Treasury and Fund

Management

By: Faisal Dhedhi

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The word ‘Treasury’ comes from the word ‘Treasure’.
A place where the funds are deposited, kept & disbursed
Treasury is a central funds depository for:
• Corporation
• Bank
• Government

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Responsibility of the Treasury Staff

 Maximize stock value by:

 Forecasting and planning

 Investment and financing decisions

 Coordination and control

 Transactions in the financial markets

 Managing risk
Role of Treasury in a Corporation
 Cash Management

 Forecasting & Planning

 Liquidity Management

 Bank Reconciliation

 Fund Management
 Trade Finance – FX Exposure Management
 Risk Management
 Dealing with Financial Institutions to meet all their requirements
Financial Management Decisions
Decisions made by Treasury Managers:

Investment decisions

Financing decisions (the relative use of debt financing)

Dividend policy decisions

Different Cash Positions
Businesses can get into the following 3 situations with

regards to funds:
Square - Perfect Situation (Practically Impossible)

Surplus - Excess Funds, Requires Investment

Deficit - Less Funds, Requires Financing

 Investing Surplus Funds
 Surplus Funds are invested as per the investment objective:
 Capital Appreciation
 Capital Preservation
 Current Income
 Total Return
 Investment Objective depends on the following
constraints:
 Risk Appetite
 Liquidity Constraints
 Unique Constraints
 Time Horizon
 Investment Avenues will be discussed later in the course
Financing Deficit Situation
Firms can borrow in the following ways in a capital
structure:
Debt
Equity
Debt includes the following:
Bank Loans (Credit Lines)
Term Finance Certificates (Bonds)
Equity includes issuance of shares.
Firms can also meet deficit by disinvestments
Role of Treasury in a Bank

Front Office – Dealing/Trading

Middle Office – Risk Management

Back Office – Operations & Settlement

Typical Dealing Room
Role of Front Office
 Asset & Liability Management (ALM)
 Practice of managing risks that arise due to mismatch
between the assets and liabilities.
 Trading:
 Money Market/Fixed Income
 FX
 Derivatives
 Equity
 Sales
 FX
 Rates (Fixed Income & Derivatives)
Front Office
 The front office performs the most public and visible operations of any bank or
financial institution as it focuses on areas like planning, dealing and trading,
investments, risk management, interactions with clients and other banks, and
handling accounts. In broad strokes, the front office is responsible for:
 Initiating and executing transactions.
 Funding operations.
 Investments.
In planning and deciding on cost-effective funding, the front office has to
consider market conditions such as the interest rate outlook, yield curve
changes, competition, central bank policies, and market demand for credit, as
well as internal factors like the ratio between wholesale and retail funding,
target credit rating and bank product mix. The investment and trading
process of the front office is managed to maximize returns with minimum
cash balances that meet the cash flow needs of clients and at the same time
smooth short term liquidity surplus and shortfalls. Investing longer term
assets requires consideration of the size and mix of high quality liquid assets
to earn a reasonable return and at the same time enabling client trades in the
bank’s role as market maker, meet contingent funding needs and satisfy the
new OTC derivative collateral margining requirement. 13
Bank Trading Activities
The front office acts as the interface between the bank and the market,
including both clients and other banks. One of the most visible roles of
the front office is to put in place and execute trades and transfers between
banks, whether in fulfillment of client activities or to meet the needs of
the bank’s own proprietary trading and dealing. The front office is often
staffed by traders who execute transactions for the bank, as part of its
proprietary trading, to optimise cash flows and earn profits, and by
dealers who trade based on the needs of the clients. The traders and
dealers typically specialise in the following financial instruments:
Foreign exchange, such as spot, outright contracts, and non-deliverable
forward (NDF), although in some banks the swap desks are responsible
for outright contracts/NDF; Money market products, including loans and
deposits, money swaps, forward rate agreements, interest rate swaps, and
interest rate futures; Debt security instruments, including all kinds of
debt securities issued by government or corporate, Financial
derivatives/structured products, credit derivative products.

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Corporate Treasury
Treasury operations in banks involve managing cash,
collections, payments, managing investments, and
investment concentrations, and trading in instruments
like bonds, currencies, derivatives and various issues
associated with risk management. Although the actual
structure of the treasury may differ from bank to bank,
treasuries are often made up of a fixed income or
money markets desk, a foreign exchange desk, a
capital markets or equities desk, a proprietary trading
desk, an asset liability management desk, and a
transfer pricing or pooling function.

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Corporate Treasury
Corporate Treasury can deal with the following
external parties:
Regulators.
Exchanges.
Banks.
Rating Agencies.
Other Institutions.
Technological firms.
Service Providers.

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Middle Office
Banks developed the concept of the middle office, which
works closely with the front and back office but reports
independently & directly report to treasurer.
The focus of the middle office is control, valuation, and
reconciliation of the operations of the front and back
office. The middle office evaluates performance, validates
models, generates risk reports, and monitors limits. In this
regard, the middle office has oversight over both the front
and back office operations thanks to its reporting and
control responsibilities, which are typically independent.

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Back Office
The treasury operation of a bank is usually referred to
as the back office and it has a range of responsibilities
including processing, settling, and confirming
transactions, and ensuring operations are reconciled
and recorded. Ideally, the back office should provide
independent reports. The operations of the back office
include:
Processing transactions.
Confirmation of transactions.
Settlement of transactions.
Reconciliation.
Accounting entries.

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Concept of Financial Intermediation/Cash Flows

 Businesses can get into the following 3 situations with regards to

funds:
 Square - Perfect Situation (Practically Impossible)

 Surplus - Excess Funds, Requires Investment

 Deficit - Less Funds, Requires Financing

 Financial Intermediary brings together the surplus & deficit units.

 Typically a commercial or investment bank, a brokerage house, an

insurance company etc.

What is the term ‘Financial Markets’?
An aggregate of possible buyers and sellers of
Financial Securities

Refer to markets that are used to raise Finance:

Long Term Finance (Maturity > 01 Yr)
Short Term Finance (Maturity < 01 Yr)

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Financial Institutions
 Commercial Banks
 Central Bank
 Investment Banks
 Brokers
 Development Financial Institutions
 Insurance Companies
 Leasing Companies
 Mutual Funds
 Real Estate Investment Trusts
 Exchange Dealers
Types of ‘Financial Markets’
Capital Market
Equity/Stock Market
Bond or Money Market

Derivatives Market

Currency and Commodity Market

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Financial Market Players

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Capital Markets
Further sub-divided into:

Primary Market

Secondary Market

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Sources of Raising Finance
Equity/Stock Market
Through issuing of Shares/Derivatives

Bond Market
Through issuance of Income Instruments

Collectively referred as ‘Capital Markets’

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Financial Markets Function
Borrowing and Lending

Price Determination

Information Dissemination

Risk Sharing – Transfer of Risk

Liquidity – Easy Entry and Exist

Efficiency – Reduce Transaction Cost

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Types of Financial Products - Introduction
Debt securities
 Loans that lenders make to borrowers.
 Interest payments on many loans are fixed, debt securities are also
called fixed- income securities.
 Also known as bonds, and investors in bonds are referred to as
bondholders.

Equity securities
 Also called stocks, common shares, or shares
 Shareholders (also known as stockholders) have ownership in a
company
 Investors who buy shares expect to earn a return by being able to
sell their shares at a higher price
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Types of Financial Products - Introduction
Bonds (Corporate/Government)
 Issued by companies and governments to fund budget expenses
 Makes regular fixed/floating interest rate payments, making the
risk associated with them lower than that with shares
 The principal or face value of bonds is recovered at the time of
maturity

Treasury Bills (T-Bills)

 Instruments issued by the government for financing its short term
needs
 They are issued at a discount to the face value
 The profit earned by the investor is the difference between the face
or maturity value and the price at which the Treasury Bill was issued

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Types of Financial Products - Introduction
Options
Options are right to buy and sell Securities.
An Option holder does not actually purchase Securities,
instead he purchases the rights on such Securities.

Mutual Funds
 These are professionally managed Financial Instruments
 Helps to reduce investor’s direct risk exposure, while
increasing prospects of earning better profits.

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Types of Financial Products - Introduction
Certificate of Deposits
 Issued by Banks and DFIs.
 They usually have a fixed term and interest rate

Annuities
 These are contracts between investor and insurance
company
 Investor agrees to pay an allocated amount of Premium
 At the end of a pre-determined fixed term, the insurer will
guarantee paying series of payments to the insured party

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Complex Financial Products
 Credit Default Swaps (CDS)
 Credit default swaps are highly leveraged contracts
 Privately negotiated between parties to the contract
 These swaps insure against losses on securities in case of a
Credit Default Event

 Collateralized Debt Obligations (CDO)

 Securities created by collateralizing various similar debt
obligations such as Bonds and Mortgage Loans
 CDOs can be bought and sold
 The buyer gains the right to a part of the debt pool’s
principal and interest income
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CDOs Example
Assume a bond pool of $100 million divided into three tranches
and expected to earn 15% or $15 million in interest pa.

The three tranches are A ($25 million), B ($50 million) and C

($25 million); and, A is senior to B and B is senior to C. A, B and
C tranches provide 10%, 15% and 20% interest rates,
respectively.

If none of the bonds defaults, A receives $2.5 million, B $7.5

million, and C $5 million. But, say there is a default and the
interest income shrinks to $11 million.

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Conclusion (CDO)
As A and B are senior to C, they will be settled
first. So, tranche A and B receive full interest of
$2.5 million and $7.5 million, whereas tranche C
receives $1 million only.

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Importance of TFM in the Economy and for
the Financial Sector
Mobilize funds from those who have savings to those who have more
productive uses for them. (Lenders/Borrowers)

Reduces cost of moving funds between borrowers and lenders,

leading to a more efficient allocation of resources and faster economic
growth.

Creates liquidity and the transformation of the risk characteristics

of assets.

Provide cash sources to high return investment projects having

‘Long Term Capital Commitments’
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The Treasury Department

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Must read newspaper
Following are the must read newspapers for this
course:
Business Recorder
Dawn Business Section
Bloomberg (Website)
Financial Times

You’ll be tested on it!!!

Thank You!