1. Treasury Market Risk Management

2. Treasury Management Treasury management is a broader concept than liquidity management Management of cash flows in terms of: –Amount of cash inflow / outflow –Currency of the flows –Time pattern –Places of occurrences of cash flows

3. Functions performed by Treasury Management Liquidity management (including cash management) Interest rate risk management Currency risk management Equity risk management Commodity risk management Investment risk management

4. Functions of Treasury Management (International Scenario) Insurance Investor relations management Pension fund management Tax management

5. Investment Function Commitments of funds for an expected benefit in the future. Investments in financial assets –Equity shares –Government securities –Bonds –Corporate debentures Investment in real assets –Commodities –Bullion (Gold / Silver) –Real estate investment

6. Investment in Financial Assets Cash or near cash asset Exchange of cash or other financial asset Securities traded in an open market Transactions are recorded in a trading book Trading books record positions held in financial instruments and commodities –Trading interest –Hedge interest Instruments are held without any restrictive covenants

7. Basel Committee Norms for Trading Bank committee defines the trading strategy Setting position limits on trading Monitoring of position limits Authority to the dealers to undertake trade within a defined limit Mark-to-market of positions Assessment system –Valuation process –Market turnover levels –Position size

8. Basel Committee Disclosure Requirements of Investments Disclosure on holding of investments with capital gains expectations. Valuation process and accounting of investment holdings. Fair market values of investments in balance sheet. Information on publically and privately traded investments. Cumulative realized values and losses from sale and liquidation of investments. Unrealized gains and losses from investments and capital. Disclosure to assess the risk of investments.

9. Investment Classification Held to maturity –Dated instruments –Intended to be held till the maturity date –Portfolio not to exceed 25% of total investment portfolio –Exemption from 25% limit Recapitalized bonds issued by Central Government Investment in a bank’s subsidiaries and joint ventures Investments made under private placements

10. Investment Classification Available for sale / Held for Trading –Invested for earning revenues –Expected movement in price/ interest rates –Bank’s may determine the quantum of investment Intention of holding the investment Risk management system Tax plan Employee skill set Bank’s net worth position

11. Investment Classification Available for sale / Held for Trading –Disposed off within a maximum holding period of 90 days from the date of acquisition –Profit / loss from investment reported in the income statement

12. RBI Guidelines on Shifting Security Classification Shifting of held to maturity classification can be done only once a year at the beginning of the accounting year Shifting of available for sale to held to maturity can be at any point of time Shifting of held to maturity to available for sale is not permitted

13. RBI Guidelines on Shifting Security Classification Transfer from one classification to another –At acquisition cost –Book value or market value on the date of transfer whichever is less –Provision for depreciation

14. RBI Guidelines on Valuation of Quoted Securities Held to Maturity –Actual cost –When acquisition cost is more than the face value, the premium is absorbed over maturity period in the income statement –Periodical review of acquisition cost and decline in value has to be reported

15. RBI Guidelines on Valuation of Quoted Securities Available for Sale –Valuation at mark-to-market on a quarterly basis –Provision for depreciation in value –Book value of securities are recorded

16. RBI Guidelines on Valuation of Quoted Securities Held for Trading –Equity shares at mark-to-market on a daily basis –Valuation at mark-to-market on a monthly basis Exchange quoted price RBI price (Government securities) Price quotes of Primary Dealers’ Association

17. RBI Guidelines on Valuation of Unquoted Securities Yield to maturity

18. Investment Fluctuation Reserve Changes in investment portfolio due to unforeseen interest rate fluctuations or other changes. Minimum 5% and maximum 10% of investment value of held for trading and available for sale classifications to be held as investment fluctuation reserve. Transfer of a part of gain on sale of investments to investment fluctuation reserve.

19. Guidelines on Investment Policy Investment policy to be based on acceptable bank practices Policy to be based on –Size of bank operation –Composition of assets and liabilities –Long term policy on bank operations –Risk evaluation Bank needs to trade only on the basis of securities held Government securities to be acquired through auction

20. Guidelines on Investment Policy Sale and purchase recorded in the bank’s investment account. –Outright sale –Ready forward contract –Subsidiary general ledger –Bank receipt Approval of the designated bank authority for dealings through brokers.

21. Guidelines on Investment Policy Maintenance of separate broker accounts. Observation of due diligence when the transaction is on behalf of broker clients. Investments in equity instruments (shares and debentures) to be made with adequate skilled employees.

22. Guidelines on Investment Policy Board of Directors to determine –level of authority against each deal and dealer –Approval procedures for each investment transaction –Determination of prudential trading exposure limits –Reporting system for each classification of investment transaction