Treasury & Fund Management

Presented by: Ali Shahryar Rizvi

Disclaimer

An Intro.
With the growth of International business and the
spread of Multinational Enterprise, the treasury
function has acquired a new meaning.
No longer the treasury operations restricted to
borrowing and lending of funds only to one money
market.
The treasury function now includes a diversity of
currencies which can be converted into one another
through the exchange markets and which are
transacted in money markets.

Structure of Treasury
Department
FUNCTIONS

RESPONSIBLE FOR

Front Office
Dealing/ trading/ ALM etc
(Treasury Management Group)
Middle Office
(Risk Management Group)

Risk management/ limits

monitoring etc

Back Office
(Treasury Settlement Wing)

Confirmations/ settlement/
reconciliation etc

Elements of Treasury Front

Office
Money market Interbank desk
Foreign exchange Interbank desk
Corporate desk (FX, MM & FI Sales)
Foreign exchange transaction reporting
desk
Derivatives desk
ALCO

The Role.
Managing Asset & liabilities of the bank.
Managing 'gaps' and the 'risks'.
Maximizing profits operating within acceptable
risk parameters,
Maximizing yield on treasury/inter bank
investment.
Providing rates to branches and customers.

Functions of
TreasuryManagement

Reserve management & Investment

Liquidity & funds management
Risk management
Asset liability management

Inter-Dept Chart

Functionality.
Lending to
Branches

Borrower

Spread

Branch

Depositor

Excess
Liquidity

Borrowing
Funding

TREASURY
Front
Office

Investmen
t

Reserve
Requirement

Treasury
Back Office
Functions

Branches Receive Deposits

Branches Lend To Customers
Branches Remit Excess liquidity to try at an average rate (Pool Rate)
Try maintenance reserve with SBP.
Invest in MM Instruments
Invest in Govt. Securities
Invest in Debt Securities
Capital Market
Fund FCY Trade Nostro Account
Lend to Other Branch

Money Market.
The money market is a wholesale market for low risk, highly liquid,
short-term & long term debt instruments.
It serves as an avenue through which banks and financial institutions
can offload their excess liquidity or meet their funding requirements.
To the government an organized money market represents a means for
it to implement its monetary policies in a more efficient manner.
Moreover, it provides it with a liquid market for securities through which
it can finance its own borrowing requirements.
The large role of commercial banks in the money market can be easily
envisioned by looking at their assets and liabilities.
A major portion of their liabilities are demand deposits. Another large
portion of bank liabilities are time deposits.
On the asset side, in addition to loans banks have part of their assets
invested in marketable securities.

M.M Objective.
Managing liquidity and interest risk.
Coordinating
with
corporate/retail
departments for assets/liability pricing.

banking

To deploy excess funds in order to save liquidity

wastage
To manage funding requirements which may arise
from time to time keeping in view the cost and
interest scenario.

Purpose of M. M.
The need for financial institutions to indulge in
money market transactions arises primarily from the
reserve requirements imposed by the State Bank.
All commercial banks are required to maintain 19%
Statuary Liquidity Requirements (SLR) of their
Demand and Time Liabilities (DTL).
Commercial banks also have to maintain a 5% of DTL
in a cash reserve maintained with the SBP at 0%
interest. This ratio is known as the CRR (Cash
Reserve Requirement)

M.M Instruments & Transactions.

Pakistan Investment Bonds

Treasury Bills
Repo / Rev. Repo Transactions
Call / Clean Money
Term Finance Certificate
Certificate of Investments
Commercial Papers

M.M Instruments & Transactions.

These are long term bonds of three, five, ten,
fifteen, twenty & 30 years, maturity issued at market price and
carrying a different coupon rate according to the interest rates
scenario. Moreover, another reason for issuing PIBs is to set up a yield
curve and corporate, mutual funds etc. to invest in long term.

Pakistan Investment Bonds:

T-Bills are short term securities issued by the State Bank

on behalf of the Ministry of Finance through auctions. They are zerocoupon bonds issued at a discount, have a par value of Rs 100 and a
maturity of three, six or twelve months. Bank borrowing is one of the
various measures the government takes to fill its budgetary deficit
and this bank borrowing currently takes place against T-Bills.

Treasury Bills:

TFCs are redeemable capital instruments and

may be issued by a company directly to the general public, which
includes institutions. Unlike straight bonds, they are redeemable
capital and are of long tenors. Issued by corporate to raise long-term
fund.

Term Finance Certificate:

M.M Instruments &

Transactions.
Borrowing secured by collateral in
the form of securities.

Repurchase Transactions:

Lending secured by collateral in

the form of securities.

Rev. Repo Transactions:

Call transactions consist of non-collateralized

lending and borrowing of Funds.

Call Money:

Clean funds are similar to call funds in the

sense that this is unsecured lending/ borrowing of
funds. The only difference is that this sort of borrowing
is done by investment banks and leasing companies.

Clean Money:

FX MARKET.
Domestic markets trade in local currency and operate
under regulations governing domestic market. When
funds in any other currency are traded outside the
regulations governing domestic markets, then we
have the transaction of Foreign Exchange Markets.
Nostro Management.
Exposure Management
Blotter Management

FX TRANSACTION.
Any financial transaction that involves more than one
'convertible' currency is a foreign exchange transaction.

Most important characteristic of a foreign exchange

transaction is that it involves foreign exchange
risk/Exposure.

The exchange rate is determined by the market forces of

demand & Supply.

Exchange Rate is the price of one currency in terms of

another.

Net Open Position

A measure of foreign exchange risk.
NOP is the Net Asset/Net Liability position in all
FCs together
Net Asset Position is also called "LONG" or
"Overbought" position.
Net liability Position is also called "SHORT" or
"Oversold" position
NOP is a single statistic that provides a fairly good
idea about exchange risk assumed by the bank.

Net Open Position

Currency-wise NOP in equivalent PKR

NOP calculating in the following manner.

USD

+10

84

+840

POUND

-10

138

-1380

YEN

-10

0.9

-9

TOTAL
NOP

-549/84
-6.53

Foreign Exchange Exposure Limit

FX Exposure is the higher of the long and
short positions in Foreign Currency.
FEEL is the 10% of the paid-up capital of
the bank or PKR1.5bln whichever is higher.
FEEL(PKR)

= -1389/84

FEEL(USD)

= -16.53

Corporate Desk.

Dealing with branches and large clients.

Treasury acts as a separate profit unit versus branches.

FORWARD RATES: Forward rates depend upon interest rate differential
between the two currencies.
Currency with higher interest rates is at discount w.r.t currency having
lower interest rate.
Currency with lower interest rates is at premium w.r.t currency having
higher interest rate.

Factors Influencing Exchange

Rates(Spot/Forward)
Demand and Supply
Variety of other factors operating at
different levels:

Fundamental Factors
Refer to the underlying economic & financial
conditions of the country.
Institutional Factors
Technical Factors
Analysis of how the market moves, rather than why it
moves.

Factors Influencing Exchange

Rates(Spot/Forward)
Fundamental Factors

The Balance of Payment

Interest Rates & Inflation
Leading & Lagging Indicators
Economic Growth & Capacity Utilization
Fiscal Deficits & the Money Supply
Reporting Delays & Market Expectations

Factors Influencing Exchange

Rates(Spot/Forward)
Institutional Factors

Fixed Exchange Rates

Floating Exchange Rates

Technical Factors

Study of dynamics of market trends

Psychological resistance & support
levels in currency prices
Recurring trends

The Trading rules I live by are:

" (a) Cut losses, (b) Ride Winners, (c)
Keep bets small, (d) Follow the rules
without question, and (e) Know when
to break the rules."(Rules are important, but following them blindly
does not necessarily lead to success. Know which
conditions produced those rules in the first place,
so that when the conditions change, the rules can
too.)

Thank You