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AgendaTreasury management; concepts and functions; instruments in thetreasury market; development of new financial products; controland supervision of Treasury management; linkage of domesticoperations with foreign operations.
Asset-liability management; Interest rate risk; interest rate futures;stock options; debt instruments; bond portfolio strategy; riskcontrol and hedging instruments.
Investments – Treasury bills – Money markets instruments suchas CDs, CPs, IBPs; Securitisation and Forfaiting; Refinance andrediscounting facilities.
What is Treasury Management
A place where stores of treasures are kept; the place of deposit, care, and disbursement of collected funds
Collects funds and disburses money.Managing Funds through proper allocationResponsibilities fall under the scope of CFOThe CFO’s responsibilities include capital
management, risk management, strategic planning, investor relations and financial reporting.
The Manager
Resource Decisions
Information Decisions
Financing Decisions
Investment Decisions
Human ResourcesDecisions
Managing an entity’s Resources
Cash ManagementInventory ManagementWorking Capital ManagementInvestment in Human CapitalLong-term AssetsAccounts Receivable
Economics of InformationDatabase ManagementData ModelingIS Planning & Development
Debt vs. Tax FinancingCost ofCapital
Discount Rate
Value Creation
FinancialMarkets
Cash Inflows
OperatingDecisions
Recruitment, SelectionTraining, ProductivityPerformance AppraisalCompensationUnions & Labor Relations
Life cycle effects,Business cycle, public events,etc.
Corporate Story4
Financial supply chain management
Process flowCredit management
Issue invoice
Electronic bill presentation
Forecast cash
Cash & liquidity management
Finance working capital
Dispute management
Resolve dispute
Collect Cash
Treasury & Risk management
In-house cash management
Settle & pay
Collections management
Check credit worthiness
worhiness
Reconcile
Key areas of Public Cash Management
OrganizationCollection and disbursement of fundsNetting of interagency paymentsInvestment of excess fundsOptimal level of cash balancesCash planning and budgetingBank relations
Integrated Treasury Department
Domestic Treasury
Operations
• Make investment in their own account
• SLR, CRR, CP, CD, TB, Bonds & Debentures, Equities and various other derivaties
Forex Treasury Operations
• Conduct operation on behalf of clients
• Spot and forward markets, foreign exchange swap markets , FCNR and Nostro Account.
Integrated Treasury
Integrated Treasury refers to integration of money market, securities market and foreign exchange operations.
Objectivesa. Meeting reserve requirementsb. Provision for adequate and timely liquidityc. Global cash managementd. Optimizing profit by exploiting market opportunities in forex
market, money market and securities markete. Risk managementf. Efficient merchant servicesg. Assisting bank management in ALM
Structure of Treasury Department
Function Responsible for
Front office Dealing
Mid-Office Risk management, accounting and management information
Back office Confirmations, settlement and reconciliation
Dealing
MIS
settlement
Bank treasury departmentsMoney market desk
Foreign exchange or FX desk
Equities Desk
Derivatives Desk
Treasury Strategies, Inc. www.TreasuryStrategies.com
Debt &InvestmentManagement
PerformanceMeasurement
TreasuryOperations
RiskManagement
Treasury
Management
Credit
ExposureManagement
ValueatRisk
Simulation
CashPosition
TransactionManagement
BRM
SystemInterfaces
BestPractices
Benchmarks
OtherMetrics
LongRangeGoals
Liquidity
Long TermInvest
DebtIssuance
SystemInterfaces
Global /Domestic
Derivatives/Currencies
G/L/ERP Interfaces
Simple/Esoteric
Workstation Functionality
Treasury
Functions of Treasury Management
Reserve Management & InvestmentCash ManagementLiquidity & Funds ManagementRisk ManagementAsset liability managementTransfer PricingDerivative productsArbitrageInsurance Management
Reserve Management & InvestmentMeeting CRR/SLR obligations
a) CRR – 6%
b) SLR – 25% Appropriate mix of investment portfolio
Cash ManagementControl & care of the cash assets and liabilities of the
organization.Selection of investment products, investment brokers,
methods of borrowing, cash management information system and the development and compliance with cash and investment policy and processes.
50000000 1002 504 339.3333333 258 210
Order Quantity (Z)
Cost ($)
Z*
Total Costs
Holding Costs: (Z/2)*r
Order Costs:(M/Z)*TC
Optimal Cash Balance via Baumol Model
Z*Z*= [(2M*TC)/r]
M = $10,000M = $10,000 r = .01% .0001r = .01% .0001TC = $20TC = $20
Z = $63,246Z = $63,246
Investment of excess funds
Liquidity & Funds ManagementAnalysis of cash flow arising out of asset liability transactionFund various asset of balance sheetPolicy inputs to strategic planning and yield expected in
credit and investment.
Risk ManagementChanges in Interest ratesIncreasing NPA’sIncreasing level of disintermediationIt includes customer credit management, vendor/contractor
financial analysis, liability claims management, business disaster recovery, and employee benefits program risk.
Transfer PricingTransfer of funds to related party.Assist in enhancing profits Performance evaluation
Derivative ProductsDevelop Interest Rate Swap and other cross currency
derivative productsHedge bank’s own exposure and also sell to customers
ArbitrageRisk less profits
Insurance ManagementInsurance Management is the process of negotiation of
insurance policies to mitigate the risks that the organization does not want to assume.
Accounts Receivable ManagementAccounts Receivable Management includes the control
of cash receipt systems within the organization.
Accounts Payable ManagementAccounts Payable Management includes the control of
the cash disbursement process.
Asset Liability Management
Asset Management
How Liquid are assets of banks
Liability Management
How easily banks can generate loans from
market
In Terms of : Maturities & interest rate sensitivitiesTo Minimize: Interest rate risk & Liquidity Risk
ALMALM is an integral part of the financial
management process of a bank.ALM is concerned with strategic balance
sheet management involving risks caused by changes in interest rate, exchange rates and liquidity position of the bank.
ALM can be termed as risk management technique designed to earn an adequate return while maintaining a comfortable surplus of assets beyond liabilities.
Treasurers 10 point check list 1. "Cash is King" when liquidity is scarce, so focus on the fundamentals of
working capital and cash flow optimisation: get paid; know you've been paid; optimise payments; make surplus cash work harder
2. Focus on operational efficiencies wherever possible, such as the centralisation of processes and information, in addition to treasury, payments and collections
3. Check regularly for additional security, efficiency and portability opportunities through SWIFT
4. Closely monitor and manage FX exposures 5. Monitor counterparty risk by checking cash positions, credit default swaps and
establishing counterparty limits 6. Ensure the financial supply chain does not become too vulnerable by getting
the fundamentals right, such as avoiding late payment to suppliers 7. Begin preparations now to exploit the benefits of SEPA Direct Debits and the
Payments Service Directive (PSD) 8. Keep up to date with IFRS changes, such as in Hedge Accounting, and lobby
the authorities where proposed changes would be detrimental to the business 9. Consider opportunities for improving cash and treasury management in
countries of rapid growth, such as in Asia and the Gulf region, but retain a systematic approach to risk and ensure the visibility of cash flow
10. Focus on the company's balance sheet and P&L when making decisions, as well as when assessing treasury results
Treasury Strategies, Inc. www.TreasuryStrategies.com
TechnologyCurrent State of Treasury and Technology:
Most treasurers use treasury technology to support their treasury functionsBank-provided softwareThird party-provided software
Treasury technology has improved liquidity and risk managementBetter and more timely access to informationImproved controls over transaction processing
Treasury Strategies, Inc. www.TreasuryStrategies.com
Cash ForecastingBenefits of web-enabled technology applied
to cash forecasting:Easier access to a reporting mechanism from
any corporate locationAutomated information capture from other
data sourcesApplication of automation to establish
historical perspective and identify unusual cash flows
Global implementationStandardized approach to netting operationMore limited and manageable training
requirements
Treasury Strategies, Inc. www.TreasuryStrategies.com
ASP Solutions
Subscribers
Subscribers
Subscribers
Custody
Bank 3
Bank 2
Bank 1
Broker/Dealer
ASPService
InformationExchange
Internet
Treasury Strategies, Inc. www.TreasuryStrategies.com
E-CommerceDifferent treasury challenges and opportunities,
depending on the industry and market segmentAlternative access and delivery channel for
commercial banksBusiness-to-consumer (B2C) transactions - on the fast
track!Colleges and universities are involved in successful e-
commerce programsGovernment is facing challenges dealing with sales tax
revenue collectionsBrokerage industry, on-line trading hot, but trades are
settled with conventional payment First major wave of treasury information and software
products becoming Web-enabled
Treasury Strategies, Inc. www.TreasuryStrategies.com
E-CommerceCorporate Treasury Opportunities
New investment/borrowing sourcesOther, internet-powered financial productsDramatically enhanced information flowsCost and efficiency improvementsTreasury role in the development of global
e-commerce venturesCorporate Treasury Challenges
Treasury management issuesPayment system issuesInformation management issuesRisk management issues
Treasury Strategies, Inc. www.TreasuryStrategies.com
E-CommerceTreasury Management Issues
Change and development in working capital and credit components
Positioning treasury strategically in a global e-commerce environment
New treasury skills requiredRegional treasury management requirementsCross-border vs. intra-countryOrganizational limitations
Treasury Management Services
Improve your receivable collection processes Increase control and management of your disbursements Enhance your level of timely and comprehensive
information controls Maximize your liquidity management Reduce the potential for fraud and possible monetary
losses to your company Provide the most advanced information technology tools
available
Receivables Management
Cash ConcentrationDirect Debit
ACH Debit
Wholesale Lockbox
Receivables Management
Current day detail reporting
Imaged remittance documents
Invoice capture detail
Current day detail reporting
Imaged remittance documents
Invoice capture detail
Retail LockboxReceivables Management
Same day data transmissions
Imaging available of check, coupon or both
Searchable CD-ROM archive of processed detail
Same day data transmissions
Imaging available of check, coupon or both
Searchable CD-ROM archive of processed detail
Disbursement ManagementControlled Disbursement
PorterHemphillHoney Grove
Account ReconciliationFull ARPPartial ARPDeposit reconciliationDirect transmission of paid item filesStatement and check imaging on CD-ROM
Disbursement ManagementACH
Easy to complete transaction forms
Wide variety of payment types including EDI 820
Allows import of transaction detail from other applications
Easy to complete transaction forms
Wide variety of payment types including EDI 820
Allows import of transaction detail from other applications
Positive Pay AdvantageDisbursement Management
A “Relationship Saver”90 Day History of Paid Check Imagese-Mail Notification when Items are Ready for
ReviewDynamic ReportsExport Data to a comma delimited file (CSV)
for further CustomizationManage your Business with our Administration
Module
SAP Treasury and Risk Management (TRM)
38
Global Best Practices in Risk and Treasury Management
A comprehensive framework – 9 part framework
39
Global Best Practices in Risk and Treasury Management
Risk Approach
©2005 KESDEE Inc. All rights reserved.40
Global Best Practices in Risk and Treasury Management
Integrated, not Fragmented Approach (Asset, Liability, Off-Balance Sheet Items)
41
Global Best Practices in Risk and Treasury Management
Best Practices Institutions view Risk Management not from the perspective of compliance or control but from the perspective of value creation.
Best practice institutions take a proactive, not a reactive approach to Risk Management as part of Balance Sheet Management.
Best practice institutions have a clear articulation of the amount of risk to be taken. They are quantified, pre-specified, and measurable.
Best practice institutions have a balance sheet management process that encompasses on-balance sheet, off-balance sheet, and behind the balance sheet (quality of Risk Management infrastructure) items.
42
Global Best Practices in Risk and Treasury Management
Best practice institutions manage risk, not eliminate them.
The watchwords are:
Risk by choice, not by chance
Exposure by choice, not by chance
Clean bet, not confused bet
Bet with your head, not over your head
Best practice institutions control both the volatility of Net
Interest Income (NII), a short-term objective, and Economic
Value of Portfolio Equity (EVPE), a long-term objective.
A change in the EVPE is a leading indicator of the quality of the
future income statement.
©2005 KESDEE Inc. All rights reserved.43
Global Best Practices in Risk and Treasury Management
Strategic Process
Best practice institutions have Risk Management
function acting as a catalyst for the formulation of
strategies. They ensure that there is a fit between
different strategies. They include:
• On-Balance Sheet Business Strategies
• On-Balance Sheet Investment/Funding Strategies
• Off-Balance Sheet Strategies
44
Global Best Practices in Risk and Treasury Management
Derivatives
Best practice institutions view derivatives as a double-edged
sword - they are not an end but a potential means to
accomplishing a strategic objective.
Best Practices institutions primary emphasis is on
Strategies for Exposure Reduction and not on techniques
for Noise Reduction.
Best practice institutions follow simple, easy-to-understand
derivatives strategies for their Risk Management; in
particular, they avoid exotic products/leveraged structures.
The watchword is “ Keep It Simple, Smart ".
©2005 KESDEE Inc. All rights reserved.45
Global Best Practices in Risk and Treasury Management
Analytical Framework
Best practice institutions use an eclectic mix of
analytical techniques such as gap analysis, simulation,
duration, and value at risk depending on the structure
of the balance sheet and target variable being
measured.
No single technique is regarded as better than the
others by best practice institutions. They view these
techniques as complementary diagnostic tools.
©2005 KESDEE Inc. All rights reserved.46
Global Best Practices in Risk and Treasury Management
Information Reporting Framework
Best practice institutions share Risk Management
information among employees at right frequency and at
the right level of detail. They ensure that the amount/type
of information received is appropriate/necessary for the
recipients' task.
An appropriate balance between information overload and
the dearth of information is maintained.
©2005 KESDEE Inc. All rights reserved.47
Global Best Practices in Risk and Treasury Management
Control Framework
Best Practice institutions ensure that the Risk
Management limits are articulated to place a "ring
fence" around operating managers rather than tying
their hands with rigid limits. They strive for a judicious
balance between "tight controls" and "loose controls".
A successful treasury function has the same attributes as any other function within the organization that is considered successful. These qualities are:
• Teamwork • Respect of Organization • Forward Thinking • Global Thinking • Technologically Advanced • Customer Focused • Finance/Accounting Knowledge • Legal Knowledge • Reliability
Treasury Strategies, Inc. www.TreasuryStrategies.com
The Future of the Treasury FunctionTreasury organizations will continue to shrink
Increased use of rule based decision makingIncreased use of outsourcing
Domestic treasury functions are being diffused through corporate organizationsShift to CFO invites new competitors to the tableMore points of contact for traditional business
developmentGlobal treasury functions, on the other hand, are
being centralizedSmall business treasurers more sophisticated about
treasury management products and services
Treasury Strategies, Inc. www.TreasuryStrategies.com
The Future of the Treasury Function Success Factors - Corporate Treasury
Treasury must continue to support corporate strategy
Impact on corporate profitabilityDisciplined focus on core competenciesAccess to information versus dataCorrect employee skill set mixDeveloping an e-commerce approach that
fitsSimpler and easier execution of treasury
managementFocus on financial strategies and policies
Treasury Strategies, Inc. www.TreasuryStrategies.com
The Future of the Treasury Function Success Factors - Financial Service Providers
Banks must use CRM and data mining to know and serve clients in increasingly customized ways
Banks must find a new balance between client acquisition and client retention efforts
Treasury management banks must be creative in providing value beyond pure payment processing
Treasury management banks must develop a global perspective on services and delivery
Treasury management banks must learn to operate in “internet” time
Treasury Strategies, Inc. www.TreasuryStrategies.com
Treasury Outsourcing
Review andTest Disaster
RecoveryPlan
Assist as Bus Go up on New
Services Advisor, source of info & feedback on New Banks &
Services
Train Backup forVacations, etc.
Develop and Maintain Complete
ProceduralDocumentation
BankAccount Admin;
SignatoryTracking
Monitor Balances &
Service Charges;Troubleshoot
GetInvolved in BU
Service ProblemsAccording to
Decision RulesAdvisor
in Updating Banks & AccountStructure Due toAcquisition, etc.
Assess BankService, Periodic
QualityFeedback to
Customer/Bank
HistoricalReporting andTrend Analysis
PreparePeriodic CashManagement
Reports
OutsourcerPeriodic Activities