Treasury mgt

       

Was confined funds mgt-maintain cash bal mgtsurplussurplus-sourcing. Reserve requirements-investing-service. requirements-investingLiquidity mgtmgtNow Profit centre Connectivity with fin mkt ALMALM-ADVICE Investment &foreign exchange

Integrated Treasury


Integrated Treasury refers to integration of money market, securities market and foreign exchange operations. -Meeting reserve requirements -Efficient merchant services -Global cash management -Optimizing profit by exploiting market opportunities in forex market, money market and securities market -Risk management -Assisting bank management in ALM

Other functions of Integrated treasury

Interest arbitrage  Transfer of funds-long term to short term funds Hedging export receivables  Raising foreign currency loans  Overseas investments  Risk mgt


Process of globalisation
       

Interaction of domestic &global mkts-free cap mktsflows &mini regulatory intervention. Emerging markets Rapid economic growth Economic & financial reforms FEMA Credit rating agencies Rupee derivatives Overseas banks

Evolving role of treasury as profit centre

      

Was service centre so only in money mkt Generated from following sources ConventionalConventional-buying and selling foreign currency to customers-spreadcustomers-spreadBuy exporters-sell importers exportersMoney market deals-lending surplus funds dealsInvestment activity-SLR activityProfits from contemporary treasury-buying & treasuryselling, borrowing & lending or investing in tradable assets (RBI) Interest arbitrage-interest differentials arbitrage-

TradingTrading-speculative activity-favourable activityprice movements  Treasury products-structured loans to productscorporate customers.  Transfer pricing-costs of different pricingdepartments


Organisation of treasury
Department of bank or specialised branch  Specialised branch enjoys more powers

Chief executive Gen magr Depty gm VP

Treasury
Function Responsible for

Front office MidOffice

Dealing Risk management, accounting and management information Confirmations, settlement and reconciliation

Back office

FRONT OFFICE

Dealing

MID OFFICE

BACK OFFICE

settlement MIS

Dealing room
Headed by Chief dealer- each dealer dealerspecialises in one mkts-foreign, money, mktssecurities .  Securities market-Primary and Secondary marketmarket  Market research  Dealing in securities available and investment department.


Back office
      

Verification &settlement of the deals concluded by the dealers. Book keeping Returns to RBI. Nostro accounts-foreign currency accounts with accountscorrespondent banks Funding and security accounts with RBI Demet accounts with depositors SettlementSettlement-receipt and payment oon sale n purchase of foreign currency, lending and borrowing sale and purchase of securities.

Middle office
To provide info to the mgt and implementation of risk mgt systems  Transfer pricing implantation  ALM support in small banks  Investment department-primary issues. department Investment proposals


Treasury

Money Market
Certificate of Deposit (CD)  Commercial Paper (C.P)  Inter Bank Participation Certificates  Inter Bank term Money  Treasury Bills  Call Money


Certificate of Deposit


 

CDs are short-term borrowings in the form of shortUsance Promissory Notes having a maturity of not less than 15 days up to a maximum of one year. CD is subject to payment of Stamp Duty under Indian Stamp Act, 1899 (Central Act) They are like bank term deposits accounts. Unlike traditional time deposits these are freely negotiable instruments and are often referred to as Negotiable Certificate of Deposits

Features of CD
      

CDs can be issued by all scheduled commercial banks except RRBs Minimum period 15 days Maximum period 1 year Minimum Amount Rs 1 lac and in multiples of Rs. 1 lac CDs are transferable by endorsement CRR & SLR are to be maintained CDs are to be stamped

Commercial Paper
Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note.  Who can issue Commercial Paper (CP) Highly rated corporate borrowers, primary dealers (PDs) and satellite dealers (SDs) and all-India financial institutions (FIs) all

Eligibility for issue of CP

a)

b)

c)

the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore; (b) the working capital (fund-based) limit of the (fundcompany from the banking system is not less than Rs.4 crore and the borrowal account of the company is classified as a Standard Asset by the financing bank/s.

Rating Requirement
     

All eligible participants should obtain the credit rating for issuance of Commercial Paper Credit Rating Information Services of India Ltd. (CRISIL) Investment Information and Credit Rating Agency of India Ltd. (ICRA) Credit Analysis and Research Ltd. (CARE) Duff & Phelps Credit Rating India Pvt. Ltd. (DCR India) The minimum credit rating shall be P-2 of PCRISIL or such equivalent rating by other agencies

Maturity
CP can be issued for maturities between a minimum of 15 days and a maximum upto one year from the date of issue.  If the maturity date is a holiday, the company would be liable to make payment on the immediate preceding working day.


To whom issued
CP is issued to and held by individuals, banking companies, other corporate bodies registered or incorporated in India and unincorporated bodies, Non-Resident NonIndians (NRIs) and Foreign Institutional Investors (FIIs).

Meaning of Repo


It is a transaction in which two parties agree to sell and repurchase the same security. Under such an agreement the seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and a price The Repo/Reverse Repo transaction can only be done at Mumbai between parties approved by RBI and in securities as approved by RBI (Treasury Bills, Central/State Govt securities).

Repo
Banks can enter to this transaction  Difference in price-profit price Analysis is required  RBI uses it control liquidityliquidity Infusion of liquidity through lending to banks  Reverse repo-absorption of liquidity repoaccept deposits


Repo


Uses of Repo It helps banks to invest surplus cash It helps investor achieve money market returns with sovereign risk. It helps borrower to raise funds at better rates An SLR surplus and CRR deficit bank can use the Repo deals as a convenient way of adjusting SLR/CRR positions simultaneously. RBI uses Repo and Reverse repo as instruments for liquidity adjustment in the system

Bill rediscounting
Investment money in money market funds  3-6 months  original Discounting bank rediscounting bank  Lending bank invest surplus money  Borrowing bank liquidity  Improves capital adequecy  Credit portfolio


Coupon rate and Yield

The difference between coupon rate and yield arises because the market price of a security might be different from the face value of the security. Since coupon payments are calculated on the face value, the coupon rate is different from the implied yield.

Example
10% Aug 2015 10 year Govt Bond  Face Value RS.1000  Market Value Rs.1200  In this case Coupon rate is 10%  Yield is 8.33%


Call Money Market

The call money market is an integral part of the Indian Money Market, where the daydayto-day surplus funds (mostly of banks) are totraded. The loans are of short-term shortduration varying from 1 to 14 days. The money that is lent for one day in this market is known as "Call Money", and if it "Call Money", exceeds one day (but less than 15 days) it is referred to as "Notice Money". "Notice Money".

Call Money Market

Banks borrow in this market for the following purpose  To fill the gaps or temporary mismatches in funds  To meet the CRR & SLR mandatory requirements as stipulated by the Central bank  To meet sudden demand for funds arising out of large outflows.

Products of foreign exchange mkt

         

Spot trades-currencies take place 2 days from trade date.(3). Same tradesdayday-TOD & on the next day (TOM) ForwardForward-purchase or sale for future date. exchange rates Merchant business and inter bank-interest rate differentials bankSwapSwap-combination of spot and forward transactions. buying in the spot market and selling the same in forward market and vice versa Investment foreign Exchange surpluses Inter bank loans Short term investments Nostro accounts-current acnts maintained by the banks accountscorrespondent banks in the home country of the currency. Loans and advances Rediscounting of bills

Factors influencing interest rates

The factors which govern the interest rates are mostly economy related and are commonly referred to as macroeconomic factors. Some of factors. these factors are: 1) Demand for money 2) Government borrowings 3) Supply of money 4) Inflation rate 5) The Reserve Bank of India and the Government policies which determine some of the variables mentioned above.

Securities market products

Main function of treasury  PROFIT GENERATING


Gilt edged securities

The term government securities encompass all Bonds & T-bills issued by the Central TGovernment, and state governments. These securities are normally referred to, as "gilt"giltedged" as repayments of principal as well as interest are totally secured by sovereign guarantee.

Treasury Bills
Treasury bills, commonly referred to as T-Bills Tare issued by Government of India against their short term borrowing requirements with maturities ranging between 14 to 364 days. All these are issued at a discount-to-face value. discount-toFor example a Treasury bill of Rs. 100.00 face value issued for Rs. 91.50 gets redeemed at the end of it's tenure at Rs. 100.00.

Who can invest in T-Bill TBanks, Primary Dealers, State Governments, Provident Funds, Financial Institutions, Insurance Companies, NBFCs, FIIs (as per prescribed norms), NRIs & OCBs can invest in T-Bills. T-

What is auction of Securities

Auction is a process of calling of bids with an objective of arriving at the market price. It is basically a price discovery mechanism

Debenture
A Debenture is a debt security issued by a company (called the Issuer), which offers to pay interest in lieu of the money borrowed for a certain period.  These are long-term debt instruments longissued by private sector companies. These are issued in denominations as low as Rs 1000 and have maturities ranging between one and ten years.


Difference between debenture and bond

LongLong-term debt securities issued by the Government of India or any of the State Government Governments or undertakings owned by them or by development financial institutions are called as bonds. Instruments issued by other entities are called debentures.

Convertible Bonds
Bond holders are given an opportunity to convert debt into equity on fixed date and conversion price is determined.  Benefit to the co-no debt repayment and costrengthening equity base  SEBI requirement  Bank prefer low risk investmnents


Current yield
This is the yield or return derived by the investor on purchase of the instrument (yield related to purchase price) It is calculated by dividing the coupon rate by the purchase price of the debenture. For e. g: If an investor buys a 10% Rs 100 debenture of ABC company at Rs 90, his current Yield on the instrument would be computed as: Current Yield = (10%*100)/90 X 100 , That is 11.11% p.a.

Primary Dealers & Satellite Dealers



Primary Dealers can be referred to as Merchant Bankers to Government of India, comprising the first tier of the government securities market. Satellite Dealers work in tandem with the Primary Dealers forming the second tier of the market to cater to the retail requirements of the market. These were formed during the year 1994-96 to 1994strengthen the market infrastructure

What role do Primary Dealers play?

The role of Primary Dealers is to; (i) commit participation as Principals in Government of India issues through bidding in auctions (ii) provide underwriting services (iii) offer firm buy - sell / bid ask quotes for T-Bills & dated securities T(v) Development of Secondary Debt Market

OMO


OMO or Open Market Operations is a market regulating mechanism often resorted to by Reserve Bank of India. Under OMO Operations Reserve Bank of India as a market regulator keeps buying or/and selling securities through it's open market window. It's decision to sell or/and buy securities is influenced by factors such as overall liquidity in the system,

Financial marketing
      

Similar to product maximize shareholder value marketing approach working hard for clients institutional investors- intangible productIndividual Investors Print materials including brochures and company profiles Live Meetings, road shows and presentations at group events

       

Telemarketing Television email and internet marketing strategiespublicity Positioning-brand awareness Bull and Bear Club Cocktail Reception Identification and Liaison With Market Makers or Specialists Internet & Email Newsletter

Magazine  television show featuring  interviews with senior management



YIELD CURVE


The relationship between time and yield on a homogenous risk class of securities is called the Yield Curve. The relationship represents the time value of money showing that people would demand a positive rate of return on the money they are willing to part today for a payback into the future

SHAPE OF YIELD CURVE

A yield curve can be positive, neutral or flat. A

positive yield curve, which is most natural, is when the slope of the curve is positive, i.e. the yield at the longer end is higher than that at the shorter end of the time axis. This results, as people demand higher compensation for parting their money for a longer time into the future. A neutral yield curve is that which has a zero slope, i.e. is flat across time. T his occurs when people are willing to accept more or less the same returns across maturities. The negative yield curve (also called an inverted yield curve) is one of which the slope is negative, i.e. the long term yield is lower than the short term yield

LIBOR


LIBOR stands for the London Interbank Offered Rate and is the rate of interest at which banks borrow funds from other banks, in marketable size, in the London interbank market. LIBOR is the most widely used "benchmark" or reference rate for short term interest rates. It is compiled by the British Bankers Association as a free service and released to the market at about 11.00[London time] each day.

CRR & SLR

The minimum and maximum levels of CRR are prescribed at 3% and 20% of demand and term liabilities (DTL) of the bank, respectively, under Reserve Bank of India Act of 1934. The minimum and maximum SLR are prescribed at 25% and 40% of DTL respectively, under Banking Regulation Act of 1949. The CRR and SLR are to be maintained on fortnightly basis. The RBI is authorized to increase or decrease the CRR and SLR at its discretion.

Globalisation
        

MNCs Free flow of cap Output Banks Role Money supply Credit Boost for entrepreneur Quality ChallengeChallenge-foreign

Domestic and global markets

Globalisation  Easy convertibility  FII investments  ADR/GDR issued by Indian cos  External commercial borrowing  Foreign currency funds of banks  Special facilities to exporters-Export exportersEarners Foreign Currency Account


Demand and Time Liabilities



   

Main components of DTL are: Demand deposits (held in current and savings accounts, margin money for LCs, overdue fixed deposits etc.) Time deposits (in fixed deposits, recurring deposits, reinvestment deposits etc.) Overseas borrowings Foreign outward remittances in transit (FC liabilities net of FC assets) Other demand and time liabilities (accrued interest, credit balances in suspense account etc. )

SLR
SLR is to be maintained in the form of the following assets:  Cash balances (excluding balances maintained for CRR)  Gold (valued at price not exceeding current market price)  Approved securities valued as per norms prescribed by RBI.

VaR
Value at Risk (VaR) is the most probable loss that we may incur in normal market conditions over a given period due to the volatility of a factor, exchange rates, interest rates or commodity prices. The probability of loss is expressed as a percentage VaR at 95% confidence level, implies a 5% probability of incurring the loss; at 99% confidence level the VaR implies 1% probability of the stated loss. The loss is generally stated in absolute amounts for a given transaction value (or value of a investment portfolio).

VaR
The VaR is an estimate of potential loss, always for a given period, at a given confidence level.. A VaR of 5p in USD / INR rate for a 30- day period at 95% confidence level 30means that Rupee is likely to lose 5p in exchange value with 5% probability, or in other words, Rupee is likely to depreciate by maximum 5p on 1.5 days of the period (30*5% ) . A VaR of Rs. 100,000 at 99% confidence level for one week for a investment portfolio of Rs. 10,000,000 similarly means that the market value of the portfolio is most likely to drop by maximum Rs. 100,000 with 1% probability over one week, or , 99% of the time the portfolio will stand at or above its current value.

Exchange Rate Quotation

Exchange Quotations : There are two methods  Exchange rate is expressed as the price per unit of foreign currency in terms of the home currency is known as the Home currency quotation or Direct Quotation  Exchange rate is expressed as the price per unit of home currency in terms of the foreign currency is known as the Foreign Currency Quotation or Indirect Quotation  Direct Quotation is used in New York and other foreign exchange markets and Indirect Quotation is used in London foreign exchange market.


Principles
Direct Quotation: Buy Low, Sell High:  The prime motive of any trader is to make profit. By purchasing the commodity at lower price and selling it at a higher price a trader earns the profit. In foreign exchange, the banker buys the foreign currency at a lesser price and sells it at a higher price.  Indirect Quotation: Buy High, Sell Low:  A trader for a fixed amount of investment would acquire more units of the commodity when he purchases and for the same amount he would part with lesser units of the commodity when he sells.


Spot and Forward Transactions

A Bank agrees to buy from B Bank USD 100000. The actual exchange of currencies i.e. payment of rupees and receipt of US Dollars, under the contract may take place :  on the same day or  two days later or  some day later, say after a month.


Interpretation of Quotation


  

The market quotation for a currency consists of the spot rate and the forward margin. The outright forward rate has to be calculated by loading the forward margin into the spot rate. For example US Dollar is quoted as under in the interinter-bank market on a given day as under : Spot 1 USD = Rs.44.1000/1300 Spot/November 0200/0500 Spot/December 1500/1800

TT Buying Rate
 

TT Buying Rate (TT stands for Telegraphic Transfer) This is the rate applied when the transaction does not involve any delay in realization of the foreign exchange by the bank. In other words, the nostro account of the bank would already have been credited. The rate is calculated by deducting from the inter-bank interbuying rate the exchange margin as determined by the Bank.

Bills Buying Rate



This is the rate to be applied when a foreign bill is purchased. When a bill is purchased, the proceeds will be realized by the Bank after the bill is presented to the drawee at the overseas center. In the case of a usance bill the proceeds will be realized on the due date of the bill which includes the transit period and the usance period of the bill.

Problem
You would like to import machinery from USA worth USD 100000 to be payable to the overseas supplier on 31st Oct [a] Spot Rate USD = Rs.45.8500/8600 Forward Premium September 0.2950/3000 October 0.5400/5450 November 0.7600/7650 [b] exchange margin 0.125% [c] Last two digits in multiples of nearest 25 paise  Calculate the rate to be quoted by the bank ?

Solution
This is an example Forward Sale Contract . Inter Bank Spot Selling Rate Rs. 45.8600 Add Forward Margin .5450 -------------46.4050 Add Exchange Margin .0580 --------------Forward Rate 46.4630 Rounded Off to multiple of 25 paise Rs.46.4625 Amount Payable to the bank Rs.46,46,250

Swap
A swap agreement between two parties commits each counterparty to exchange an amount of funds, determined by a formula, at regular intervals, until the swap expires.  In the case of a currency swap, there is an initial exchange of currency and a reverse exchange at maturity.


Mechanics
Firm A needs fixed rate loan AAA rated  Firm B needs floating rate -A rated  Firm A enjoys an absolute advantage in both credit markets.

Firm A Fixedrate finance Firm B

9%

11%

Floating- LIBOR LIBOR rate finance +0.0% +1%

Mechanics
STEP ! Firm A will borrow at Fixed rate 9% Firm B will borrow at floating rate (LIBOR +1)% STEP 2 Firm A will pay Floating rate [LIBOR] to Firm B Firm B will Pay Fixed rate [9.5%] only Gain Net interest cost LIBOR- .5% LIBORNet Interest cost 9+[ 1%+0.5%]=10.5%

Mechanics
Gain
A 9.5%
Borrows at 9.0% fixed for 7 years

Interest payments to each other in years t 1 to t 7. B

Borrows at LIBOR + 1% floating for 7 years

LIBOR