AFP Learning System Treasury Module One: The Corporate Treasury Management Function Module Two: Corporate Financial Management Module Three: Working Capital

AFP Learning System Treasury Module One: The Corporate Treasury

Management Function

Module Two: Corporate Financial Management

Module Three: Working Capital Management

Module Four: Cash and Liquidity Management

Module Five: Money and Capital Markets

Module Six: Treasury Operations and Controls

v3.0 © 2011 Association for Financial Professionals. All rights reserved.

Session 1: Course Overview - 1

Session 1, Module One: The Corporate Treasury Management Function Chapter 1:

The Role and Organization of Treasury Management Chapter 2:

Financial Regulatory Environment

Chapter 1: The Role and Organization of Treasury Management

Outline: Introduction to the Study of Treasury

Management The Role of Treasury Management Finance and Treasury Organization Treasury/Finance Organizational Structure Corporate Governance Ethics and Accountability AFP Standards of Ethical Conduct

v3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 1: Module 1, Chapter 1 - 3

Treasury and Its Relationship to the Corporate Finance Function


Short-term

• Perform critical liquidity management tasks daily to ensure availability of cash resources for operational activities.

Long-term

• Perform critical finance functions that ensure availability of funds and information to sustain initiatives to support the financial objectives.

Treasury professionals:

Discussion Question

What are the principal roles of the corporate finance function?

Answer:Corporate finance functions:

Short-term funding (credit lines, revolving credit agreements, issuance of commercial paper)

Long-term funding (issuance of stocks, bonds, term loans and long-term lease agreements)

Acquiring strategic assets with long lives Assessing when and how to divest assets Advising on declaration and payment of

dividends


Discussion Question

What are eight major objectives of treasury management?

Answer: Maintain liquidity. Optimize cash resources. Manage risk. Maintain access to short-term financing. Maintain investments. Maintain access to medium- and long-term

financing to support investments in capital assets.

Coordinate financial functions and share financial information.

Enhance global and cross-border focus.


Discussion Question

What are some actions that can be taken to mitigate counterparty risk?

Answer: Add to the number of counterparties to

increase diversification. Eliminate specific counterparties. Implement or adjust single counterparty

balance limits. Rebalance liquidity allocations among

counterparties. Adopt third-party custodians for

investments.


Financial Function Organization


Discussion Question

For companies publicly traded on a U.S. public exchange, the Sarbanes-Oxley Act (SOX) makes which of the following personally responsible for the accuracy of financial statements?a) Treasurerb) Chief financial officer (CFO)c) Controllerd) All of the above


Discussion Question

What are six primary responsibilities of the treasurer?

Answer:Managing overall financial riskArranging external financingManaging relationships with banks and other financial institutionsOverseeing day-to-day liquidity and cash managementInvesting for the short- and long-termDeveloping and implementing treasurypolicies and procedures


Role of the Board of Directors in Treasury Operations General authority for treasury operations Approve business policies, major initiatives

and business contracts Board grants authority to:

Open, close and modify bank accounts Establish borrowing facilities Oversee investments Issue debt and equity securities Devise, implement and execute risk management

strategies through board-approved policy statements


Daily Funds Management

Daily funds management Prepare cash position

worksheet. Monitor cash balances. Collect, concentrate and

disburse cash. Invest and borrow on short-

term basis. Research and reconcile

exception items. Coordinate finance

functions with A/R, A/P and accounting.

Other responsibilities Banking

relationship administration

Liquidity management

Cash forecasting Systems design Financial risk

management Daily reporting


Bank Account Management

Treasury responsibilities: Opening, maintaining and

closing all organization bank accounts Organization’s articles of

incorporation and bylaws Corporate resolution Certificate of incumbency

Managing all bank and service provider relationships Company policies


Internal and External Collaboration


Internal collaboration

Internal and External Collaboration


External collaboration

Efficient Treasury Operations


Benchmarking

• Examining and comparing core activities within/across an industry or functional area for the purpose of identifying best practices

• Example: Basic staffing levels

Reengineering

• Radical redesign of a particular business process with the goal of continuous improvement

• Example: Application of Six-Sigma concepts to treasury area

Outsourcing

• Utilizing a third party to perform all or part of a core function

• Example: Payroll processing

Business Transitions: Mergers, Acquisitions and Reorganization Merger

When two companies combine, with one company ceasing to exist as legal entity. Combined assets are operated under surviving company. Usually consensual.

AcquisitionWhen one company buys a majority of voting shares of another corporation. May be friendly or hostile.

ReorganizationIn the event of severe financial distress, a company may face bankruptcy, which could result in the reorganization or liquidation of the company.


Discussion Question

Why is treasury sometimes set up as a cost center and other times as a profit center? Which is more common, and why?

Answer: A cost center is the most common approach because treasury is seen as a support function.

A profit center is used in companies specializing in global finance, trade or risk management; they require use of derivatives and should be able to generate income from hedging and/or speculation.


What are the advantages and disadvantages of centralized and decentralized control of the global treasury management organization?Answer:Centralized control

Advantages—Control, economies of scale and lower operating costs

Disadvantages—Little autonomy for field office personnel


Decentralized control Advantages—In-country personnel

familiar with local business and banking practices, language and customs

Disadvantages—May have heavier compliance burden; field offices generally submit periodic reports and the home office must conduct audits

Discussion Question

Describe some of the reasons for the popularity of SSCs.

Answer: Web-based technology has enabled

developments in treasury and may provide cost reduction benefits over outsourcing.

Some global treasury back-office operations do not require local management.

Development of global TMS standardizes information and enhances SSC benefits.


Discussion Question

Discussion Question

What are the benefits of utilizing in-house banks in international treasury management?

Answer:The primary benefit is a reduction in overall banking costs by aggregating many small transactions into fewer larger ones. An in-house bank can also manage five principal international treasury management solutions—investments/debts, netting, pooling, re-invoicing and centralization of FX exposures.


Corporate Governance

Major concern for large, publicly traded companies; regulations vary widely between countries.

Challenges include: Separation of ownership and control in large

companies (stockholders vs. executive officers) Not-for-profit organizations: board serves as oversight

for the public (public vs. internal management)

Think of stockholders as investors rather than owners (agency problem).

Establish procedures for checks and balances, board of directors.


Discussion Question

Who are the five key parties in corporate governance of publicly traded companies in the U.S.?

Answer: Securities and Exchange Commission (SEC) Public Company Accounting Oversight Board

(PCAOB) New York Stock Exchange (NYSE) Large institutional investors (e.g., labor

unions, mutual funds, pension funds) States’ attorneys general offices (especially

New York and California)


Investor Relations

Company function that deals with the disclosure or release of information to bond- and stockholders in a timely manner; activities mandated to support market regulatory requirements.

Responsibilities include earnings releases and forecasts, annual/quarterly reports, press releases, legal disclosures.

Investor relations department is a company’s only interaction with the stock market, over which it has full control.


Role of Independent Directors

Financial professionals at NYSE-listed firms must understand standards.

CEOs must certify to the listing exchanges that their companies comply with standards.


Define independent directors.

Define role and authority of independent directors.

Define shareholder participation in governance decisions.

Define control and enforcement mechanisms.

Four purposes ofNYSE standards

Ethics and Accountability

After numerous accounting scandals, AFP published “Standards of Ethical Conduct.”

Steps to institutionalize ethical conduct: Establish a code of conduct and have all

members of the treasury department pledge to adhere to it.

Develop specific treasury policies and procedures statements.

Provide ethics training sessions that review the code of conduct, its purposes, and examples.


Ethics and Accountability

Code of conduct for treasury Encourage ethical

conduct through clear statements of what is, and is not, acceptable behavior.

Confidential information Cannot be disclosed to

vendors, family or third parties.

Conflicts of interest Avoid conflict of interest

or appearance thereof.

External activities External business ventures

should not interfere with duties or create a conflict of interest.

Employee conduct On-the-job behaviors and

personal habits should not reflect negatively on company.

Conformance to code Employees should

personally certify that they have read and comply with the code.


Discussion Question

Name types of unethical and illegal activities that can be reported under whistle-blower protection.

Answer: Failure to maintain work papers Manipulation of financial statements

and reports Document destruction Securities fraud Personal loans to executives Insider trading during blackout periods


Training Sessions in Corporate Treasury EthicsPossible off-site meeting agenda: Explain company’s concern for ethics, as mandated by

board of directors, CEO and/or CFO. Discuss recent historical cases of unethical/criminal

behavior. Present hypothetical unethical situations and

resolution. Explain code of conduct (purpose and obligations). Review corporate P&Ps and cite violations at company

or elsewhere. Describe insider trading restrictions. Discuss examples of conflicts of interest.


Discussion Question

What are some areas of particular concern to treasury and finance employees regarding ethical breaches?

Answer: Check and electronic

payments fraud Rogue trading or trading

without approval Segregation of duties

failures Anti-money laundering

violations Backdating options Manipulation of earnings


Revenue recognition issues

Failure to report significant accounting deficiencies

Insider trading Unfair dealings with

vendors Improper use of

company assets Chinese wall violations

AFP Standards of Ethical Conduct


Competence

• Continue to acquire appropriate level of professional knowledge and skill in finance.

• Perform professional duties in good faith and in accordance with technical, legal and regulatory practices, as well as the letter and spirit of the law in the field of finance.

Confidentiality

• Maintain confidential information acquired in the course of professional activities and disclose such information when legally obligated to do so.

• Refrain from using or appearing to use confidential information for unethical or illegal advantage either personally or through third parties.

AFP Standards of Ethical Conduct


Integrity

• Practice honesty and accuracy in all dealings without engaging in any activity that would prejudice the ability to carry out professional responsibilities competently and fairly.

• Avoid conflicts of interest or the appearance thereof.

• Refrain from abusing the financial systems and markets.

• Disclose fully all relevant information that could reasonably be expected to influence business dealings.

• Certified Cash Manager (CCM) and Certified Treasury Professional (CTP) designations may be used only if active.

Chapter 2: Financial Regulatory EnvironmentOutline: General Regulatory Environment Primary Regulators and Standard Setters of

Global Financial Markets U.S. Regulatory Environment U.S. Federal Legislation The Uniform Commercial Code (UCC) The Employee Retirement Income Security Act

(ERISA) (1974) U.S. Bankruptcy Legislation Federal Liquidity Programs


General Types of FI Regulations

Monitoring and managing the overall safety and soundness of the banking system

Setting and implementing monetary policy

Determining guidelines for the chartering of banks and other depository FIs

Allocating credit toward certain sectors of the economy and protecting consumers

Protecting investors purchasing securities through FIs


Discussion Question

Which of the following regulatory approaches used to monitor and manage the safety and soundness of the banking system carries a moral hazard for both depositors and bankers?a) Setting minimum capital levels required of banks

operating in the country (ratio of capital to at-risk assets and tiered capital)

b) Ensuring proper investment policies and diversification (impairment of capital rules)

c) Deposit insurance for investors’ funds held by the bank

d) Regular monitoring and surveillanceAnswer: c. Depositors may not investigate a bank’s creditworthiness; banks may undertake more risk.


Primary Regulators and Standard Setters of Global Financial Markets

Financial Stability Board (FSB)

Bank for International

Settlements (BIS)

International Organization of

Securities Commissions

(IOSCO)

Financial Action Task Force (FATF)

• Coordinates national financial authorities and international standard setting bodies

• Develops and promotes implementation of effective regulatory, supervisory and other financial sector policies

• Organization that fosters international monetary and financial cooperation

• Serves as bank for central banks

• Sponsor of BCBS, CPSS

• Recognized as the international standard setter for securities markets

• Membership regulates more than 95% of world’s securities markets

• International organization composed of members from more than 30 countries

• Develops and promotes policies at national and international levels to combat money laundering and terrorist financing


U.S. Regulatory Environment

Treasury Department is organized into two major components: Departmental offices

Formulate policy and management of Treasury Operating bureaus

Carry out specific operations assigned to Treasury Regulatory agencies:


OCC OFAC FinCEN IRS U.S. Mint FMS

Office of Inspector General FSOC OFR FIO FDIC

NCUA DOJ CFPB SEC CFTC FINRA

The Federal Reserve System (Fed) Organization:

Board of Governors Federal Open Market

Committee (FOMC) 12 banks and 24 branches

Dodd-Frank Act: New governance rules

(appointing members) Periodic audits and

counterparty disclosure (discount window and open market operations)

New vice chairman for supervision

Three tools of monetary policy: Open market

operations Discount rate Reserve requirements

Principal roles: Monetary policy Supervision and

regulation Government services Depository institution

services


Discussion Question

Which component of the Fed has the most impact on monetary policy, and why?

Answer:The Federal Open Market Committee (FOMC) because it oversees the buying and selling of T-bills, T-notes and T-bonds. The FOMC’s sale of government securities reduces the money supply and credit; redemption causes the opposite.


Office of the Comptroller of the Currency (OCC)

Regulates the national banking system

Administers: Nationally chartered

banks and federal thrifts of all sizes

Holding companies of national banks and federal thrifts with less than $50 billion in assets

For national banks and federal thrifts: Oversees the execution

of laws Proposes rules and

regulations governing operations

Supervises a nationwide staff of bank examiners

Approves/denies national bank and thrift charters, branches, capital and other banking structure changes

Examines national banks and federal thrifts for asset (loan) quality, capital adequacy, management and key regulatory issues


Discussion QuestionWhich of the following is true?a) FinCEN enforces counter-money laundering

legislation (e.g., the Bank Secrecy Act) and provides intelligence and analytical support to law enforcement agencies to build investigations and plan new strategies that combat money laundering.

b) The FDIC provides deposit insurance for banks and thrifts and acts as a trustee for failed banks but does not supervise any depository institutions.

c) The Dodd-Frank Act phased out the “dual nature” of the U.S. banking system.

Answer: a


Regulatory/Supervisory Agencies Focusing on Consumer Protection, Investors and Insurance Companies


CFPB SEC CFTC FINRA FIO

Office accountable for consumer protection

Regulates and supervises securities sales

Regulates commodity futures and options in U.S.

Provides investor protection and market integrity

Will provide recommen-dations and guidance on insurance industry

Securities and Exchange Commission (SEC) Registers public offerings

of debt and equity securities by banks, bank holding companies and other corporations

Sets financial disclosure standards for corporations that sell securities to the public

Requires filing of quarterly and annual financial statements by companies with publicly owned securities

Regulates mutual funds and investment advisors

Monitors insider trading


End of Session 1

Assignment: Complete the online pre-test. Complete the following tasks for

Module One, Chapters 1 through 3: Review each chapter. Complete the test-your-understanding

questions at the end of each chapter. Complete the online module-specific test. Complete the Exam Practice (Describe and

Differentiate) questions (located at the end of the module).


Session 2, Module One:The Corporate Treasury Management Function

Chapter 2: Financial Regulatory EnvironmentOutline: General Regulatory Environment Primary Regulators and Standard Setters of

Global Financial Markets U.S. Regulatory Environment U.S. Federal Legislation The Uniform Commercial Code (UCC) The Employee Retirement Income Security Act

(ERISA) (1974) U.S. Bankruptcy Legislation Federal Liquidity Programs


Gramm-Leach-Bliley Act (1999) Permits the creation of financial holding

companies (FHCs) Establishes the Fed as the primary

regulator of FHCs Allows easier entry by foreign banks Placed CRA rating stipulations on

mergers of bank holding companies with insurance or securities firms

Required financial institutions to establish and regularly disclose privacy policies; prohibited credit card and account numbers from being shared with third-party marketers


Eliminated many provisions of the Glass-Steagall Act (e.g., barriers among banking, insurance and securities businesses)

Dodd-Frank Wall Street Reform and Consumer Protection Act (2010)

Ends “too big to fail” bailouts Increases regulation of payment,

clearing and settlement systems Provides an advance warning system Increases transparency and

accountability for exotic instruments Provides executive compensation

and corporate governance Provides transparency and

accountability rules for credit rating agencies

Enforces regulations on the books


Enacted in response to the near failure of the U.S. banking system as a result of the Great Recession

Check Clearing for the 21st Century Act (Check 21) (2003) Facilitates check truncation Fosters check-payment innovation

without mandating receipt of electronic checks

Improves payment system overall Creates IRD or substitute check that is

legal equivalent of original check MICR-encoded paper reproduction with image

of front/back Conforms to industry standards


Acts Controlling Money LaunderingBank Secrecy Act (1970) and Money Laundering Control Act (1986) Stages of money

laundering: Placement Layering Integration

All FIs must report suspicious financial transactions.

USA PATRIOT Act (2001) Imposed obligations on non-

bank financial institutions Made foreign banks in U.S.

subject to U.S. jurisdiction Prohibited U.S. banks from

maintaining correspondent accounts for foreign shell banks

Prevented U.S. credit card operators from authorizing foreign banks to issue or accept U.S. credit cards without taking steps to prevent terrorist use

Requires banks to know customers (due diligence)


Sarbanes-Oxley Act (SOX) (2002)

Improves disclosure and financial reporting. SEC rule changes require companies to:

Disclose code of ethics for senior management (and any waivers).

Indicate if audit committee has a financial expert. Have audit committees preapprove auditor’s audit and non-

audit services; be briefed on company’s accounting (including preferable alternatives).

Regulation G requires companies to: Reconcile pro-forma financial information to financial

statements. Issue earnings releases on Form 8-K. Include material off-balance-sheet arrangements in MD&A.


Discussion Question

Which act requires periodic evaluations of a depository institution’s records to meet credit needs in the area in which they operate?

a) Community Reinvestment Act (CRA) (1977, 1995)b) Expedited Funds Availability Act (1997)c) Gramm-Leach-Bliley Act (1999)d) Dodd-Frank Act (2010)


Federal Reserve Regulations


Regulation D

Implements Federal Reserve Act of 1913; imposes uniform reserve requirements on all depository institutions with different levels of reserves for different types of deposits

Regulation E

Implements EFTA (1978); defines rights and responsibilities of parties using consumer-related EFTs and provides consumer protection for ATM, ACH and credit card transactions

Regulation J

Implements check collection and settlement provision of Federal Reserve Act (1913); establishes check collection and settlement procedures, duties and responsibilities

Regulation QProhibits depository institutions from paying interest on corporate demand deposit accounts; repealed by Dodd-Frank Act

Federal Reserve Regulations


Regulation Z

Protects consumers from unexpected credit card rate increases; prohibits issuing credit card to consumer under age 21; requires consent before charging over-limit fees; limits high fees; bans creditors from two-cycle billing method; prohibits allocating payments to maximize interest charges

Regulation BB Implements CRA

Regulation CC

Establishes rules designed to speed the collection and return of checks; establishes endorsement standards for banks and companies to follow in depositing and clearing checks; imposes the same return procedures that apply to checks to payable through drafts

Discussion Question

Match each tax with its correct use.a) Foreign tax credit

(FTC)b) Capital taxc) Asset tax and

turnover taxd) Withholding taxe) Sales and use

taxesf) VAT


To relieve double taxation

To slow foreign direct investment

To tax despite no profits

To tax funds moving out of a country

To tax at the point of purchase or Internet

To tax at each stage of production

The Uniform Commercial Code (UCC)

Article 3—Negotiable Instruments Accord and satisfaction:

Stipulates when a check could constitute a payment made in full

Revised to permit avoidance of inadvertent accord and satisfaction (if the payee discovers an error within 90 days)

Unauthorized signatures: Properly payable checks When a company may be

held liable for situations related to check issuance

Article 4—Bank Deposits and Collections Defines the various

bank parties to the deposit and collection process and their respective rights and duties

Defines the relationship between a bank and its customers

Defines a company’s duty to examine bank statements; makes it imperative to accurately reconcile accounts on a timely basis


The Uniform Commercial Code (UCC)

Article 4A—Funds Transfers Bank must make security

procedures available to the customer.

Includes the use of: Personal identification

numbers (PINs) Callbacks Encryption Message authentication

Consequential damages: Relieves a bank of liability

for losses beyond the actual loss

Holds a bank liable for interest losses or incidental expenses

Article 5—Letters of Credit (L/Cs) Defines a L/C, a

documentary draft or documentary demand for payment

Defines the roles of the issuer, applicant, beneficiary, advising and confirming banks

Article 9—Secured Transactions Businesses that require a

security interest must file UCC-1 Financing Statement listing collateral.


Retirement Plan Formats

Defined benefit plan Defined contribution plan

• Based on pay or seniority.• Plan obligation is discounted

aggregate of projected benefits.

• Value is independent of liability and based on fair market value (can be overfunded or underfunded).

• Funding/valuation can have significant impact on firm’s financial condition.

• Retirement savings based solely on contributions credited to an individual account and its earnings.

• Participants bear risk of self-directed investment decisions.

• Assets and liabilities are always equal.

• No funding/valuation issues but significant record keeping (work with HR).


Other types of plans: Hybrid plans (technically one or the other) Qualified vs. non-qualified plans

Employee Retirement Income Security Act (ERISA)

Objectives Ensure that employees and beneficiaries receive

adequate information on plans. Set standards of conduct for individuals who

manage employee benefit plans and funds. Determine that adequate funds are set aside to

pay promised pension benefits. Ensure that employees receive pension benefits

after they have satisfied certain minimum requirements.

Safeguard pension benefits for workers whose pension plans are terminated.


ERISA Reporting and Disclosure Requirements Favorable tax treatment

vs. penalties, disqualification or excise tax

Applies to all private-sector retirement plans

DOL Annual report (Form 5500)

that describes plan, financial statements, insurance and actuarial information, plan assets

Summary plan description and ERISA statement of rights

Pension Benefit Guaranty Corporation (PBGC) Insures pension plans of

private U.S. corporations and sends report of premiums due

Other filings Must give participants

summary plan description and annual summary of financial statements (others on request)

Must provide participants with periodic benefit statements


Discussion Question

Which of the following is true of ERISA rules?a) Using the ratio percentage test, the plan must cover a

nondiscriminatory group of non-HCEs who receive compensation worth at least 70% of what HCEs receive.

b) Using the average benefits test, the percentage of non-HCEs benefiting must be ≥ 70% of HCEs who benefit.

c) Any firm with unfunded benefits can qualify fora distress termination and PBGC plan takeover.

d) In a distress termination, the plan sponsor and control group of companies are liable for unfunded benefits.

Answer: dv3.0 © 2011 Association for Financial Professionals. All rights reserved. Session 2: Module 1, Chapter 2 - 61

Pension Protection Act (PPA) (2006)

Impact on defined benefit plans Specifies actions to

remedy underfunded plan

Must pay higher premiums to PBGC

If underfunded at time of termination, must pay extra funding to pension system

Closes other loopholes

Updates for defined contribution plans Removes conflict of

interest fiduciary liability for self-interested investment advice

Gives plan participants greater control over how their accounts are invested

Establishes safe harbor investments


U.S. Bankruptcy Legislation

Chapter 11 reorganization Unanimous consent

procedure Cram-down procedure

Chapter 7 liquidation Provides safeguards against

withdrawal of assets by owners of bankrupt firm

Provides for equitable distribution of assets among creditors

Allows insolvent debtors to discharge all of their obligations and start over

Formal bankruptcy Freefall Pre-arranged Pre-packaged

Informal bankruptcy


Discussion Question

Complete the following Chapter 7 bankruptcy priority of claims.1. Specific property pledged (e.g., lien)2. Trustee’s costs3. Pre-trustee involuntary liquidation expenses4. Wages earned three months prior to filing5. Unpaid benefit contributions owed six months prior6. Unsecured claims for customer deposits7. Taxes due8. Unfunded pension plan liabilities up to 30%

of book value of common/preferred equity9. General unsecured creditors10. Preferred stockholders (paid up to par value)11. Common stockholders (receive remaining

funds)


Documents

AFP Learning System Treasury Module One: The Corporate Treasury Management Function Module Two: Corporate Financial Management Module Three: Working Capital