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Treasury Management - Overview

NIIT University March 22, 2013

Introduction Function of Treasury Treasury Instruments Key Concepts/Terminologies


Traditionally role of (rupee) Treasury in Indian Banks was limited to ensuring
the maintenance of RBI stipulated norms of CRR and SLR.

Similarly activity in Foreign Exchange was confined to meeting merchants and

customers requirements for imports, exports, remittances and deposits.

With gradual liberalization, de-regulation and various financial market reforms,

(freeing of bank deposit/lending rates, Repo/Open Market Operations to manage liquidity, determination of interest on Government securities in a more transparent and competitive manner by holding auctions, market determined exchange rates, volatility in interest/exchange rates etc.) much vibrant money market, bond markets, exchange markets have evolved providing opportunities to Bank treasuries to earn profits and thus resulted in transformation of Bank treasuries from mere CRR/SLR keepers to a profit center. Trading (short term directional trades) etc.

Sources of profit for Treasury Investments, Spreads, Arbitrage, Proprietary

Functions of Treasury

Functions of Treasury
Domestic Operations
Liquidity and Balance Sheet Management
Liquidity Management - ability to meet contractual obligations as and when they arise and ability to satisfy funds requirements to meet new business opportunities. Daily inflow/outflow management. Borrowing/Deployment of Funds to meet the liquidity gaps in Inter Bank markets/Call Money/Repo window etc. Asset Liability Management Balanced and well diversified liability base to fund the various assets in the balance sheet of the Bank. Optimal mix of various sources to ensure that there is no excessive dependence on any single category and maturity profile of assets conform broadly to that of the liabilities to avoid structural mismatches that can lead to liquidity problems. Involves recording of maturity and Interest rate patterns of assets and liabilities (ALCO).

Reserve Management (CRR/SLR) and Investments

Ongoing maintenance of CRR/SLR Investments of Surplus in various instruments viz. CDs, CPs, PSU Bonds, Corporate Bonds etc. depending upon various factors viz. market conditions, liquidity position, tenure of funding available, market liquidity in various instruments. Investments can be held till maturity or can be traded (HTM/HFT)

Functions of Treasury
Domestic Operations
Transfer Pricing
Interface between Assets and Liability Groups of the Bank Treasurer has to ensure that the funds of the Bank are deployed in the mot appropriate manner without sacrificing either yield or liquidity Administered through Transfer Pricing mechanism Depending on the signals provided by the treasury in form of benchmark rates for assets and liabilities, focus of the individual business groups can be shifted from asset growth to liability growth or vice versa as dictated by the needs of the Bank.

Proprietary Trading & Arbitrage

Focus is short term as opposed to investments, which is long term. Short term directional trades. Aim is to earn trading profit from movement in security prices during a day or a few days of trading

Risk Management
Liquidity Risk (Asset Liability Mismatches), Interest Rate Risk etc.

Functions of Treasury
Forex Operations
Extending cover to foreign exchange trade transactions/remittances (Cash/TOM/Spot) Funding and managing Foreign exchange assets and liabilities (FC Deposits, PCFC, PSFC, Foreign Currency Loans, Nostro Accounts etc.) Proprietary Trading & Arbitrage
Short term directional trades based on view on Currency movements

Hedge to Foreign Exchange Risks

Forwards/Options/Swaps to cover Foreign Exchange Risks

Treasury Instruments

Treasury Instruments Domestic Treasury

Asset Products/Instruments (Deployment of Funds)
Call/Notice Money Lending

Term Lending/Inter Bank Deposits

Investments in Certificate of Deposits/Commercial Papers Inter Bank Participation Certificates Reverse Repo/CBLO backed lending

SLR Bonds issued by GOI (T Bills/G Secs), State Governments

Bonds issued by FIs, Banks, Corporates etc. Asset Backed Securities (PTCs) Private Placement of Securities

Tax Free Bonds

Preference Shares/Listed Unlisted Equity Shares/Mutual Funds


Treasury Instruments Domestic Treasury

Liability Products/Instruments (Borrowings)
Call/Notice Money Borrowing Term Money Borrowing Issuance of Certificate of Deposits Inter Bank Participation Certificates Repo/CBLO backed borrowings Refinance (RBI/SIDBI/NABARD etc.) Bills Re Discounting Tier I/Tier II Bonds issued by Banks


Treasury Instruments Forex Treasury

Cash/TOM/Spot Transactions for buy and sell of Foreign Exchange Forwards, Options, Swaps Foreign Currency Placements, Investments & Borrowings

Merchant Transactions
PCFC/PSFC/FBP/FBD Foreign Currency Loans


Key Concepts/Terminologies
Bid/Ask: Quote by Market Makers for both buying (bid) and selling (ask) . Bid
is generally lower than Ask as directed by normal profit motive. Difference between Bid and Ask is normally called as bid-ask spread.

Balance Tenor: Unexpired life of the Security. Basis Point: One Hundredth of a percentage (i.e. 0.01). Call Money: Overnight Borrowing/Lending in the interbank market.
Banks/PDs are allowed to participate in call market.

Notice Money: Borrowing/Lending in interbank market upto 14 days. Term Money: Borrowing/Lending in interbank market > 14 days. Certificate of Deposit: Negotiable money market instrument issued in
demateralised form or Usance Promissory note for funds deposited at a Bank. of debt to the investor. CP is issued at a discount to face value. value, is called as coupon.

Commercial Paper: Short term unsecured promissory note issued by the raiser Coupon: Rate of interest paid on a security, generally a fixed percentage of face

Key Concepts/Terminologies
Primary Market: Primary market is the financial market for the initial issue and
placement of securities

Secondary Market: Secondary market is the market where securities (bonds,

shares, derivatives etc.) are traded. This market can be in form of Over the Counter (OTC) where the transaction takes place between two parties directly and through an organized exchange.
Banks are required to hold as cash in balance with RBI.

Cash Reserve Ratio: Part of the Net Demand and Time Liabilities which Indian Statutory Liquidity Ratio: Part of the Net Demand and Time Liabilities that a
bank is required by law to keep invested in approved securities. elapsed between two dates (A/360, A/365, A/A)

Day Count: Market conventions for calculation of the number of days that have Options: Call Option gives the buyer the right but not obligation to buy a given
quantity of underlying asset at a given price on or before a given future date. Put Option gives the buyer the right but not obligation to sell a given quantity of underlying asset at a given price on or before a given future date.

Key Concepts/Terminologies
Liquidity Adjustment Facility (LAF): Facility by which RBI adjusts the daily
liquidity in the domestic market either by injecting funds or by withdrawing them out.

Open Market Operations: One of the major instruments of monetary policy by

which the Central Bank of a country manipulates short term liquidity and thereby the interest rates to desired levels. Generally open market operations involve purchase and sale of treasury bills in the open market or conducting repos. and act at market maker in securities. A PD has to give an annual undertaking to RBI on his level of participation in the primary issues of government securities. securities are sold in a temporary sale with a promise to buy back the securities at a future date at a specified price. In Reverse Repo, securities are purchased in a temporary purchase with a promise to sell it back after a specified number of days at a pre-specified price.

Primary Dealer: An entity licensed by RBI to carry on the business of securities

Repo: Short term money market instruments. In a repurchase agreement,

Key Concepts/Terminologies
Treasury Bills: Short term obligations of upto 364 days of the

Current Yield: Is defined as coupon rate defined by the price of the Bond. Yield to Maturity: That rate of discount that equates the discounted value of all
future cash flows of a security with its current price.

Bond: Is a promise in which the Issuer agrees to pay a certain rate of interest

(fixed, floating to a benchmark), usually a percentage of Face Value of the bond, to the investor at specific periodicity (monthly, quarterly, yearly, Deep Discount) over the life of the Bond. within a specified period of time from the date of issue.

Convertible Bond: A bond that is partially or fully convertible into equity

Zero Coupon Bond: A bond that does not carry any coupon (interest). Normally
the specified return is paid in form of Redemption Premium.


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