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Creator Ravindra A. Kamath
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 Treasury &
Financial System An Overview

BSE - INTERNAL
Concept of treasury
￮ Originally engaged as a service centre
￮ only in daily cash management
￮ preemptive reserve management
￮ Restricted deployment of surplus funds

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Concept of treasury cont.…
￮ Currently being looked as a profit centre
￮ With active operations in all the markets in the country and
abroad except commodity markets
￮ Continues to deal in only short term markets excepting in case of
SLR investments and capital market products

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Integrated treasury
￮ Implies merger of both domestic and foreign markets meaning two
way movement of funds depending upon changing market scenarios
and emerging opportunities
￮ Forex, money and equity markets
￮ Being possible due to liberalised environment
￮ As markets are integrated so are the risks
￮ Derivatives are used extensively for the risk management

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Enabling environment
￮ Creation of clearing corporation of India
￮ Establishment of NSDL
￮ Large number of NBFCs and mutual funds
￮ Private insurance providers
￮ FIIs and FDIs
￮ Availability of derivative products in money, equity and forex markets
for interest and price risk hedging

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Treasury's role in profit maximisation

￮ Treasury operations are more profitable due to

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Sources of Treasury’s profits
￮ Forex market operations
￮ both merchant and proprietary
￮ Arbitrage in different markets due to time differentials though
negligible
￮ Both in cash and derivative markets

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Sources of Treasury’s profits
￮ Money market
￮ Shuffling of investments taking advantage of price changes in
investment holdings
￮ Borrowing and Lending in money and Repos markets taking
advantage of inherent strengths
￮ Retailing of Govt. securities

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Organisation of treasury
￮ Front office or dealing room
￮ Dealers in various segments carrying actual trades
￮ Forex markets - there can be specialists operating in
forwards, derivatives
￮ Securities markets- generally in secondary markets
￮ Investment desk operating in primary markets

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Organisation of treasury
￮ Back office
￮ Verification of deals done and settlements thereof
￮ Accounting, maintenance of Nostros and reporting to regulator
￮ Middle office
￮ Risk management and adherence to various exposure limits and
MIS to Board

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Financial System
An institutional framework existing in a country to enable financial
transactions.
Regulation is one major aspect of the financial system (RBI, SEBI, IRDA,
DGFT)
Three main parts are:
￮ Financial assets (loans, deposits, bonds, equities, etc.)
￮ Financial institutions (banks, mutual funds, insurance
companies, etc.)
￮ Financial markets (money market, capital market, forex market,
etc.)

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BSE - INTERNAL
Role of Regulators
Main role of the regulator is to make policies, provide guidelines, regulate
supervise and monitor various types of financial transactions undertaken
by the market players.
Some of the important financial regulators are:
￮ RBI – Money Market, Forex Market, Govt. Debt Market, Derivatives
Market;
￮ SEBI – Capital Market, Corporate Bond Market, Derivatives Market;
￮ IRDA – Insurance Products Market;

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Financial Assets / Instruments
Various assets / instruments and the purpose of their use are::
￮ Enable channelising funds from surplus units to deficit units
￮ There are instruments for savers such as deposits, equities, mutual fund
units, etc.
￮ There are instruments for borrowers such as loans, overdrafts, etc.
￮ Like businesses governments too raise funds through issuing of bonds,
Treasury bills, etc.
￮ Instruments like PPF, KVP, etc. are available to savers who wish to lend
money to the government.
￮ Life Insurance, Term Insurance, Mediclaim policies etc. help investors to
mitigate their risks.

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Financial Institutions
￮ Includes institutions and mechanisms which
￮ Affect generation of savings by the community
￮ Mobilisation of savings
￮ Effective distribution of savings
￮ Institutions are banks, insurance companies, mutual funds, NBFCs,
Credit Societies – To promote & mobilise savings
￮ Individual investors, industrial and trading companies- borrowers

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Financial Markets
￮ Money Market- for short-term funds (less than a year)
￮ Organised (Banks)
￮ Unorganised (money lenders, chit funds, etc.)
￮ Capital Market- for long-term funds generally for periods beyond 1 year
￮ Primary Issues Market
￮ Stock Market
￮ Bond Market – Government Securities Segment & Corporate Debentures
Segment
￮ Forex Market – for undertaking foreign exchange trade related transactions
through either OTC Market or Exchange Traded Markets
￮ Spot Market Segment
￮ Forward Market Segment
￮ Insurance Products Market for those mitigating their risks by buying various
types of insurance products

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Financial Markets
￮ Derivatives Markets
￮ Mutual Fund Markets
￮ Commodities Markets
￮ Real Estate Property Market
￮ Securitisation Products Markets

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Organised Money Market segments
￮ Call money market
￮ Bill Market
￮ Treasury bills
￮ Commercial bills
￮ Bank loans (short-term)
￮ Organised money market players includes RBI, banks (commercial and
co-operative), NBFCs, Insurance Companies, PDs, MFs, AMCs, ec.

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Various Money Market Products
￮ Call Money / Notice Money / Term Money
￮ Treasury Bills
￮ Commercial Paper
￮ Certificate of Deposits.
￮ LAF / Repo / Reverse Repo
￮ CBLO
￮ Bills Rediscounting .
￮ IBPC

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BSE - INTERNAL
Various Money Market Products
￮Call Money – Money borrowed by a scheduled bank for a day @ O/N MIBOR
in the Inter Bank Market.
￮Notice Money - Money borrowed by a scheduled bank for 2 - 14 days.
￮Tem Money - Money borrowed by a scheduled bank for 15 days to 364 days.
￮Liquidity Adjustment Facility – Facility available to Scheduled Commercial
Banks to borrow Funds / Lend Funds to RBI against approved security @ Repo
/ Reverse Repo rates.
￮REPO – Repurchase Obligation is facility available to Scheduled Banks to
borrow funds against approved security.
￮REVERSE REPO – Facility for Banks to deposit funds with RBI against security.
￮CBLO – Facility provided by CCIL to Scheduled banks to borrow funds against
approved security.

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Treasury Bills
￮ Treasury Bills – Money borrowed by C. Govt. through RBI auction
process for 91 /182 / 364 days by issue of T-bills. They are issued at a
discount price & redeemed at face value.
￮ Sometimes they are issued “on tap basis” or as Ways & means
advances for the sake of S. G.
￮ Yield = (Discount*365)/(Issue Price or CMP * No. of Days money
invested)

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BSE - INTERNAL
Certificate of Deposits
￮ Certificate of Deposit (CD) is a negotiable money market instrument issued
in dematerialised form or as a Usance Promissory Note, for funds deposited
at a bank or other eligible financial institution for a specified time period.
￮ CDs can be issued to Individuals, Corporations, Companies, Trusts,
Associations & Banks by (i) Scheduled Commercial Banks excluding Regional
Rural Banks (RRBs) and Local Area Banks (LABs); and (ii) Select all-India
Financial Institutions that have been permitted by RBI to raise short-term
resources
￮ The minimum amount for which a CD can be issued is Rs.1 lakh and in
multiples of Rs.1 lakh thereafter
￮ CDs issued by banks should not be for less than 7 days and not more than
364 days. Hence CD's are considered as good short term investments
￮ Different rates of Stamp duty are applicable depending upon the tenure of
the issue. Stamp Duty applicable will be borne by the issuer

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BSE - INTERNAL
Money Market Products
￮ Bill Rediscounting – Treasury rediscounts commercial usance bills
already discounted by other Banks.
￮ IBPC – INTERBANK PARTICIPATION CERTIFICATE – is treated as short
term Money market instrument. It is confined to Banks and helps in
management of Capital Adequacy and Balance sheet. Participation is
on risk sharing basis – underlying asset must be HC I as standard
assets.
￮ Commercial Paper (CPs) are issued by corporates to raise short term
money. They are Issued in multiple of 25 lakhs, can be issued by
companies with a net worth of at least 5 crores. CPs are unsecured
promissory note privately placed with investors at a discount rate to
face value. The maturity of CP is between 3 and 6 months
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Foreign Exchange Markets
￮ Over the counter markets.
￮ Only market open 24/7.
￮ No single location / no barriers.
￮ Very large capital & trade flows.
￮ Exchange rates fluctuates almost every 4 seconds.
￮ Other markets like money market, capital market, debt market,
commodity market etc. affect FE markets.
￮ Highly Liquid market.
￮ Govt. policies & controls affect FE markets.
￮ FE transactions are not settled simultaneously.

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BSE - INTERNAL
Foreign Exchange
What is Foreign Exchange?
￮ The term popularly denotes foreign currency and methodology
adopted for exchange or conversion of one currency into another
currency. Rate of Exchange is the price of one currency in terms of
another.
￮ These rates fluctuate quite often.
￮ There are different factors which affect these exchange rates.

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BSE - INTERNAL
Factors affecting Exchange Rates
￮ Demand & Supply.
￮ Balance of Trade/Payment.
￮ Interest rate differential.
￮ Speculation.
￮ Intervention by Central Bank of the Country.
￮ Inflation.
￮ Investment opportunities availability at these centres.
This list is illustrative and not exhaustive.

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FE Market Players
￮ Clients/customers- corporate houses, HNWI, etc.
￮ International Banks.
￮ Local Banks.
￮ Central Bank of the Country.
￮ Speculators & Hedgers.
￮ Brokers.

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FE Markets in India
Role of RBI: In terms of FEMA – 1999, they are forex controllers who are
authorised to regulate foreign exchange business in India and they ensure:
￮ Active market participation by all.
￮ Smooth functioning of the Markets.
￮ Maximum international currencies are traded actively in unison with
exchange rates in International Markets.
￮ Active Intervention in Markets to ensure that exchange rate fluctuation
will not affect Import/Export Trade.
￮ Issues Licences to various entities interested to deal in FE business.
Role of FEDAI:
￮ Sets the ground rules and also involve in the matters of market
participants.
￮ Foreign Exchange licence holders have to be members of FEDAI.

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BSE - INTERNAL
Dealing Room Operations
Conversation between Inter Bank Dealers:
￮ Bank A: Hi Frds. Bank A here! Spot USD/DEM please++.
￮ Bank B: Hi! 1.6945/50 ++.
￮ Bank A: OK at 45 yours. Two++.
￮ Bank B: Agreed. I buy USD 2 mio at 1.6945 val spot. USD to my acc.
with BTC,NY.
￮ Bank A: My DEM to my acc. with my Frankfurt. Tks & Bi Bi.

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BSE - INTERNAL
Dealing Room Segments
Main Segments:
￮ Front Office.
￮ Mid Office.
￮ Back Office.

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Front Office
￮ It is headed by a Chief Dealer and supported by dealers. Chief Dealer
is totally responsible for every action/deal in the dealing room. He
coordinates & directs all activities and is the link between
Management & dealers.
￮ It is the main hub of all FE activities.
￮ It has two desks – Inter Bank Spot & Swap Desk & Corporate clients
desk.

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BSE - INTERNAL
Mid Office
￮ It oversees overall administration of the risk management policy of
the Bank.
￮ It supervises & regulates various risk tolerance limits approved by the
top management.
￮ It formulates procedures and policies to comply with prescribed
control measures.

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Back Office
￮ It is responsible for follow up of every transaction till it reaches a
logical end.
￮ It maintains parallel exchange position, cross checking for accuracy of
deals entered, settlement dates, follow up of receipt of broker notes &
counter party confirmations, reconciliation of accounts, etc.

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BSE - INTERNAL
Dealing room transactions
￮ Dealing Room is the main profit centre of a Bank.
￮ These days, most of the Banks have globalised integrated dealing
room operations to have synergies in operations resulting in
optimisation of profits.
￮ They have extensive telecommunication network with Reuters / SWIFT
connections, voice recorders, etc. for speedy communication.
￮ Dealers normally maintains 2 positions: Funds position & Currency
position. Any error in funds position will result in Interest Rate Risk
while an error in currency position will result in exchange risk.

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BSE - INTERNAL
Different types of risks
￮ Operational Risk: Risk due to Human errors, Technical faults, Lack of
internal controls, Infrastructure breakdown, faulty systems &
procedures, etc.
￮ Exchange Risk: Due to Exchange rate fluctuations, mismatches in
exchange positions, assets / liabilities, receivables /payables, etc.
￮ Credit Risk. (incl. Presettlement risk & settlement risk): Loss due to
inability or unwillingness of the counter party to meet its obligations
during or on maturity of the contract / transactions.
￮ Liquidity Risk: Inability to liquidate an asset in the market due to
various reasons and hence unable to meet the commitments made.
￮ Gap risk/Interest rate Risk: due to mismatches in the maturity
patterns of assets / liabilities & movement of interest rates in the
market place.

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Different types of risks
￮ Market Risk: due to failure on account of a party to exit or settle a
position at reasonable price.
￮ Legal Risk: faiure on account of non- enforceability of contract against
counter party.
￮ Systemic Risk: failure of a major Bank resulting in losses to counter
party.
￮ Country Risk: failure on part of counter party due to change in govt.
policies, regulations, economic instability, etc.
￮ Sovereign Risk: King cannot be questioned even in court.
An accurate assessment of above risk exposures is the key to dealing room
functioning.

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Different Types of Exchange Rates
￮ Direct Exchange Rates
￮ Indirect Exchange Rates
￮ Cross currency Exchange Rates
￮ Spot , Cash & Tom Rates
￮ Forward Exchange Rates

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Inter Bank Market
￮ Only players in this market are Scheduled Authorised Dealers, Foreign
Banks and RBI.
￮ Type of Transactions are:

Type Date of Convention Settlement of

Cash/Ready/TOD 28/04/2020 T+0 28/04/2020

TOM 28/04/2020 T+1 29/04/2020

Spot 28/04/2020 T+2 30/04/2020

Forward 28/04/2020 Beyond T+2 After 30/04/2020

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Direct Exchange Rate
￮ It is also called as Foreign Currency Quotation.
￮ USD 1 = INR 75.59/60
￮ Foreign Currency constant & Home Currency fluctuating.
￮ Principle: Buy Low / Sell High
￮ Profit in terms of Home Currency
￮ In India, we follow this method since 2nd Aug., 1993.

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BSE - INTERNAL
Indirect Exchange Rate
￮ It is also called as Home Currency Quotation.
￮ INR 100 = USD 1.23/24
￮ Home Currency constant & Foreign Currency fluctuating.
￮ Principle: Buy More/ Sell Less
￮ Profit in terms of Foreign Currency
￮ In only 4 currency pairs these rates are applied – GBP/USD, EUR/USD,
AUD/USD & NZD/USD

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BSE - INTERNAL
Cross Currency Rates
￮ Sometimes, when transactions are required to be undertaken in
different markets then rates may not be available in common currency
pairs. In such cases, cross currency rates are used. In such cases,
mostly USD is the common currency used.
￮ In India, the only traded pair in inter bank market is USD/INR
￮ Hence, GBP/INR, EUR/INR or JPY/INR rates are arrived at by using the
chain rule by crossing USD/INR with GBP/USD or EUR/USD or USD/JPY

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￮ While quoting the rates to customers Bank adds their Exchange
margin while quoting Selling Rates and subtract Exchange margin
while quoting buying rates.
￮ In case of forward rates, the currency can be at a premium or discount
depending upon various factors. If it is at a premium then Premium is
added to the spot rate while discount is deducted from the spot rates.

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Market Rates
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THANK YOU

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