Treasury Management

SSBM, Semester III

Batch 2011-13
Slides – Week 10
 Developments
• ECB’s QE
– Unlimited bond buying plan
– Effect on
• Spain Italy Bond Yields down 100bp
• Dollar 82 to 81
• Gold $1650/oz to 1700
• Equities 1350 to 1430 S&P500
• Bonds 1.55% to 1.68%
• Euro 1.2550 to 1.2630
• Debate on CRR
• Fuel price hike
• Gold Prices cross Rs32K/10gm
• Non Farm Payroll (NFP) data today
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 Assignment
• Why should investment books be Marked to Market?
• You have done a 5 year Currency Swap with a
Thailand Based Corporate where you are paying fixed
rate 9% (INR) and receiving $LIBOR+400. To hedge
the PVBP you purchased a 5 year Corporate Bond
– What are the risks you are running?
– Write a note (about 75 words) on how this position and
the hedge will be valued. Which curves will be used and
what adjustments may be needed

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 Assignment
A bank has an active treasury dealing in Bonds,
Swaps and Currency. Due to excessive volume
the deal input system crashed and could not
capture all the trades of the day. Post market
closing RBI reduced interest rates and reduced
NOOPL of banks by 50%.
• As a Risk Management person describe the
various risks the bank is running, how do you
estimate the worst case and suggest a solution
(150 words)
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 Assignment
• Swaps
• Bank A has an SLR portfolio of Rs 1000cr in
securities maturing between 5 and 10 years.
Its funding is mainly through 3 month term
deposits
• What swap structure would you suggest.
Describe the transaction. Cover – benchmark,
amount, deal slip, graphically represent
• As market maker what would do next
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 Week 9 Agenda
• Cases – Group presentations
– Eurex
– ICICI CDO
– IDFC
• Pending
– Presenter  6 Evaluator 5 - Eurex
– Presenter 7 Evaluator 1 - ICICI

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 Week 10 Agenda
• Audit
• Technology in Banks

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 Audit
• Concept
– Why should banks be audited
• Key Business unit
• High Volumes of transactions
• Repository of Risk – Credit, Market, Operational
• Impact on balance sheet is very high
• Focus of stakeholders

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 Audit
• Definition
– Inspection/ Checking/ Scrutiny
• Transactions
• Processes
• Personnel
• Accounts
– Evaluation or Assessment of Internal Controls

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 Types of Audit
• Types
– Internal
– External
– Concurrent
– Statutory

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 Types of Audit
• Internal
– Conducted by a team employed by the bank
– Has an independent line to management
– Experience and Expertise are key
– Increasingly front line or business personnel to be
part of the team
– Usually does theme based or specific audits
• Eg KYC, Derivatives underlying, Account opening

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 Types of Audit
• External
– Conducted by a team external to the bank
– Has an independent line to CEO, Board
– Experience and Expertise are key
– Systemic risks evaluated
– Concentration Risk/ Sectoral
– Cross border transactions

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 Types of Audit
• Concurrent
– A team seated in the dealing room
– External to the bank
– Does a sample or thorough check of transactions
– Checks for compliance with regulations and internal
policies
– Dealer limits, exposure limits are checked
– Exception reports are checked
– Acts as a first level check or alert
– Submits monthly reports to management
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 Types of Audit
• Statutory
– Big Four firms
– Focuses on financials
– Validates processes
– Validates models
– Validates approaches to valuation
– Thorough check at non transactional level
– Focus is to present a credible picture to
shareholders
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 Types of Audit
• External
– Regulatory
• Conducted by the regulating authority
• In case of MNC banks, there would be multiple
regulators Eg FSA, Fed, RBI
– Non regulatory
• Process audits mainly
• Consultants, Experts

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 Types of Audit
• Types
– Off Site Supervision
• Regular data/ information sought
• Collation done for system as a whole
• Each bank’s data is studied over time and for specific
exposures
• Increasingly becoming online

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 Types of Audit
• Types
– On Site Supervision
• Conducted at the bank’s premises
• A team of inspectors is sent to the bank
• Concept of Principal Investigating Officer (PIO)
• Disrupts the normal working of the bank

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 Types of Audit
• RBI Audit
– Annual Financial Inspection
• 2-3 months duration
• Intensive scrutiny
• Thorough check of most/ all products, processes
• Close and Continuous monitoring
• Coordination with Offsite
• Report prepared with Major/ Minor issues
• Submitted to CEO/ Board
• Rectification or compliance with observations is required

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 Types of Audit
• RBI Audit
– Ad hoc Inspections
• Short duration issue based checks
– Eg Derivatives underlying
– KYC documents
– Wealth management related
– Related parties exposures
– Real estate sector
– Currency movement
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 Debate
• “Audits are a waste of a bank’s resources –
time, people. They provide no useful inputs to
business and are of no benefit to
shareholders.”

• Take a stand FOR or AGAINST the motion

• Support your position with points/
arguments/proof

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 Auditor’s checklist
• Operational losses
• Credit losses
• Delayed customer payments
• NPA accounts
• Provisioning
• Compliance with recent guidelines
• Internal policies and their monitoring

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 Modern approach to Audit
• Increasingly becoming Risk based rather than
transaction based
– Risk based supervision
• Identify and grade the various risks
– Low, medium, high
• Direction of risk and its criticality are measured
– Rising, stable or reducing Eg NPA
• Attempt to identify new risks as they appear to
assist management
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 Technology in Treasury
• For the Treasury
– Access to information
– Timeliness and
– Accuracy are critical
• Eg Trader returns from lunch and quotes stale
prices to a customer
• “9.15% 2024 was at Rs 106”
• Operational loss fructified immediately

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 Technology in Treasury
• Technology takes various forms in the treasury
– News and information services
– Market infrastructure
• NDS, RBI owned networks
• Private exchanges
– Internal deal capture software
– Deal management applications

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 News and Information
• Reuters
• Bloomberg
• Newswire18
– Live Market data
– Charting
– Analytics
– Opinion
– Dealing services

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 Market Infrastructure
• Technology used by the market to conclude trades
• NDS
• NDS OM
• CCIL related applications
– CROMS
– NDS Call
– FX Clear
• NDS and CCIL applications are mandatory for banks
• BSE, NSE related platforms

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• Advantages of common market infrastructure
– Liquidity is maintained on most products
– Cost of transaction is low
– Transparency and trade data maintained
– Audit trail is possible
– Immediate settlement possible
– Benefit of Netting
– Benefits of STP

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 Proprietary Applications
• Bank owned Software that accomplishes
– Deal Capture
– Generates deal slip, transaction record
– Communicates with Risk Management system
– Checks limits, alerts
– Communicates with Core Banking System
– Generates income, P/L
– Generates settlement entries

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 Proprietary Applications
• Tends to be disaggregated like specialised software for
bonds, derivatives
– Best to have a single suite
• Eg Bloomberg TW, Murex, Reuters Kondor, Summit
• Product capability, Security
• Valuation models
• Transparency
• Ease of audit, data download
• Geographical aggregation, by region, state and country are
also key going forward and this must be incorporated at
the time of system design
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 NFP release 1830hrs yesterday
• The US economy created a disappointing 96,000
jobs in August, below expectations of 130,000,
and the unemployment rate fell to 8.1 per cent, a
new low, as more members left the labor force.
• The number is likely to remove any final doubts
at the Federal Reserve about the need for more
monetary stimulus
• The economy added 96,000 workers last month
following a revised 141,000 rise in July
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 Developments
• ECB’s QE
– Unlimited bond buying plan
– Effect on
• Spain Italy Bond Yields down 100bp
• Dollar 82 to 81
• Gold $1650/oz to 1700 to 1735
• Equities 1350 to 1430 S&P500 to 1435
• Bonds 1.55% to 1.68%
• Euro 1.2550 to 1.2630 to 1.28
• Debate on CRR
• Fuel price hike
• Gold Prices cross Rs32K/10gm
• Non Farm Payroll (NFP) data today
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 Understanding Markets
• Factors affecting Interest Rates
• Factors affecting Exchange Rates
• Data Releases and their expected impact
• Trading Tips

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 Factors affecting exchange rates
• Interest rate differential
– Money should move to the higher interest rate ceteris paribus
• Inflation differential
– Higher inflation reduces purchasing power hence money will
flow towards the lower inflation currency
• BoP
– Current Account Deficit/ Trade Deficit
• Printing Money (Who owns the public debt)
– QE, Write offs, Subsidies
• Political Stability
• Growth Expectations
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 Factors affecting interest rates
• Inflation
• Government Balances (Fiscal Deficit)
– Revenue
– Expenditure
– Fiscal Policy
– Who funds this
• Monetary Policy
• Government Borrowing number
• Growth Rate, GDP
– Demand for money
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 Impact analyses by data release
• Vehicle Sales, Retail Sales, Home Sales (Growth
indicators, Surveys, PMI, ISM)
– Higher number indicates better growth
• Higher yields, stronger currency. Higher equities
• Inflation, CPI, WPI
– Higher inflation means monetary policy will become tighter
• Higher yields, weaker currency, higher equities unless very sharply off
• Employment situation
– Higher unemployment means lower income, weaker growth
• Lower yields, lower equities, weaker currency

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 Impact analyses by data release
• Trade Deficit
– Narrower the trade deficit stronger for the
currency but this has to be carefully analysed
• Government Borrowing/ Fiscal Deficit
– Larger the borrowing more is the supply of bonds
• Higher yields, lower equities, weaker currency

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 What traders are tracking
Further reading
• http://www.bloomberg.com/markets/econom
ic-calendar/

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 Trading tips
• The market is always right
– Stay nimble, money management is key
– Eg Lighthouse
• When looking at price remember positioning is
equally important
– Eg whether a certain news was expected by the
majority will determine the behavior post release
• Fundamentals are important but also is Flow
– Large flow can temporarily go against fundamentals
– Eg Emerging market currencies
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 Week 9 Agenda
• Cases – Group presentations
– Eurex
– ICICI CDO
– IDFC
• Pending
– Presenter  6 Evaluator 5 - Eurex
– Presenter 7 Evaluator 1 - ICICI

Arvind Sampath