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Iswar Padhan. Agenda for the Session 1.Role & Rationale for Treasury 2.Need for a Well-organised treasury 3.Set up of a Good Treasury System 4.Various.

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Presentation on theme: "Iswar Padhan. Agenda for the Session 1.Role & Rationale for Treasury 2.Need for a Well-organised treasury 3.Set up of a Good Treasury System 4.Various."— Presentation transcript:

1 Iswar Padhan

2 Agenda for the Session 1.Role & Rationale for Treasury 2.Need for a Well-organised treasury 3.Set up of a Good Treasury System 4.Various segments of Treasury 5.Functions of various segments

3 Banking – Definition Banking is defined as the business of accepting of deposits for the purpose of lending …………….. Core activity, combined with the rapid growth of modern day banking activities necessitates a well organised Treasury.

4 4 Financial Intermediation & Risk Profile Depositors / Investors Bank Borrowers [ Corporates / Individuals ] Risk Associated are: Credit Risk Liquidity Risk Int. Rate Risk Forex Risk Operational Risk ALM mainly deals with liquidity, Int Rate & Forex Risks Objectives: Earn Profit Enhance Value of Equity

5 5 Risk Profile Credit Risk : All risks related to a borrower/ counterparty not fulfilling his obligations on time Credit Risk : All risks related to a borrower/ counterparty not fulfilling his obligations on time Liquidity Risk : All risks arising out of the bank’s inability to meet financial commitments when due Liquidity Risk : All risks arising out of the bank’s inability to meet financial commitments when due Interest Rate Risk :Risk of loss in the bank’s NII or Economic Value of Capital arising out of changes in the level of interest rates Interest Rate Risk :Risk of loss in the bank’s NII or Economic Value of Capital arising out of changes in the level of interest rates Currency Risk : Risk of loss due to changes in forex rates Currency Risk : Risk of loss due to changes in forex rates Operational Risk: Risk of loss due to failure in system / deficiencies in process and procedures Operational Risk: Risk of loss due to failure in system / deficiencies in process and procedures

6 Banking: Regulatory Requirements – Connected with Treasury Statutory Pre-emption : a) Cash Reserve Ratio – 4% of NDTL b) Statutory Liquidity Ratio – 23% of DTL ALM Guidelines : a) Liquidity Gap Limits b) Interest Rate Risk Limits Capital Adequacy Guidelines : a) Basel II Guidelines b) Basel III Guidelines Authorised Dealership : a) Forex Services to Merchant b) FX Interbank Dealing

7 Management of Statutory Pre-emption (CRR & SLR) CRR Requirement : CRR requirement : Daily average of 4% of NDTL to be maintained in the RBI account on fortnightly basis with individual day’s minimum at 95% of the CRR requirement Issues & Challenges : a) Zero return on CRR balance, hence avoid excess b) Regulatory penalty in case of default in CRR maintenance SLR Requirement : 23% of DTL on fortnightly basis to be maintained mainly in the form of SLR eligible Central, State Govt & other approved securities Issues & Challenges : To optimize the balance between liquidity, return and risk

8 Money Market Operations RBI Liquidity Supports : Liquidity Adjustment Facility (LAF) : Repo, Reverse Repo, MSF Open Market Operation Refinance FC INR Swap facility Lender of last resort Money Market Products : Call / Notice / CBLO Market Repo Term Money Certificate of Deposits Short term investments TBs, CP, CD, MFs

9 Investment Operations Objectives: Regulatory compliance for SLR Liquidity Management Maximise Return on Investments Make trading income Manage risk – credit, liquidity, interest rate, operational Investment Products : Risk Free Securities – TBs and G-Secs Bank, FI and PSU securities – CP, CD, Bonds & Equity Corporate Debts – CP, Bonds and Equity Issues & Concerns: Underdeveloped Debt Market Underdeveloped derivatives market for hedging Migration to IFRS

10 Investment Guidelines Classification: 3 Categories – HFT, AFS & HTM HFT & AFS treated as trading Defeasance period of 90 days for HFT HTM is treated as permanent – limit on HTM Valuation & MTM Provisioning: Fixed income securities valuation as per FIMMDA Price / rates Equity as per exchange price HFT valuation on monthly AFS valuation on quarterly HTM valuation for MIS and RBI reporting MTM loss on HFT & AFS to be provided Shifting between Categories : Shifting to / from HTM permitted once in a year, at beginning Shifting from HFT to AFS in exceptional situation Shifting from AFS to HFT with ALCO approval

11 Investment Risk Management & Control Policy and Monitoring Framework: Board approved Investment Policy and Framework Segregation of book into banking and trading Segregation of functions into dealing, back office and mid office Board approved limit structure: Book Size, Duration, Loss Limit Dealing in secured and recorded platform Policy with dealings through brokers Dealer-level control and monitoring On-line, end-of-the day and periodic monitoring and reporting Overall supervision and control by ALCO

12 FOREX MANAGEMENT Forex Regulation FEMA Act 1999 FEMA Guidelines by RBI FEDAI Rules & Regulations Banks Act as Authorissed Dealer (AD) FX Brokers and Money Changers act as limited AD FOREX Transactions All FX remittances to be routed through Authorised Dealers RBI based on FEMA sets rules, regulations and limits on FX transactions Nature of FX Market Closely regulated by RBI Rupee is market determined, RBI regulates to control volatility Rupee is not fully convertible

13 FOREX OPERATIONS OF BANKS Forex Services To provide services to exporters, importers and remittance facilities to resident & non-residents To channelise foreign currency funds in deposits, borrowings and investments to meet foreign currency needs on the domestic market To manage assets and liabilities in the various currencies and time buckets Provide foreign currency risk management products and services to clients Undertaking Trading in forex market To raise Capital in Foreign Currency

14 Forex Accounts / Terms / Products Forex Accounts Nostro Accounts Vostro Accounts Loro Account FOREX Quotations Direct quote – USD / INR Indirect Quote – CHF / INR through USD / CHF & USD / INR Bid (Buy) & Offer (Sell) Forex Transactions Cash, Tom & Spot Forward / Swap Non-deliverable Forward (NDF) FX Rates Interbank Rates Domestic Currency Rate & Cross Currency Rate Merchant Rates TT & Bills Rates

15 FOREX MARKET: Objective & Players Objectives: Remittance Hedge Arbitrage Trading / Speculation Major Players : Corporates Banks FIIs Hedge Funds Pension Funds Central Banks Resident / Non-resident Individuals

16 SPECIAL FEATURES OF FX MARKET IN INDIA MANAGED FLOAT FLOW DRIVEN TRADE FLOWS CAPITAL FLOWS OPTIONS HEDGING REER / RBI MONTH END SYNDROME GLOBAL DOLLAR VALUE IMPACT OF US DATA RELEASE INFLUENCE OF NDF MARKET

17 Derivative Market A contract whose price depends on the price of the underlying instrument like : a) Foreign Currency b) Interest rate c) Equity d) Index e) Commodity etc… Products Traded : Options, Currency Swaps, Interest rate Swaps, FRA, Range accruals, Futures, etc…..

18 Forex Risk Management & Control Policy and Monitoring Framework: Board approved Policy and Framework Segregation of functions into dealing, back office and mid office Segregation of dealing into inter-bank and merchant desks Client Appropriateness & Suitability for Derivatives Board approved limit structure: Net Open Overnight Open Position (NOOP) Day Light Open Position Aggregate Gap Limit (AGL) Dealer & Book wise Loss limit Credit Risk Limit Structure for Clients (LER) Dealing in secured and recorded platform Policy with dealings through brokers Dealer-level control and monitoring Month-end valuation as per FEDAI rates On-line, end-of-the day and periodic monitoring and reporting Overall supervision and control by ALCO Concurrent Audit of regular day-to-day activity

19 Need for Treasury in Banks 1. Maintenance of CRR and SLR 2. Judicious Funds Management 3. Quoting of Rates for Forex transactions 4. Management of Nostro Funds 5. Structuring and Selling of Derivatives 6. Proprietary Trading 7. Contribute Profit as a Profit Centre

20 Broad Classification of Treasury 1.Front Office-To Strike Deals 2.Mid Office-Risk Management Policies, Monitoring, MIS etc. 3.Back Office-Settlement and Accounting

21 TREASURY FX Sales Product Structuring FX Interbank Money MarketEquities SLR & Non-SLR Commodities, Bullion, Metals, ……

22 Money Market Desk 1.Maintenance of CRR and SLR 2.Investment of Surplus funds - Call / Notice Money, Mutual Funds, USD/INR Swaps, Commercial Papers, Certificate of Deposit, T Bills, G Secs, 3.Raising Short Term Funds – Call / Notice Money, USD/INR Swaps, Term Money, MIBOR Linked Deposits, 4.Quoting rates for Bulk Deposits 5.Monitoring of Maturity of Bulk Deposits 6.Keeping track of outflow on account of loan disbursement 7.Maintenance of RBI balances in various centres 8.Proprietary Trading

23 Forex Sales Desk 1.Preparation of Card rates 2.Quoting of rates Export, Import, Remittances 3.Booking of forward contracts 4.Acceptance and monitoring of Customer Orders 5.Apprising customers of currency movements and views on various currencies 6.Structuring and Sale of Derivative products 7.Always on the look out for new business opportunities

24 FX Interbank Desk 1.Providing liquidity in the market by quoting in USD/INR Spot, Forward and Cross Currency 2.Running proprietary trading position 3.Enabling cover operation for deals done by Sales and Derivatives Desk 4.Management of Nostro Balances 5.Providing information on market developments and currency views

25 Product Structuring Desk 1.Covering of Deals concluded by Sales desk in interbank market 2.Structuring and pricing of new derivative products 3.Running USD/INR Option Book 4.Running Interest Rate Swap Book 5.Interact with Other banks in India and abroad to devise new products

26 Derivative Products Exchange Rate products USD / INR options Cross currency options Put Options, Call Options European, American Interest Rate Products Interest Rate Swaps Currency Swaps – Principal, coupon

27 Thank YOU Wish You All Good Luck


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