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.

FUNCTIONS RESPONSIBLE FOR

Front Office (Treasury Management Group)

Dealing/ trading/ ALM etc

Middle Office (Risk Management Group)

Risk management/ limits monitoring etc

Back Office (Treasury Settlement Wing)

Confirmations/ settlement/ reconciliation etc

Structure of Treasury Department

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

desk• Derivatives desk • ALCO

Elements of Treasury Front Office

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.

• Reserve management & Investment• Liquidity & funds management• Risk management• Asset liability management

Functions of Treasury Management

Inter-Dept Chart…

Investment in Shares. CFS/Badla Transaction. IPO’s and Pre IPO’s. Ready Future Arbitrages.

Spot and Forward Transaction. FX Swaps. Third Currencies. Nostro Management.

Dealing with branches and clients.

Treasurer Treasurer

Head of M.M Head of Equity Head of FX

Repo and Rev Repo Transaction.

SLR and CRR management. Govt. Securities.

C. Desk

TREASURYFront Office

Lending to BranchesBorrower

Investment

Reserve RequirementDepositor

Branch

Excess Liquidity

Borrowing Funding

Spread

• 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

Treasury Back Office Functions

Functionality….

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 it’s monetary policies in a more efficient manner. Moreover, it provides it with a liquid market for securities through which it can finance it’s 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 banking departments for assets/liability pricing.

• 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….• Pakistan Investment Bonds: 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.

• Treasury Bills: T-Bills are short term securities issued by the State Bank on behalf of the Ministry of Finance through auctions. They are zero-coupon 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 it’s budgetary deficit and this bank borrowing currently takes place against T-Bills.

• Term Finance Certificate: 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.

M.M Instruments & Transactions….• Repurchase Transactions: Borrowing secured by collateral in

the form of securities.

• Rev. Repo Transactions: Lending secured by collateral in the form of securities.

• Call Money: Call transactions consist of non-collateralized lending and borrowing of Funds.

• Clean 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.

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.

TOTAL -549/84

NOP -6.53

USD +10 84 +840

POUND -10 138 -1380

YEN -10 0.9 -9

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.CALCULATING FORWARD RATE

Interest rate of USD = 4.75% Interest rate of PKR = 9% Spot Rate = 59.95 Tenure = Six Month Six month Forward Rate = spot rate + (spot rate * Int. rate differential * Tenure/365) Six month Forward Rate = 59.95 + (59.95 * (9% - 4.75%) * 180 / 365) Six month Forward Rate = 61.20

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

• " (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.)

The Trading rules I live by are:

Thank You