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Par 100 posts (V.I.P)
OVERVIEW OF TREASURY
What is treasury management?
The specialist treasury function is a recent development in many companies but has grown dramatically since the early 1970s. Treasury management is the efficient management of the financial risk and liquidity of the business. It is often called risk management which is simply managing the risks facing the company. Managing the risks facing a company involves:
• identifying the risks to which the company is exposed;
• quantifying these exposures;
• determine the possible outcomes; and
• design a strategy to transform risk exposures to achieve the desired outcome.
Treasury management can vary between simple money management to all financial matters excluding accounting and controllership matters depending on the size and type of the organization. Since it covers everything from cash management, funding, dividend policy, investment appraisal and currency management all organizations have a treasury function though they might not define it as such and it may not be a distinct treasury function. It is mainly large and medium sized companies that have a function formally organized under the management of a treasurer. It is estimated any company with a turnover of greater than £250 million should have a separate treasurer department. In many large companies the treasury operation is the size of a small bank. No two businesses are the same and a universal approach to treasury issues cannot be advanced.
In 1979 the Association of Corporate Treasurers was formed as a professional body to raise the profile of the treasury function and provide education and training for those involved in treasury management. The treasury function is not often mentioned in the published accounts of large companies. However, the recent Operating Financial Review issued by the Accounting Standards Board in the UK is a code of best practice requires companies to disclose information in relation to "Treasury Policies and Activities". Also treasury management is often in the news especially when things go wrong. For example, the following provide examples were the treasurer has hit the headlines:
• The loss of £150 million on foreign exchange dealings by the treasury department of Allied Lyons;
• The collapse of the BCCI and the losses incurred by the Western Isles Council;
• Laura Ashley's disagreements with its bankers over loan agreements;
• The losses suffered by the holders of commercial paper in Polly Peck; and
• The problems Saatchi & Saatchi had with a long term funding instrument.
There have been numerous surveys of corporate treasurers which give us some indication of their activities. Basically in conjunction with their colleagues the Treasurer is concerned with maximizing profits by making decisions on risk management. To get an indication of the activities of a treasurer the following is based on an interview with John Grout, the treasurer of Cadbury Schweppes Plc, a major international company and gives an indication of the role of a treasurers in a multi-national company.
What is the main concern of the treasury department?
The main concern of the treasury department is financial risk management, trading in money as a commodity and long term financial planning. Treasurers deal with issues of valuation in that they see any part of the business as for sale at any particular time.
The treasury function is split into three departments:
• Tax Department - Most treasury decisions will have tax implications and the tax treatment must be carefully considered. This department therefore closely interacts with the other departments.
• Dealing Operation - money management and funding
• Corporate Finance Department - Group Structure i.e. the legal entities in which they operate, mergers and acquisitions and long term projects.
Treasury departments will be organized differently. There is no universal definition of what a treasurer does or how a treasury department will be structured. It will depend on factors such as, the size of the company, its geographical diversification and the industry type
What are the main functions of the treasury department?
The Treasury Operations Department is responsible for Treasury's middle and back office functions, all systems services, and provides Cash Management and Banking Relations services Treasury Operation’s cross-functional staff provide pricing and valuation, performance measurement, transaction and securities processing and compliance support functions. The middle office provides quantitative analytics support and operational risk reporting and coordinates Treasury's control risk assessments related to internal corporate governance and risk management functions. Treasury Operations implements and manages information systems in support of Treasury's asset management, funding, and pension investment and cash operations functions. Its staff participates in delivering services for client central banks under the Reserves Advisory and Asset Management Program (RAMP). The operational units are structured to provide dedicated processing and analytical support for the Banking, Capital Markets and Financial Engineering (BCF), Investment Management (IMD), Quantitative Risk and Analytics (QRA), and Pension Investment (PID) Departments. This support includes ensuring the integrity and smooth transfer of financial data, the maintenance of legal documentation and prudential controls, and for the provision of all accounting, trade settlement and call monitoring activities for traded financial instruments (e.g. bonds, swaps, swaptions, etc.).
What is the relationship of the treasurer to the financial markets?
It is easiest to break down the financial markets in relation to their time scale.
Short Term: Reuters screens for the money markets and topic screens for the equity markets enable the company to monitor these markets on a second by second basis.
Medium Term: Slightly in the longer term they will have contacts with market makers other than through dealing in each of the markets in which they operate. In commercial paper markets they have contacts with the rating agencies and with some large investors in some financial markets but are infrequent and not routine.
Long Term: The company and markets are subject to regulation and through organizations like the Confederation of British Industries and the Association of Corporate Treasurers they have an interface with regulators such as the Bank of England, the Department of Trade and Industry and the European Commission.
What have been the main changes in the treasury function over the last years?
One of the most important is the growth in range of activities and instruments available to manage risk due to currency exposure, interest rate exposure and liquidity management. Access to markets is much easier, deregulation has taken place and companies are no-longer subject to exchange controls which enable companies to carry out transactions more quickly. Finally, volatility has increased in the financial markets especially the freeing of the exchange markets since the end of fixed exchange rate has spread volatility into other markets. The need to maintain earnings in face of this volatility has propelled the treasury function into the spotlight.
-Adithi – C01
-Amit - C03
What is treasury management?
The specialist treasury function is a recent development in many companies but has grown dramatically since the early 1970s. Treasury management is the efficient management of the financial risk and liquidity of the business. It is often called risk management which is simply managing the risks facing the company. Managing the risks facing a company involves:
• identifying the risks to which the company is exposed;
• quantifying these exposures;
• determine the possible outcomes; and
• design a strategy to transform risk exposures to achieve the desired outcome.
Treasury management can vary between simple money management to all financial matters excluding accounting and controllership matters depending on the size and type of the organization. Since it covers everything from cash management, funding, dividend policy, investment appraisal and currency management all organizations have a treasury function though they might not define it as such and it may not be a distinct treasury function. It is mainly large and medium sized companies that have a function formally organized under the management of a treasurer. It is estimated any company with a turnover of greater than £250 million should have a separate treasurer department. In many large companies the treasury operation is the size of a small bank. No two businesses are the same and a universal approach to treasury issues cannot be advanced.
In 1979 the Association of Corporate Treasurers was formed as a professional body to raise the profile of the treasury function and provide education and training for those involved in treasury management. The treasury function is not often mentioned in the published accounts of large companies. However, the recent Operating Financial Review issued by the Accounting Standards Board in the UK is a code of best practice requires companies to disclose information in relation to "Treasury Policies and Activities". Also treasury management is often in the news especially when things go wrong. For example, the following provide examples were the treasurer has hit the headlines:
• The loss of £150 million on foreign exchange dealings by the treasury department of Allied Lyons;
• The collapse of the BCCI and the losses incurred by the Western Isles Council;
• Laura Ashley's disagreements with its bankers over loan agreements;
• The losses suffered by the holders of commercial paper in Polly Peck; and
• The problems Saatchi & Saatchi had with a long term funding instrument.
There have been numerous surveys of corporate treasurers which give us some indication of their activities. Basically in conjunction with their colleagues the Treasurer is concerned with maximizing profits by making decisions on risk management. To get an indication of the activities of a treasurer the following is based on an interview with John Grout, the treasurer of Cadbury Schweppes Plc, a major international company and gives an indication of the role of a treasurers in a multi-national company.
What is the main concern of the treasury department?
The main concern of the treasury department is financial risk management, trading in money as a commodity and long term financial planning. Treasurers deal with issues of valuation in that they see any part of the business as for sale at any particular time.
The treasury function is split into three departments:
• Tax Department - Most treasury decisions will have tax implications and the tax treatment must be carefully considered. This department therefore closely interacts with the other departments.
• Dealing Operation - money management and funding
• Corporate Finance Department - Group Structure i.e. the legal entities in which they operate, mergers and acquisitions and long term projects.
Treasury departments will be organized differently. There is no universal definition of what a treasurer does or how a treasury department will be structured. It will depend on factors such as, the size of the company, its geographical diversification and the industry type
What are the main functions of the treasury department?
The Treasury Operations Department is responsible for Treasury's middle and back office functions, all systems services, and provides Cash Management and Banking Relations services Treasury Operation’s cross-functional staff provide pricing and valuation, performance measurement, transaction and securities processing and compliance support functions. The middle office provides quantitative analytics support and operational risk reporting and coordinates Treasury's control risk assessments related to internal corporate governance and risk management functions. Treasury Operations implements and manages information systems in support of Treasury's asset management, funding, and pension investment and cash operations functions. Its staff participates in delivering services for client central banks under the Reserves Advisory and Asset Management Program (RAMP). The operational units are structured to provide dedicated processing and analytical support for the Banking, Capital Markets and Financial Engineering (BCF), Investment Management (IMD), Quantitative Risk and Analytics (QRA), and Pension Investment (PID) Departments. This support includes ensuring the integrity and smooth transfer of financial data, the maintenance of legal documentation and prudential controls, and for the provision of all accounting, trade settlement and call monitoring activities for traded financial instruments (e.g. bonds, swaps, swaptions, etc.).
What is the relationship of the treasurer to the financial markets?
It is easiest to break down the financial markets in relation to their time scale.
Short Term: Reuters screens for the money markets and topic screens for the equity markets enable the company to monitor these markets on a second by second basis.
Medium Term: Slightly in the longer term they will have contacts with market makers other than through dealing in each of the markets in which they operate. In commercial paper markets they have contacts with the rating agencies and with some large investors in some financial markets but are infrequent and not routine.
Long Term: The company and markets are subject to regulation and through organizations like the Confederation of British Industries and the Association of Corporate Treasurers they have an interface with regulators such as the Bank of England, the Department of Trade and Industry and the European Commission.
What have been the main changes in the treasury function over the last years?
One of the most important is the growth in range of activities and instruments available to manage risk due to currency exposure, interest rate exposure and liquidity management. Access to markets is much easier, deregulation has taken place and companies are no-longer subject to exchange controls which enable companies to carry out transactions more quickly. Finally, volatility has increased in the financial markets especially the freeing of the exchange markets since the end of fixed exchange rate has spread volatility into other markets. The need to maintain earnings in face of this volatility has propelled the treasury function into the spotlight.
-Adithi – C01
-Amit - C03