risks and returns.
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Integrated Treasury Structure and Mechanism
Mid-office (Middle Office) As long as treasury operations remained as a service center, trading activity was supported by back-office. With increase in volatility of the market and vertical and horizontal integration of trading rooms, mid-office has been conceptualized and come into operations. The mid-office is responsible for the critical functions of independent market risk, monitoring measurement analysis and reporting to bank’s management for control assessment to asset liability committee, it is also responsible for daily tracking of risk exposures individually as also collectively. The function of mid-office is highly specialized and must include competent staff experts in market risk concepts and assessments. The ways of analysis and reporting may vary from bank to bank depending on the degree of specification and exposure to market risks.
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Integrated Treasury Structure and Mechanism
Derivatives Market Indian banks have now access to the derivative market, which, considering situation in developed countries can be considered as being in its emerging stage. The word derivative is originated from the word “derive” and can be understood as a financial product which has been derived from another financial product / market or commodity for example, BSE sensex is a derivative of some basic stocks / prices. The most common from of derivatives for integrated treasury operation are forwards, option, futures, swaps, etc. It may not be out of place to mention that hedgers, speculators and arbitrageurs all use these derivatives market. Though banks in India are yet to actively participate in derivative markets, they will do so in future as hedgers and arbitrageurs. The days are not very far off when such derivative market will also expand to include commodity derivatives. The futures market uses a form of forward contract which conveys agreement to sell specific amount of financial payments/ currencies at a particulars price on stipulated future date when only
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Integrated Treasury Structure and Mechanism
the right to buy is provided it is known as call option and when right to sell is provided, it is called as put option. A derivative market providing forward rate agreements is quite popular for financial institutions. To hedge against interest rate risks, interest rate swaps are entered in between the banks or financial institutions where, against one pays fixed rate of interest and another a variable rate. This arrangement minimizes the interest risk sensitivity of a portfolio. Technological Platform Whatever has been stated so far is a very simplified summary of objectives and processes of integrated treasury operation. Obviously, its success depends on information and computer technology put to use by the bank. Huge numbers of transactions, complicated algorithm for each decision, continuous calculation of duration, portfolio appreciation need an advanced real time online technological platform along with decision support system without a deft system integrated treasury operations will be highly risky proposition.
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Integrated Treasury Structure and Mechanism
What is the nature of integration?
To start with, there is geographical and infrastructural integration, the forex dealing rooms are merged and located in the same premises along with the domestic treasury unit. Under horizontal integration the dealing / trading rooms engaged in the same trading activity are brought under same policy, hierarchy, technological and accounting platform. In vertical integration all existing and diverse trading and arbitrage activities are brought under one control with common pool of funding and contributions. The impact of transactions of all units on rupee funds is merged. There is computerized linking of transactions.
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Integrated Treasury Structure and Mechanism
Functions of Integrated Treasury
The major functions of integrated treasury unit are as follows.
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Reserve Management and Investment It involves 1) meeting CRR/SLR obligations, 2) having an
appropriate mix of investment portfolio to optimize yield and duration. Duration Analysis is used as a tool to monitor the price sensitivity of an investment instrument to interest rate charges.
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Liquidity and Fund Management It involves 1) analysis of major cash flows arising out of
asset-liquidity transactions 2) providing a balanced and well diversified liquidity base to fund the various assets in the balance sheet of the bank 3) providing policy inputs to strategic planning group of the bank on funding mix and yield expected in credit and investment.
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Asset Liability Management and Term Money ALM calls for determining the optimal size and growth rate
of the balance sheet and also price the asset and liabilities in respect with guidelines. The reduction in CRR rates and ALM practices by banks increase the demand for funds for tenor of above 15 days to match duration of their assets.
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Integrated Treasury Structure and Mechanism
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Risk management Integrated treasury manages all market Risks associated with
a bank’s liabilities and assets. The market Risk and Liabilities pertain to floating interest rate risks and mismatch of assets and liability. The market Risk for assets can arise from 1) unfavorable change in interest rate 2) increasing levels of disintermediation 3) Securitization of assets 4) emergence of credit derivatives etc. ? Transfer pricing Treasury is to ensure that the funds of the bank are deployed optimally, without scarifying on yield or liquidity. An integrated Treasury unit has an idea of the bank’s overall funding needs as well as direct access to various markets (like money market, capital market, forex market, credit market) Hence, ideally treasury should provide benchmark rates, after assuming market risk, to various business groups and product categories about the correct business strategy to adopt.
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Derivative Products Treasury can develop Interest Rate Swap and other Rupee
based/ cross-currency, derivative products for hedging Bank’s own exposures and also sell such products to customers/ other Banks.
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Integrated Treasury Structure and Mechanism
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Arbitrage Treasury units of banks undertake this by simultaneous
buying and selling of the some type of assets in two different markets to make risk-less profit.
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Capital Adequacy This function focuses on quality of assets, with Return on
Assets being key criteria for measuring the efficiency of deployed funds. An Integrated Treasury is a major profit center. It has its own profit and loss measurement. It undertakes exposures through proprietary trading that may not be required for general banking.
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Integrated Treasury Structure and Mechanism
Benefits of Integration
The purpose of integration is to improve portfolio, profitability, to reduce risk, to synergize banking assets with trading assets etc. Banking assets are held basically for client relationship/ steady income and are generally held till maturity whereas trading assets are held primarily for generating profits on short term differences in prices / yields. The purpose is achieved through efficient utilization of funds, cost effective sourcing of liability, proper transfer pricing, availing arbitrage opportunities, on-line and off-line exchange of information between the money and forex dealers, single window service to customers, minimization of risks etc. An integrated treasury acts as a center of arbitrage and hedging activities. It seeks to maximize its currency portfolio and free transfer of funds one currency to another in order to remain a proactive profit center with phased liberalization on capital account. With convertibility, there will be scope for banks with integrated treasury to structure multi-currency balance sheet and take advantage of strategic positioning.
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Integrated Treasury Structure and Mechanism
What are the arbitrage benefits to
treasury?
Arbitrage is the practice of taking advantage of a price differential between two or more markets. A combination of matching deals is struck that capitalize upon the imbalance, the profit being the difference between the market prices. A person who engages in arbitrage is called an arbitrageur. The term is mainly applied to trading in financial instruments, such as bonds, stocks, derivatives, commodities, treasury and currencies. If the market prices do not allow for profitable arbitrage, the prices are said to constitute an arbitrage free market
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Integrated Treasury Structure and Mechanism The price differentials between different markets on same asset category give rise to arbitrage opportunities. Given below is a scenario of interest rates to explain
Various Rates a US $ Libor b Forward Premier c Implied Deposit d Sovereign zero coupon e Arbitrage (c-d)
Interest Rate for period 3 month 6 month 12 month 1.15 1.37 2.52 4.48 -1.96 1.18 1.17 2.35 4.45 -2.12 1.34 1.12 2.46 4.48 -2.02
From the above table, one can observe clear arbitrage benefit which can be availed by borrowing in US Dollar, converting the same to Rupee, taking forward cover to hedge exchange risk and investing in Rupee. However, well functioning financial market generate asset price and exchange rates that preclude arbitrage.
Drawbacks of Integrated treasury
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Integrated Treasury Structure and Mechanism
? The integration of individual system is the biggest cost incurred by a firm. This is evidenced by the fact that the cost of developing interface between various point solutions takes a big share in corporates’ IT budget. ? The treasurer will have limited control over the function transferred under the responsibility of the treasury system provider. ? Another disadvantage is the manual intervention when the data has to be re-entered because of the heterogeneity of the system. Sometimes the batch interfaces cannot provide the real-time data or information. The confusion of finance managers regarding the technology used and the modification processes also shows the low level of integration of corporate treasuries all over the world
Risk involve in integrated treasury
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Integrated Treasury Structure and Mechanism
Credit Risk Credit risk is the risk of loss due to a debtor's non-payment of a loan Credit risk is risk resulting from uncertainty in a counterpart’s ability or willingness to meet its contractual obligations. A bank makes a loan to a corporate client. Because it is possible that the client will fail to make timely principal or interest payments, the bank faces credit risk. A corporation executes an interest rate swap with counterparty. If interest rates move in the corporation's favor, the counterparty will owe the corporation a net obligation. Because the counterparty could fail to perform on such an obligation, the corporation faces pre-settlement credit risk. Operational Risk A bank's back office fails to catch a discrepancy between a reported trade and a confirmation from the counterparty. Ultimately, the trade could be disputed, causing a loss. A trader mis-hedges a position and loses Rs.10 crores. Rather than acknowledge the error, he obtains access to the operations systems and disguises the loss. He then takes a speculative position in the market, hoping to recover the loss. Liquidity Risk
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Integrated Treasury Structure and Mechanism
Liquidity risk is financial risk from a possible loss of liquidity. There are two types of liquidity risk:
•
Specific liquidity risk is the risk that a particular institution will lose liquidity. This might happen if the institution's credit rating fell or something else happened which might cause counterparties to avoid trading with or lending to the institution.
•
Systemic liquidity risk affects all participants in a market. It is the risk that an entire market will lose liquidity. Financial markets tend to lose liquidity during periods of crisis or high volatility. Liquidity risk tends to compound other risks. It can be most
damaging
for
institutions
that
are
experiencing
financial
difficulties which create a need for immediate cash.
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Integrated Treasury Structure and Mechanism
Components
System
of
Integrated
Treasury
Integrated Treasury System is based on its respective components. Each component can be combined with other components, or can be deployed individually, as well as in connection with other systems. Integrated Treasury System Consists of the following modules:
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Cash Management System (CMS) Treasury Management System (TMS) Risk Management System (RMS) Payment System (PMS) Integrated Report System (IRS)
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Integrated Treasury Structure and Mechanism
Cash Management System The Cash Management System supports in planning, budgeting, monitoring and analyzing all financial transactions. It covers all requirements- as well as assists for budgeting and planning. It automates the processing and controlling of transactions. It provides infrastructure for all additionally required functionality and enforces the strict security requirements for the system. It provides the functionality one needs for automated processing of electronic bank statements, entry in accounts, short term payment planning and long term liquidity planning. These features are provided by the following component:
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Automatic Bank Statement Processing Group Cash Management Automatic Account Assignment and Posting Liquidity Planning
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Integrated Treasury Structure and Mechanism
Treasury Management System Treasury Management System supports entire Treasury Process – right from word planning, administration, execution, booking till accounting of transactions. It covers the products such as: Money Market, Foreign Exchange, Interest, Derivatives, Loans, Guarantees, and Securities etc. The sophisticated reporting system conforms to highest possible security standards and allows the separation of front – and back office, as well as a definition of work-flows based on specific types of transactions. These features are provided by the following component:
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Money Market Foreign Exchange Interest Rate Management Contract Management Leasing Management Securities Management Standing Instructions
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Integrated Treasury Structure and Mechanism
Risk Management System: New accounting standards, along with new legal frameworks, increasingly require companies to deploy risk management procedures, to protect the company against losses which may endanger a company's existence. This System allows the monitoring and control of such risks in the financial management. The components which support in managing financial risk are:
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Value at Risk Advanced Simulation Hedge Relations and Effectiveness Testing Contingent Liabilities Limit Administration Process Risk Monitor
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Integrated Treasury Structure and Mechanism
Payment System With the help of Payment System one is able to process all payments generated in the group through a central and automated system; regardless whether payments are initiated manually or through clearing or accounting systems. This system fulfills all requirements of a highly
scalable‚ payment factory, capable of processing large number of transactions in short time, highest security standards, optimized choice of bank, and ability to process any kind of electronic data format. These features are provided through the following component:
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Central Payment Factory Direct Payment Processing
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Integrated Treasury Structure and Mechanism
Integrated Report System The Integrated Report System allows Integrated Treasury System users to design reports with full access to all data available within itself. Layout and content of the reports can be freely designed and modified through a graphical user interface. Integrated Report System provides the following functions: ? Individual report definition
• • •
Complete access to all business data Dynamic layouts, with data grouping and aggregation Pricing tools such as Net Present Value, Mark-toMarket, Duration etc. Graphs based on all data
•
? Time report generation ? Archiving of temporary results ? Import and export of report data
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Integrated Treasury Structure and Mechanism
Fundamental Concepts
Integrated Treasury System is designed to meet the following requirements: ? Support for all treasury concepts - from treasury centre to inhouse bank ? Highest possible techniques of all operative processes. ? Highest security standards ? Full scalability regarding the number of users, ? Access to all Integrated Treasury System functionality via standard internet connections ? Interoperability with third party systems and components Specifically, Integrated Treasury System implements the following concepts: Flexibility ? Modular design and control through adjustable parameters ? Unlimited number of unique and separated user groups ? Unlimited number of companies, which can be freely defined. Multiple levels of companies within a holding structure can be defined.
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Integrated Treasury Structure and Mechanism
Efficiency ? Highest possible level of techniques of all processes ? Constant monitoring of all processes ? Automated reporting and automated distribution of reports Security ? Logging of all changes to core data and system parameters ? User authorization and access control defined per company, system input dialogue and system object. ? Archiving of all transactions and dealings ? Definition of workflows and full support for ‘four eye principle. ? Automated checks through the monitoring system Integration ? Standard interfaces for import of transactions from third party systems, when relevant for the company's liquidity. ? Standard interfaces for third party systems to retrieve booking records from ITS. ? Automated import of price data ? Integrated Reporting and Data Charting system
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Integrated Treasury Structure and Mechanism
Initiatives for integrated treasury
Many banks in India have taken the initiatives to set up their integrated treasury operations supported by infrastructural facilities like Reuters, hotlines, dealing Boards, Internet, software for Integrated Treasury etc. Payment systems like Negotiated Dealing System, clearing Corporation of India Ltd. are in place. New initiatives like Real Time Gross Settlement System, Centralized Fund Management have also been initiated recently.
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Integrated Treasury Structure and Mechanism
Structure of Integrated Treasury
The treasury department is managed by front office, mid office, back office and audit group. The dealer and traders constituted the front office. In the course of their buying and selling transactions they are the first point of interface with other participants in the market. They report to their department heads. They also interact among themselves to exploit arbitrage opportunities. A mid office set-up independent of the treasury unit, acts as a unit responsible for risk monitoring, measurement and analysis and reports directly to Top management for control. This unit provides risk assessment to Assets Liability Committee and is responsible for daily tracking of risk exposures, individually as well as collectively. The back office undertakes accounting settlement and reconciliation operation operations. The audit group independently inspects/ audits daily operations in the treasury department to ensure adherence to internal/ regulatory systems and procedures. Given below is a structure of an integrated treasury unit.
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Integrated Treasury Structure and Mechanism
Structure of Integrated Treasury
Top management
Middle Office
Treasurer
Financial Control Back-office Equities and Commodities
Fund Management Money Market Activities Forex Activities Derivatives
Treasury Marketing
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Integrated Treasury Structure and Mechanism
Functional Areas under Integrated
Treasury
Fund Management: It involves management of liquidity and maintenance of reserve requirements (CRR & SLR). ? Liquidity management ? Asset-liability management ? Management of reserves (SLR & CRR) ? Primary investment in bonds or equities ? Setting up a proper transfer pricing mechanism Money Market Activities: It undertakes Bond trading and Swap trading. ? Swap trading ? Bond trading
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Management of foreign currency liabilities vis-à-vis rupee liabilities
? Managing the gap through short term rupee derivatives
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Integrated Treasury Structure and Mechanism
Forex Activities: It deals with spot forex trading, merchant transactions and interbank cover transactions. ? Merchant cover operations ? Spot trading ? Forex options trading ? Trading in currency futures Derivatives: It deals with interest rate derivatives and forex derivatives ? Selling of derivatives products to clients ? Interest rate derivatives trading-long term ? Cross –currency swaps Treasury Marketing: In this markets all the interest rates, foreign exchange and derivatives products ? Daily advisory on markets to clients ? Risk management solutions –short term & long term ? Covering all the products of the treasury Equities and Commodities:
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Integrated Treasury Structure and Mechanism
It deals with trade in equities in the secondary market and commodities like gold, oil etc. for which a liquid spot and futures market exists.
Integrating Treasury Mechanism
A typical treasury comprises three sub-sections – front middle and back office. Each office has specified functions and goals to achieve. The front office usually performs the market trading, tracking of exchange rate etc. it may consist of different desks, each dealing with different market like forex, money market, fixed income etc. the front office also looks after the market intelligence, relationships with investors and banks. In fact, the front office is the strategic decision making part of corporate treasury. The middle office usually looks after the risk management aspects such as Asset Liability Management (ALM), disbursement of information on various positions to the front office and compliance of reporting requirement. Back office does all the background work like keeping the records and managing the past data and accounting systems. In treasury integration it is a usual practice that a specialized solution provider maintains both the back and middle office function of
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Integrated Treasury Structure and Mechanism
treasury. However, the strategic front office is managed by an internal team. Computer system coupled with internet processes all the information and trade orders in real time because the solution provider manages these functions for a host of other companies also the clients benefit on reduced costs through economies of scale. (See figure)
Back Office
Middle Office
Treasury Integration
Front Office
Integrated treasury is now a global phenomenon. Financial borders between countries are breaking down. Cross-country movements of currency, goods and services are now practically free from impediments, giving rise to widening and deepening of growth of capital and money markets. To cope with such
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Integrated Treasury Structure and Mechanism
developments,
treasury
operations
are
being
integrated
horizontally, vertically, albeit three dimensionally.
Transfer pricing
Transfer pricing mechanism is one by which the efficiency of a treasury is monitored; profit allocation between various profit centers of the bank is properly done borrowings Transfer Pricing Mechanism
Market
Advances
Borrows all loan from Treasury Treasury Lend all deposits to Treasury Commercia l
Market placements
Deposits
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Integrated Treasury Structure and Mechanism
Case Study
SBI is one of the India's largest banks. It is also home to the country's biggest and most powerful Treasury, contributing to a major part of the total turnover in the money and forex markets. Through a network of state-of-the-art dealing rooms in India and abroad, backed by the assured expertise of informed professionals, the SBI extends round-the-clock support to clients in managing their forex and interest rate exposures. SBI's relationships with over 700 correspondent banks are also leveraged in extracting maximum value from treasury operations. SBI's treasury operations are channeled through the Rupee Treasury, the Forex Treasury and the Treasury Management Group.
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Integrated Treasury Structure and Mechanism
Rupee Treasury
The Rupee Treasury deals in the domestic money (Rs) and debt markets while the Forex Treasury deals mainly in the local foreign exchange market. The Treasury Management Group monitors the investment, risk and asset-liability management aspects of the Bank's overseas offices. The Rupee Treasury carries out the bank’s rupee-based treasury functions in the domestic market. Broadly, these include asset liability management, investments and trading. The Rupee Treasury also manages the bank’s position regarding statutory requirements like the cash reserve ratio and the statutory liquidity ratio; as per the norms of the Reserve Bank of India.
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Integrated Treasury Structure and Mechanism
Products and Services
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Asset Liability Management: The main function comprises management of liquidity, maturity profiles of assets and liabilities and interest rate risks. Investments: SBI offers financial support through a wide spectrum of investment products that can substitute the traditional credit avenues of a corporate like commercial papers, preference shares, non-convertible debentures, securitized paper, fixed and floating rate products. SBI invests in primary and secondary market equity as per its own discretion. These products allow leveraging the flexibility of financial
?
markets, enabling efficient interest risk management and optimizing the cost of funds. SBI invests in these instruments issued by the company, thus providing you a dynamic substitute for traditional credit options. The Rupee Treasury handles the bank’s domestic investments. Trading The bank’s trading operations are unmatched in size and
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Integrated Treasury Structure and Mechanism
value in the domestic market and cover government securities, corporate bonds, call money and other instruments. SBI is the biggest lender in call. Forex Treasury The SBI is the country’s biggest and most important Forex Treasury, both in the Interbank and Corporate Foreign Exchange markets, and deals with all the major corporates and institutions in all the financial centers in India and abroad. The bank’s team of seasoned, skilled and professional dealers can tailor situation. The bank’s dealing rooms provide 24-hour trading facilities and employs state-of-the-art technology and information systems. SBI’s relationships with over 700 correspondent banks and institutions across the globe enhance the strength of the Forex treasury. The Forex Treasury can also structure and facilitate execution of derivatives including long term rupee-foreign currency swaps, rupee-foreign currency interest rate swaps and cross currency swaps.
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customized solutions that meet your specific
requirements and extract maximum value out of each market
Integrated Treasury Structure and Mechanism
Overseas Treasury Operations
Treasury Management Group The Treasury Management Group is a part of the International Banking Group and functions under the Chief General Manager. As the name implies the department monitors the management of treasury functions at SBI’s foreign offices including asset liability management, investments and forex operations. Products and Services
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Asset Liability Management: The ALM function comprises management of liquidity, maturity profiles of assets and liabilities and interest rate risks at the foreign offices.
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Integrated Treasury Structure and Mechanism ?
Investments: Monitoring of investment operations of the foreign offices of the bank is one of the principal activities of Treasury Management Group. The main objectives of investment operations at our foreign offices, apart from compliance with the regulatory requirements of the host country, are a) b)
c)
safety of the funds invested, Optimization of profits from investment operations and Maintenance of liquidity Investment operations are
conducted in accordance with the investment policy for foreign offices formulated by Treasury Management Group. The activities include appraisal of the performance of the foreign offices broad parameters such as income earned from investment operations, composition and size of the portfolio, performance vis-à-vis the budgeted targets and the market value of the portfolio.
?
Forex
monitoring:
Monitoring
of
forex
operations of foreign offices is done with the objective of optimizing of returns while managing the attendant risks.
?
Forex and Interest rate derivatives: Treasury
Management Group also plays an important role in structuring, marketing, facilitating execution of foreign
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Integrated Treasury Structure and Mechanism
currency derivatives including currency options, long term rupee - foreign currency swaps, foreign currency interest rate swaps, cross currency swaps and forward rate agreements. Commodity hedging is one of the recent activities taken up by Treasury Management Group.
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Reciprocal Lines: The department is also
responsible for maintenance of reciprocal lines with international banks. Portfolio Management & Custodial Services The Portfolio Management Services Section of State bank of India has been set up to handle investment and regulatory related concerns of Institutional investors functioning in the area of Social Security. This service forms part of the Treasury Dept. of State Bank of India, and is based at Mumbai. Portfolio Management Services was set up exclusively for management of investments of Social Security funds and custody of the securities related thereto. In the increasingly complex regulatory and investment environment of today, even the most sophisticated investors are
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Integrated Treasury Structure and Mechanism
Finding it difficult to address day to day investment concerns, such as ? adherence to stated investment objectives ? security selection quality considerations ? conformity to policy constraints ? investment returns The team manning the Portfolio Management Services Section consists of highly experienced officers of State Bank of India, who have the required depth of knowledge to handle large investment portfolios and address the concern of large investors. The capabilities of the team range from Investment Management and Custody to Information Reporting.
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Integrated Treasury Structure and Mechanism
Conclusion
I would like to conclude by discussing the enormous understanding while preparing the project. To compile this project was a great challenge as it provided me with an occasion to interact with extremely skilled people who have specialized approach towards their work. This also gave me the right mantra for meeting deadlines. One can easily Integrated treasury is a very complex concept, but it was vital to be aware of the concepts, workings, management of the banks in relation to their treasuries collected. After compiling this project I can easily say that, integrated treasury, its management which the bank do is really great. We don’t come to know how their strategies and working are done as we are not the ones who are in related to such matters of the bank, but when I came across such concept; I can say that it requires fully trained and qualified team for such tasks because it has to be done keeping profitability of bank in to consideration.
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Integrated Treasury Structure and Mechanism
The need and the purpose of integration occurred for improving portfolios, profitability, for reducing risks, for synergizing banking assets with trading assets etc. and this purpose is achieved through efficient utilization of funds, cost effective sourcing of liability, proper transfer pricing, minimization of risks etc. As bank is working harder to achieve and cover all aspects, still they have to maintain as well as improve their techniques related to treasuries in the highly competitive banking sector. Lastly one can say that management of treasury, integrated treasury plays a very important role in helping banks profitability.
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Integrated Treasury Structure and Mechanism
Bibliography
? Treasury Management : A new Focus ? Treasury Management : The New Dynamics
?
ICFAI library: Thane
? College library
Webilography
?
www.Indian-bank.com www.banking.com
? www.google.com
?
? www.sbi.com ? www.syndicatebank.com
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Integrated Treasury Structure and Mechanism
Annexure
Name of the Bank________________________________________ Name of the Branch______________________________________
1. When did your bank felt the need to implement the integrated treasury? Ans._________________________________________________________ _____________________________________________________________ _____________________________________________________________ ________________ 2. Why integrated treasury is important? Ans._________________________________________________________ _____________________________________________________________ _____________________________________________________________ ________________ 3. How far integrated treasury is useful or benefited? Ans._________________________________________________________ _____________________________________________________________
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Integrated Treasury Structure and Mechanism
_____________________________________________________________ ________________
4. Do you think integrating treasury operations would provide a fruitful solution to idle fund? Ans._________________________________________________________ _____________________________________________________________ _____________________________________________________________ ________________ 5. What are the difficulties you faced and facilities you faced after integration? Ans._________________________________________________________ _____________________________________________________________ _____________________________________________________________ ________________ 6. What change did your bank gain after implementing the integrated treasury program? Ans._________________________________________________________ _____________________________________________________________ _____________________________________________________________ ________________ 7. What measure should you take to enhance the derivatives market of your bank’s dealing?
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Integrated Treasury Structure and Mechanism
Ans._________________________________________________________ _____________________________________________________________ _____________________________________________________________ ________________
8. What kind of technical competencies are required to integrate treasuries? Ans._________________________________________________________ _____________________________________________________________ _____________________________________________________________ ________________ 9. How do you decrease market risk by integrated treasury operations? Ans._________________________________________________________ _____________________________________________________________ _____________________________________________________________ ________________ 10. What problems did you face? How do you rectify to achieve integrated treasury management? Ans._________________________________________________________ _____________________________________________________________ _____________________________________________________________ ________________
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Integrated Treasury Structure and Mechanism
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doc_376029943.doc
Introduction
Treasury refers to the fund or revenue at the disposal of a commercial bank and the day to day management of the same. The treasury manager and the treasury unit acts as the custodian of cash and other liquid assets. The art of managing the funds and the revenues of the bank optimally and profitably with low level of risk is called Treasury management . Treasury Management is fast emerging as a specialization in many companies and its accounting function is being de-linked from the finance managing the treasury profit center successfully. Treasury management is function. Highly focused knowledge of capital markets, money markets, instruments and investment avenues, treasury and risk management and related areas, has become essential for defined as "The management of the liquidity of the business to ensure that the right amount of funds in the right currency is in the right place at the right time". However, the definition is further extended as it does not incorporate the commercial or active element and therefore, the second definition states that, "The management of liquidity should be undertaken in such a way as to
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Integrated Treasury Structure and Mechanism
maximize yields and minimize costs subject to security, liquidity, interest and currency risk constraints".
Functions of Treasury Management
Following are some of the functions of the Treasury Management” ? Cash & Liquidity management ? Risk exposure management ? Asset & liability management ? Maintenance of statutory reserve requirements ? Control & development of dealing operations ? Funding of investment in subsidiaries & affiliates ? Control of investment portfolio ? Capital debt raising & loan stock administration
?
Responsibility of the sensible use of bank’s name
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Integrated Treasury Structure and Mechanism
What is Integrated Treasury?
“An integrated treasury system offers several significant benefits in managing public funds more effectively and efficiently” In earlier times, the bank’s forex dealing room used to manage the foreign dealings mainly arising out of merchant and subsequent cover operations in inter-bank market. The domestic treasury, investment operations were independent of forex dealings of a bank. Treasury also undertook investment in both Government and non-government securities. The need for integration of forex dealing and domestic treasury operation aroused in setting of interest rate deregulation, liberalization, Development of forex market, Introduction of derivative products, technological advancement etc. The integrated treasury performs the traditional roles of forex dealings room and treasury unit In era of high profile corporate failures and increasing volatility in financial markets, management of financial risk and
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Integrated Treasury Structure and Mechanism
strategic cash are gaining prime focus for a corporates to survive. Unlike the past, the changes in treasury management arena are increasing at a rapid pace. Financial professionals now have the opportunity and tools to mange corporate liquidity. This has come as a boon due to advancements in technology and liberalization process across the globe in financial environment. In addition, the desire to rapidly adopt technological advancements has led the companies to migrate from the existing to a new innovative platform. In general terms and from the perspective of commercial banking treasury refers to the fund and revenue at the possession of the bank and day to day management of the same. Idle funds are usually source of loss, real or opportunate and thereby need to be managed, invested and deployed with intent to improve profitability. There is no profit or reward without risk. Thus, treasury operations seek to maximize profit and earning by investing available funds at an acceptable level of risks. Returns and risks both need to be managed. If we have a look at the balance sheet of commercial banks, we see that investment / deposit ratio has by far overtaken credit / deposit ratio. Interest income / investments have overtaken interest income from loans / advances. The special feature of such portfolio
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Integrated Treasury Structure and Mechanism
is that more than 85 % of it is invested in government securities. The reasons for such developments appear to be as under: ? Poor credit off-take coupled with high increase in Non Performing Assets ? Bank’s reluctance to cut down the size of their balance sheet ? Government’s aggressive role in lowering cost of debt, resulting in high inventory profit to commercial banks.
?
Capital adequacy requirements. In this context, treasury operations are becoming more
important to the banks and a need for integration both horizontal and vertical has come to the attention of the corporates. The basic purpose of integration is to improve portfolio profitability risk insulation and also to synergize banking assets with trading assets. In horizontal integration, dealing / trading rooms engaged in the same trading activity are brought under same policy, hierarchy, technological and accounting platform, while in vertical integration, all existing and diverse trading and arbitrage activities are brought under control with one common pool of funding and contribution. Since 1990s, the prime movers of financial intermediaries and services have been the policies of globalization and reform. All players and regulators had been actively participating only with variation of the degree of participation, to globalize the economy.
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Integrated Treasury Structure and Mechanism
With growing forex reserves, Indian banks and financial institutions have no alternative but to be directly affected by global happenings and trades. This is where integrated treasury operation has emerged as a basic tool for key financial performance. Banks in India now have the option and opportunity to conduct treasury operations in numerous ways. Domestic and cross-border markets are now available to banks virtually for 24 hours, 365 days a year. However, opportunities in trading activities are also full of risk. Chain reaction of risk-failures in integrated treasury operations could be sweeping. To meet the challenges, along with guidance from regulating authorities, banks are arming themselves with clear policies, organizational structure, training of staff and technological initiatives to manage their participation with maximum success. We look into some such aspects here under. Reserve Bank of India The Reserve Bank of India has taken a large number of decisions bringing reforms to banking activities. Systematic deregulations of interest rate and frequent cuts in Banks / CRR and SLR rate, liquidity manipulation by RBI through open market operations have been quite significant for many banks. RBI proposes to modernize settlement and dealing environment, which would definitely help to deepen the debt and forex markets.
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Integrated Treasury Structure and Mechanism
Forex Trade As mentioned earlier, with advent of globalization and reforms, forex dealings / trading rooms have emerged as centers of arbitrage and hedging activities. Integrated treasury operations seek to maximize the currency portfolio and free transfer of funds from one currency to another in order to remain a proactive profit center. Merchant purchase / sales, proprietary trading / currency swaps / correspondent banking are some of the traditional activities of forex dealings room. Clear guidelines from Reserve Bank of India and bank’s policies are available regarding open-position day light limit, overnight limit. Treasury operations now maintain their own profit and loss measurement, undertake exposures. As financial markets all over the world are full of uncertainty and volatility, it is imperative that treasury operations are conducted after taking into account the matching of risks and returns.
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Integrated Treasury Structure and Mechanism
Mid-office (Middle Office) As long as treasury operations remained as a service center, trading activity was supported by back-office. With increase in volatility of the market and vertical and horizontal integration of trading rooms, mid-office has been conceptualized and come into operations. The mid-office is responsible for the critical functions of independent market risk, monitoring measurement analysis and reporting to bank’s management for control assessment to asset liability committee, it is also responsible for daily tracking of risk exposures individually as also collectively. The function of mid-office is highly specialized and must include competent staff experts in market risk concepts and assessments. The ways of analysis and reporting may vary from bank to bank depending on the degree of specification and exposure to market risks.
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Integrated Treasury Structure and Mechanism
Derivatives Market Indian banks have now access to the derivative market, which, considering situation in developed countries can be considered as being in its emerging stage. The word derivative is originated from the word “derive” and can be understood as a financial product which has been derived from another financial product / market or commodity for example, BSE sensex is a derivative of some basic stocks / prices. The most common from of derivatives for integrated treasury operation are forwards, option, futures, swaps, etc. It may not be out of place to mention that hedgers, speculators and arbitrageurs all use these derivatives market. Though banks in India are yet to actively participate in derivative markets, they will do so in future as hedgers and arbitrageurs. The days are not very far off when such derivative market will also expand to include commodity derivatives. The futures market uses a form of forward contract which conveys agreement to sell specific amount of financial payments/ currencies at a particulars price on stipulated future date when only
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Integrated Treasury Structure and Mechanism
the right to buy is provided it is known as call option and when right to sell is provided, it is called as put option. A derivative market providing forward rate agreements is quite popular for financial institutions. To hedge against interest rate risks, interest rate swaps are entered in between the banks or financial institutions where, against one pays fixed rate of interest and another a variable rate. This arrangement minimizes the interest risk sensitivity of a portfolio. Technological Platform Whatever has been stated so far is a very simplified summary of objectives and processes of integrated treasury operation. Obviously, its success depends on information and computer technology put to use by the bank. Huge numbers of transactions, complicated algorithm for each decision, continuous calculation of duration, portfolio appreciation need an advanced real time online technological platform along with decision support system without a deft system integrated treasury operations will be highly risky proposition.
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Integrated Treasury Structure and Mechanism
What is the nature of integration?
To start with, there is geographical and infrastructural integration, the forex dealing rooms are merged and located in the same premises along with the domestic treasury unit. Under horizontal integration the dealing / trading rooms engaged in the same trading activity are brought under same policy, hierarchy, technological and accounting platform. In vertical integration all existing and diverse trading and arbitrage activities are brought under one control with common pool of funding and contributions. The impact of transactions of all units on rupee funds is merged. There is computerized linking of transactions.
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Integrated Treasury Structure and Mechanism
Functions of Integrated Treasury
The major functions of integrated treasury unit are as follows.
?
Reserve Management and Investment It involves 1) meeting CRR/SLR obligations, 2) having an
appropriate mix of investment portfolio to optimize yield and duration. Duration Analysis is used as a tool to monitor the price sensitivity of an investment instrument to interest rate charges.
?
Liquidity and Fund Management It involves 1) analysis of major cash flows arising out of
asset-liquidity transactions 2) providing a balanced and well diversified liquidity base to fund the various assets in the balance sheet of the bank 3) providing policy inputs to strategic planning group of the bank on funding mix and yield expected in credit and investment.
?
Asset Liability Management and Term Money ALM calls for determining the optimal size and growth rate
of the balance sheet and also price the asset and liabilities in respect with guidelines. The reduction in CRR rates and ALM practices by banks increase the demand for funds for tenor of above 15 days to match duration of their assets.
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Integrated Treasury Structure and Mechanism
?
Risk management Integrated treasury manages all market Risks associated with
a bank’s liabilities and assets. The market Risk and Liabilities pertain to floating interest rate risks and mismatch of assets and liability. The market Risk for assets can arise from 1) unfavorable change in interest rate 2) increasing levels of disintermediation 3) Securitization of assets 4) emergence of credit derivatives etc. ? Transfer pricing Treasury is to ensure that the funds of the bank are deployed optimally, without scarifying on yield or liquidity. An integrated Treasury unit has an idea of the bank’s overall funding needs as well as direct access to various markets (like money market, capital market, forex market, credit market) Hence, ideally treasury should provide benchmark rates, after assuming market risk, to various business groups and product categories about the correct business strategy to adopt.
?
Derivative Products Treasury can develop Interest Rate Swap and other Rupee
based/ cross-currency, derivative products for hedging Bank’s own exposures and also sell such products to customers/ other Banks.
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Integrated Treasury Structure and Mechanism
?
Arbitrage Treasury units of banks undertake this by simultaneous
buying and selling of the some type of assets in two different markets to make risk-less profit.
?
Capital Adequacy This function focuses on quality of assets, with Return on
Assets being key criteria for measuring the efficiency of deployed funds. An Integrated Treasury is a major profit center. It has its own profit and loss measurement. It undertakes exposures through proprietary trading that may not be required for general banking.
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Integrated Treasury Structure and Mechanism
Benefits of Integration
The purpose of integration is to improve portfolio, profitability, to reduce risk, to synergize banking assets with trading assets etc. Banking assets are held basically for client relationship/ steady income and are generally held till maturity whereas trading assets are held primarily for generating profits on short term differences in prices / yields. The purpose is achieved through efficient utilization of funds, cost effective sourcing of liability, proper transfer pricing, availing arbitrage opportunities, on-line and off-line exchange of information between the money and forex dealers, single window service to customers, minimization of risks etc. An integrated treasury acts as a center of arbitrage and hedging activities. It seeks to maximize its currency portfolio and free transfer of funds one currency to another in order to remain a proactive profit center with phased liberalization on capital account. With convertibility, there will be scope for banks with integrated treasury to structure multi-currency balance sheet and take advantage of strategic positioning.
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Integrated Treasury Structure and Mechanism
What are the arbitrage benefits to
treasury?
Arbitrage is the practice of taking advantage of a price differential between two or more markets. A combination of matching deals is struck that capitalize upon the imbalance, the profit being the difference between the market prices. A person who engages in arbitrage is called an arbitrageur. The term is mainly applied to trading in financial instruments, such as bonds, stocks, derivatives, commodities, treasury and currencies. If the market prices do not allow for profitable arbitrage, the prices are said to constitute an arbitrage free market
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Integrated Treasury Structure and Mechanism The price differentials between different markets on same asset category give rise to arbitrage opportunities. Given below is a scenario of interest rates to explain
Various Rates a US $ Libor b Forward Premier c Implied Deposit d Sovereign zero coupon e Arbitrage (c-d)
Interest Rate for period 3 month 6 month 12 month 1.15 1.37 2.52 4.48 -1.96 1.18 1.17 2.35 4.45 -2.12 1.34 1.12 2.46 4.48 -2.02
From the above table, one can observe clear arbitrage benefit which can be availed by borrowing in US Dollar, converting the same to Rupee, taking forward cover to hedge exchange risk and investing in Rupee. However, well functioning financial market generate asset price and exchange rates that preclude arbitrage.
Drawbacks of Integrated treasury
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Integrated Treasury Structure and Mechanism
? The integration of individual system is the biggest cost incurred by a firm. This is evidenced by the fact that the cost of developing interface between various point solutions takes a big share in corporates’ IT budget. ? The treasurer will have limited control over the function transferred under the responsibility of the treasury system provider. ? Another disadvantage is the manual intervention when the data has to be re-entered because of the heterogeneity of the system. Sometimes the batch interfaces cannot provide the real-time data or information. The confusion of finance managers regarding the technology used and the modification processes also shows the low level of integration of corporate treasuries all over the world
Risk involve in integrated treasury
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Integrated Treasury Structure and Mechanism
Credit Risk Credit risk is the risk of loss due to a debtor's non-payment of a loan Credit risk is risk resulting from uncertainty in a counterpart’s ability or willingness to meet its contractual obligations. A bank makes a loan to a corporate client. Because it is possible that the client will fail to make timely principal or interest payments, the bank faces credit risk. A corporation executes an interest rate swap with counterparty. If interest rates move in the corporation's favor, the counterparty will owe the corporation a net obligation. Because the counterparty could fail to perform on such an obligation, the corporation faces pre-settlement credit risk. Operational Risk A bank's back office fails to catch a discrepancy between a reported trade and a confirmation from the counterparty. Ultimately, the trade could be disputed, causing a loss. A trader mis-hedges a position and loses Rs.10 crores. Rather than acknowledge the error, he obtains access to the operations systems and disguises the loss. He then takes a speculative position in the market, hoping to recover the loss. Liquidity Risk
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Integrated Treasury Structure and Mechanism
Liquidity risk is financial risk from a possible loss of liquidity. There are two types of liquidity risk:
•
Specific liquidity risk is the risk that a particular institution will lose liquidity. This might happen if the institution's credit rating fell or something else happened which might cause counterparties to avoid trading with or lending to the institution.
•
Systemic liquidity risk affects all participants in a market. It is the risk that an entire market will lose liquidity. Financial markets tend to lose liquidity during periods of crisis or high volatility. Liquidity risk tends to compound other risks. It can be most
damaging
for
institutions
that
are
experiencing
financial
difficulties which create a need for immediate cash.
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Integrated Treasury Structure and Mechanism
Components
System
of
Integrated
Treasury
Integrated Treasury System is based on its respective components. Each component can be combined with other components, or can be deployed individually, as well as in connection with other systems. Integrated Treasury System Consists of the following modules:
? ? ? ? ?
Cash Management System (CMS) Treasury Management System (TMS) Risk Management System (RMS) Payment System (PMS) Integrated Report System (IRS)
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Integrated Treasury Structure and Mechanism
Cash Management System The Cash Management System supports in planning, budgeting, monitoring and analyzing all financial transactions. It covers all requirements- as well as assists for budgeting and planning. It automates the processing and controlling of transactions. It provides infrastructure for all additionally required functionality and enforces the strict security requirements for the system. It provides the functionality one needs for automated processing of electronic bank statements, entry in accounts, short term payment planning and long term liquidity planning. These features are provided by the following component:
? ? ? ?
Automatic Bank Statement Processing Group Cash Management Automatic Account Assignment and Posting Liquidity Planning
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Integrated Treasury Structure and Mechanism
Treasury Management System Treasury Management System supports entire Treasury Process – right from word planning, administration, execution, booking till accounting of transactions. It covers the products such as: Money Market, Foreign Exchange, Interest, Derivatives, Loans, Guarantees, and Securities etc. The sophisticated reporting system conforms to highest possible security standards and allows the separation of front – and back office, as well as a definition of work-flows based on specific types of transactions. These features are provided by the following component:
? ? ? ? ? ? ?
Money Market Foreign Exchange Interest Rate Management Contract Management Leasing Management Securities Management Standing Instructions
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Integrated Treasury Structure and Mechanism
Risk Management System: New accounting standards, along with new legal frameworks, increasingly require companies to deploy risk management procedures, to protect the company against losses which may endanger a company's existence. This System allows the monitoring and control of such risks in the financial management. The components which support in managing financial risk are:
? ? ? ? ? ?
Value at Risk Advanced Simulation Hedge Relations and Effectiveness Testing Contingent Liabilities Limit Administration Process Risk Monitor
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Integrated Treasury Structure and Mechanism
Payment System With the help of Payment System one is able to process all payments generated in the group through a central and automated system; regardless whether payments are initiated manually or through clearing or accounting systems. This system fulfills all requirements of a highly
scalable‚ payment factory, capable of processing large number of transactions in short time, highest security standards, optimized choice of bank, and ability to process any kind of electronic data format. These features are provided through the following component:
? ?
Central Payment Factory Direct Payment Processing
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Integrated Treasury Structure and Mechanism
Integrated Report System The Integrated Report System allows Integrated Treasury System users to design reports with full access to all data available within itself. Layout and content of the reports can be freely designed and modified through a graphical user interface. Integrated Report System provides the following functions: ? Individual report definition
• • •
Complete access to all business data Dynamic layouts, with data grouping and aggregation Pricing tools such as Net Present Value, Mark-toMarket, Duration etc. Graphs based on all data
•
? Time report generation ? Archiving of temporary results ? Import and export of report data
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Integrated Treasury Structure and Mechanism
Fundamental Concepts
Integrated Treasury System is designed to meet the following requirements: ? Support for all treasury concepts - from treasury centre to inhouse bank ? Highest possible techniques of all operative processes. ? Highest security standards ? Full scalability regarding the number of users, ? Access to all Integrated Treasury System functionality via standard internet connections ? Interoperability with third party systems and components Specifically, Integrated Treasury System implements the following concepts: Flexibility ? Modular design and control through adjustable parameters ? Unlimited number of unique and separated user groups ? Unlimited number of companies, which can be freely defined. Multiple levels of companies within a holding structure can be defined.
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Integrated Treasury Structure and Mechanism
Efficiency ? Highest possible level of techniques of all processes ? Constant monitoring of all processes ? Automated reporting and automated distribution of reports Security ? Logging of all changes to core data and system parameters ? User authorization and access control defined per company, system input dialogue and system object. ? Archiving of all transactions and dealings ? Definition of workflows and full support for ‘four eye principle. ? Automated checks through the monitoring system Integration ? Standard interfaces for import of transactions from third party systems, when relevant for the company's liquidity. ? Standard interfaces for third party systems to retrieve booking records from ITS. ? Automated import of price data ? Integrated Reporting and Data Charting system
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Integrated Treasury Structure and Mechanism
Initiatives for integrated treasury
Many banks in India have taken the initiatives to set up their integrated treasury operations supported by infrastructural facilities like Reuters, hotlines, dealing Boards, Internet, software for Integrated Treasury etc. Payment systems like Negotiated Dealing System, clearing Corporation of India Ltd. are in place. New initiatives like Real Time Gross Settlement System, Centralized Fund Management have also been initiated recently.
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Integrated Treasury Structure and Mechanism
Structure of Integrated Treasury
The treasury department is managed by front office, mid office, back office and audit group. The dealer and traders constituted the front office. In the course of their buying and selling transactions they are the first point of interface with other participants in the market. They report to their department heads. They also interact among themselves to exploit arbitrage opportunities. A mid office set-up independent of the treasury unit, acts as a unit responsible for risk monitoring, measurement and analysis and reports directly to Top management for control. This unit provides risk assessment to Assets Liability Committee and is responsible for daily tracking of risk exposures, individually as well as collectively. The back office undertakes accounting settlement and reconciliation operation operations. The audit group independently inspects/ audits daily operations in the treasury department to ensure adherence to internal/ regulatory systems and procedures. Given below is a structure of an integrated treasury unit.
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Integrated Treasury Structure and Mechanism
Structure of Integrated Treasury
Top management
Middle Office
Treasurer
Financial Control Back-office Equities and Commodities
Fund Management Money Market Activities Forex Activities Derivatives
Treasury Marketing
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Integrated Treasury Structure and Mechanism
Functional Areas under Integrated
Treasury
Fund Management: It involves management of liquidity and maintenance of reserve requirements (CRR & SLR). ? Liquidity management ? Asset-liability management ? Management of reserves (SLR & CRR) ? Primary investment in bonds or equities ? Setting up a proper transfer pricing mechanism Money Market Activities: It undertakes Bond trading and Swap trading. ? Swap trading ? Bond trading
?
Management of foreign currency liabilities vis-à-vis rupee liabilities
? Managing the gap through short term rupee derivatives
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Integrated Treasury Structure and Mechanism
Forex Activities: It deals with spot forex trading, merchant transactions and interbank cover transactions. ? Merchant cover operations ? Spot trading ? Forex options trading ? Trading in currency futures Derivatives: It deals with interest rate derivatives and forex derivatives ? Selling of derivatives products to clients ? Interest rate derivatives trading-long term ? Cross –currency swaps Treasury Marketing: In this markets all the interest rates, foreign exchange and derivatives products ? Daily advisory on markets to clients ? Risk management solutions –short term & long term ? Covering all the products of the treasury Equities and Commodities:
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Integrated Treasury Structure and Mechanism
It deals with trade in equities in the secondary market and commodities like gold, oil etc. for which a liquid spot and futures market exists.
Integrating Treasury Mechanism
A typical treasury comprises three sub-sections – front middle and back office. Each office has specified functions and goals to achieve. The front office usually performs the market trading, tracking of exchange rate etc. it may consist of different desks, each dealing with different market like forex, money market, fixed income etc. the front office also looks after the market intelligence, relationships with investors and banks. In fact, the front office is the strategic decision making part of corporate treasury. The middle office usually looks after the risk management aspects such as Asset Liability Management (ALM), disbursement of information on various positions to the front office and compliance of reporting requirement. Back office does all the background work like keeping the records and managing the past data and accounting systems. In treasury integration it is a usual practice that a specialized solution provider maintains both the back and middle office function of
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Integrated Treasury Structure and Mechanism
treasury. However, the strategic front office is managed by an internal team. Computer system coupled with internet processes all the information and trade orders in real time because the solution provider manages these functions for a host of other companies also the clients benefit on reduced costs through economies of scale. (See figure)
Back Office
Middle Office
Treasury Integration
Front Office
Integrated treasury is now a global phenomenon. Financial borders between countries are breaking down. Cross-country movements of currency, goods and services are now practically free from impediments, giving rise to widening and deepening of growth of capital and money markets. To cope with such
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Integrated Treasury Structure and Mechanism
developments,
treasury
operations
are
being
integrated
horizontally, vertically, albeit three dimensionally.
Transfer pricing
Transfer pricing mechanism is one by which the efficiency of a treasury is monitored; profit allocation between various profit centers of the bank is properly done borrowings Transfer Pricing Mechanism
Market
Advances
Borrows all loan from Treasury Treasury Lend all deposits to Treasury Commercia l
Market placements
Deposits
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Integrated Treasury Structure and Mechanism
Case Study
SBI is one of the India's largest banks. It is also home to the country's biggest and most powerful Treasury, contributing to a major part of the total turnover in the money and forex markets. Through a network of state-of-the-art dealing rooms in India and abroad, backed by the assured expertise of informed professionals, the SBI extends round-the-clock support to clients in managing their forex and interest rate exposures. SBI's relationships with over 700 correspondent banks are also leveraged in extracting maximum value from treasury operations. SBI's treasury operations are channeled through the Rupee Treasury, the Forex Treasury and the Treasury Management Group.
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Integrated Treasury Structure and Mechanism
Rupee Treasury
The Rupee Treasury deals in the domestic money (Rs) and debt markets while the Forex Treasury deals mainly in the local foreign exchange market. The Treasury Management Group monitors the investment, risk and asset-liability management aspects of the Bank's overseas offices. The Rupee Treasury carries out the bank’s rupee-based treasury functions in the domestic market. Broadly, these include asset liability management, investments and trading. The Rupee Treasury also manages the bank’s position regarding statutory requirements like the cash reserve ratio and the statutory liquidity ratio; as per the norms of the Reserve Bank of India.
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Integrated Treasury Structure and Mechanism
Products and Services
?
Asset Liability Management: The main function comprises management of liquidity, maturity profiles of assets and liabilities and interest rate risks. Investments: SBI offers financial support through a wide spectrum of investment products that can substitute the traditional credit avenues of a corporate like commercial papers, preference shares, non-convertible debentures, securitized paper, fixed and floating rate products. SBI invests in primary and secondary market equity as per its own discretion. These products allow leveraging the flexibility of financial
?
markets, enabling efficient interest risk management and optimizing the cost of funds. SBI invests in these instruments issued by the company, thus providing you a dynamic substitute for traditional credit options. The Rupee Treasury handles the bank’s domestic investments. Trading The bank’s trading operations are unmatched in size and
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Integrated Treasury Structure and Mechanism
value in the domestic market and cover government securities, corporate bonds, call money and other instruments. SBI is the biggest lender in call. Forex Treasury The SBI is the country’s biggest and most important Forex Treasury, both in the Interbank and Corporate Foreign Exchange markets, and deals with all the major corporates and institutions in all the financial centers in India and abroad. The bank’s team of seasoned, skilled and professional dealers can tailor situation. The bank’s dealing rooms provide 24-hour trading facilities and employs state-of-the-art technology and information systems. SBI’s relationships with over 700 correspondent banks and institutions across the globe enhance the strength of the Forex treasury. The Forex Treasury can also structure and facilitate execution of derivatives including long term rupee-foreign currency swaps, rupee-foreign currency interest rate swaps and cross currency swaps.
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customized solutions that meet your specific
requirements and extract maximum value out of each market
Integrated Treasury Structure and Mechanism
Overseas Treasury Operations
Treasury Management Group The Treasury Management Group is a part of the International Banking Group and functions under the Chief General Manager. As the name implies the department monitors the management of treasury functions at SBI’s foreign offices including asset liability management, investments and forex operations. Products and Services
?
Asset Liability Management: The ALM function comprises management of liquidity, maturity profiles of assets and liabilities and interest rate risks at the foreign offices.
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Integrated Treasury Structure and Mechanism ?
Investments: Monitoring of investment operations of the foreign offices of the bank is one of the principal activities of Treasury Management Group. The main objectives of investment operations at our foreign offices, apart from compliance with the regulatory requirements of the host country, are a) b)
c)
safety of the funds invested, Optimization of profits from investment operations and Maintenance of liquidity Investment operations are
conducted in accordance with the investment policy for foreign offices formulated by Treasury Management Group. The activities include appraisal of the performance of the foreign offices broad parameters such as income earned from investment operations, composition and size of the portfolio, performance vis-à-vis the budgeted targets and the market value of the portfolio.
?
Forex
monitoring:
Monitoring
of
forex
operations of foreign offices is done with the objective of optimizing of returns while managing the attendant risks.
?
Forex and Interest rate derivatives: Treasury
Management Group also plays an important role in structuring, marketing, facilitating execution of foreign
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Integrated Treasury Structure and Mechanism
currency derivatives including currency options, long term rupee - foreign currency swaps, foreign currency interest rate swaps, cross currency swaps and forward rate agreements. Commodity hedging is one of the recent activities taken up by Treasury Management Group.
?
Reciprocal Lines: The department is also
responsible for maintenance of reciprocal lines with international banks. Portfolio Management & Custodial Services The Portfolio Management Services Section of State bank of India has been set up to handle investment and regulatory related concerns of Institutional investors functioning in the area of Social Security. This service forms part of the Treasury Dept. of State Bank of India, and is based at Mumbai. Portfolio Management Services was set up exclusively for management of investments of Social Security funds and custody of the securities related thereto. In the increasingly complex regulatory and investment environment of today, even the most sophisticated investors are
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Integrated Treasury Structure and Mechanism
Finding it difficult to address day to day investment concerns, such as ? adherence to stated investment objectives ? security selection quality considerations ? conformity to policy constraints ? investment returns The team manning the Portfolio Management Services Section consists of highly experienced officers of State Bank of India, who have the required depth of knowledge to handle large investment portfolios and address the concern of large investors. The capabilities of the team range from Investment Management and Custody to Information Reporting.
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Integrated Treasury Structure and Mechanism
Conclusion
I would like to conclude by discussing the enormous understanding while preparing the project. To compile this project was a great challenge as it provided me with an occasion to interact with extremely skilled people who have specialized approach towards their work. This also gave me the right mantra for meeting deadlines. One can easily Integrated treasury is a very complex concept, but it was vital to be aware of the concepts, workings, management of the banks in relation to their treasuries collected. After compiling this project I can easily say that, integrated treasury, its management which the bank do is really great. We don’t come to know how their strategies and working are done as we are not the ones who are in related to such matters of the bank, but when I came across such concept; I can say that it requires fully trained and qualified team for such tasks because it has to be done keeping profitability of bank in to consideration.
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Integrated Treasury Structure and Mechanism
The need and the purpose of integration occurred for improving portfolios, profitability, for reducing risks, for synergizing banking assets with trading assets etc. and this purpose is achieved through efficient utilization of funds, cost effective sourcing of liability, proper transfer pricing, minimization of risks etc. As bank is working harder to achieve and cover all aspects, still they have to maintain as well as improve their techniques related to treasuries in the highly competitive banking sector. Lastly one can say that management of treasury, integrated treasury plays a very important role in helping banks profitability.
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Integrated Treasury Structure and Mechanism
Bibliography
? Treasury Management : A new Focus ? Treasury Management : The New Dynamics
?
ICFAI library: Thane
? College library
Webilography
?
www.Indian-bank.com www.banking.com
? www.google.com
?
? www.sbi.com ? www.syndicatebank.com
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Integrated Treasury Structure and Mechanism
Annexure
Name of the Bank________________________________________ Name of the Branch______________________________________
1. When did your bank felt the need to implement the integrated treasury? Ans._________________________________________________________ _____________________________________________________________ _____________________________________________________________ ________________ 2. Why integrated treasury is important? Ans._________________________________________________________ _____________________________________________________________ _____________________________________________________________ ________________ 3. How far integrated treasury is useful or benefited? Ans._________________________________________________________ _____________________________________________________________
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Integrated Treasury Structure and Mechanism
_____________________________________________________________ ________________
4. Do you think integrating treasury operations would provide a fruitful solution to idle fund? Ans._________________________________________________________ _____________________________________________________________ _____________________________________________________________ ________________ 5. What are the difficulties you faced and facilities you faced after integration? Ans._________________________________________________________ _____________________________________________________________ _____________________________________________________________ ________________ 6. What change did your bank gain after implementing the integrated treasury program? Ans._________________________________________________________ _____________________________________________________________ _____________________________________________________________ ________________ 7. What measure should you take to enhance the derivatives market of your bank’s dealing?
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Integrated Treasury Structure and Mechanism
Ans._________________________________________________________ _____________________________________________________________ _____________________________________________________________ ________________
8. What kind of technical competencies are required to integrate treasuries? Ans._________________________________________________________ _____________________________________________________________ _____________________________________________________________ ________________ 9. How do you decrease market risk by integrated treasury operations? Ans._________________________________________________________ _____________________________________________________________ _____________________________________________________________ ________________ 10. What problems did you face? How do you rectify to achieve integrated treasury management? Ans._________________________________________________________ _____________________________________________________________ _____________________________________________________________ ________________
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doc_376029943.doc