Introduction of Treasury Management

Meaning:
Treasury is the glue binding together liquidity management, asset/liability management, capital requirements
and risk management. It has an increasingly important job to do. At one end of the spectrum it
manages balance sheets and liquidity, and does good things to enhance the yield on assets and minimize the
cost of liabilities, mostly through the clever and intelligent use of derivatives. At the other end of the
spectrum, treasury can help restructure the balance sheet and provide new products.
All banks have departments devoted to treasury management, as do larger corporations. Treasury
management modules are available for many larger enterprise software systems. Banks do not disclose the
prices
they
charge
for
Treasury
Management
products.
Definition:
Treasury management is the management of an organizations liquidity to ensure that the right amount
of cash resources are available in the right place in the right currency and at the right time in such a way as
to maximize the return on surplus funds, minimize the financing cost of the business, and control interest
rate
risk
and
currency
exposure
to
an
acceptable
level.
In other words, Treasury management (or treasury operations) includes management of an enterprise'
holdings in and trading in government and corporate bonds, currencies, financial futures, options and
derivatives, payment systems and the associated financial risk management.

Treasury generally refers to the funds and revenue at the disposal of the bank and day-to-day
management of the same.
The treasury acts as the custodian of cash and other liquid assets.
The art of managing, within the acceptable level of risk, the consolidated fund of the bank optimally and
profitably is called Treasury Management.
It is the window through which banks raise funds or place funds for its operations.

Structure of an integrated treasury

The treasury department is manned by the front office, mid office, back office and the audit group. In
some cases the audit group forms a part of the middle office only.

The dealers and traders constitute the front office. In the course of their buying and selling
transactions, they are the first point of interface with the other participants in the market (dealers of
other banks, brokers and customers).

They report to their department heads. They also interact amongst themselves to exploit arbitrage
opportunities.

A mid office set up, independent of the treasury unit, responsible for risk monitoring, measurement
analysis and reports directly to the Top management for control.

This unit provides risk assessment to Asset Liability Committee (ALCO) and is responsible for daily
tracking of risk exposures, individually as well as collectively.

The back office undertakes accounting, settlement and reconciliation operations.

The audit group independently inspects/audits daily operations in the treasury department to ensure
adherence to internal/regulatory systems and procedure

Advantages of integrating treasury operations

Is to improve portfolio profitability, risk insulation and also to synergies banking assets with trading
assets.

This is achieved through efficient utilization of funds, cost effective sourcing of liability, proper
transfer pricing, availing arbitrage opportunities, online and offline exchange of information between
the money and forex dealers, single window service to customers, effective MIS, improved internal
control, minimization of risks and better regulatory compliance.

An integrated treasury acts as a centre of arbitrage and hedging activities.

It seeks to maximize its currency portfolio and free transfer of funds from one currency to another so
as to remain a proactive profit centre.

Department of Treasury Management

The Dealing Room

The Treasury has a responsibility to manage market risk in accordance with instructions received
from the banks ALCO.

This is undertaken through the Dealing Room which acts as the banks interface to domestic and
international financial markets.

it is the clearing house for such risk and has the responsibility to manage the market risk taken in all
areas of the bank, on behalf of customers, and on behalf of the bank, within the policies and limits
prescribed by the Board and RMC.

For this reason significant authority is given to the Treasurer, and the Dealing Room staff to commit
the bank to market risk.

Thus controls over the activities of these staff are critical to ensure that the bank is protected from
undue market risk.

The Middle Office

The duties and responsibilities of the Middle Office vary from bank to bank.

Middle Office is a relatively new concept in the risk management structure, not all banks will have
formal Middle Office structures.

Middle Offices are in place primarily to provide market risk monitoring, evaluation and reporting for
ALCO and Treasury.

The Middle Office is the first line of review of dealing activities and it provides timely assessment of
dealing activities and consolidated market risk exposures of the bank.

The Back Office

The key controls over market risk activities, and particularly over Dealing Room activities, are
exercised by the Back Office.

It is critical that both a clear segregation of duties and reporting lines are maintained between
Dealing Room staff and Back Office staff, as well as clearly defined physical and systems access
between the two areas.

The Back Office and Middle Office, where present, are also entrusted with the responsibility of
ensuring the timeliness and completeness of data in regard to market risk activities and providing
ALCO and management with verified reports from the banks books as defined in bank policy and
procedures.

Key controls performed in this area are :

Key controls performed in this area are

The control over confirmations both inward and outward.

All confirmations must be verified by Back Office staff for consistency with Dealing Room forms
and reports. Any follow up of discrepancies between the two (including confirmations received
where no dealers record is provided) must be performed independently by the Back Office in a
timely manner.

Confirmations must under no circumstances be sent out by or received by the dealing area.

The control over dealing accounts, vostros and nostros must also be timely, accurate and
discrepancies followed up independently and in a timely manner.

Revaluations and marking-to-market risk exposures, where required by policy and RBI directives,
must be carried out by the Back Office, for bank records, from rates received independent of the
Dealing Room.

Monitoring and reporting of risk limits and usage including open positions, product usage,
counterparty settlement, overall limits and portfolio limits are the responsibility of the Back Office or
Middle Office, where in place.

Reporting prompt resolution of exceptions and excesses are vital responsibilities of the Back and
Middle Offices and key control considerations.

Control over payments systems, particularly those related to Dealing Room activities is the
responsibility of the Back Office. Under no circumstances should staff with access and/or authority
to the Dealing Room or dealing mechanism have any authority, responsibility or access to bank
payment systems.

Role of Treasury Management

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In its broadest sense Treasury covers cash management, corporate finance and financial risk
management.
Closer inspection reveals that the Treasury function undertakes a range of complex and skilled tasks; liaises
with internal and external stakeholders and plays a key role in the smooth functioning and value creation of
an organization.
Although the role of the Treasury function is constantly evolving, it can be broken down into 6 broad but
interlinked categories:
1. Planning and Operations
2. Cash and Liquidity Management
3. Funding and Capital Markets
4. Financial Risk Management
5. Corporate Governance
6. Stakeholder Relations

Planning and Operations

Key activities

Key benefits

Cash flow forecasting

Subsidiary and Group financial management

Risk forecasting

Risks are identified early and mitigated

Investment appraisal

Resources are directed to the best opportunities

Tax planning

Clear and quantifiable approach to the future

Pensions planning

Tested contingencies in the event of exceptions

Co-operate with
development

Board

on

strategic

Operational risk management

Choose and operate Treasury systems

Transaction costs minimized

Negotiate, analyze and manage the fees and

margins of service providers

Smooth operations

Ensure quality standards of service providers

Efficiency gains

Cash and Liquidity Management

Key activities

Key benefits

Manage
internal
capital
Market by
investing and lending to subsidiaries

Minimize external borrowing requirement

Work with the business to optimize

commercial cash flows

Optimize interest expense

Work with the business to optimize

Optimize tax expense

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working capital
Minimize idle cash through netting and
cash concentration

Avoid future liquidity problems

Confirmation and reconciliation of receipts

Create cash is king culture

Timely disbursement of payments

Smooth operations and supplier relationships

Funding and Capital Markets

Key activities

Key benefits

Optimization of capital structure

Optimization of Weighted Average Cost of

Capital (WACC)

Manage short,
investments

medium

and

long-term

Maximize yield on assets

Ensure adequate liquidity to support the

business

Minimize interest expense

Ensure adequate liquidity to meet obligations

as they fall due

Access to capital at the right time, price and

conditions

Arrange liquidity for strategic events such as

M&A, Divestiture and JVs

Removal of concentration risks

Diversify capital
maturities

Ensure good credit ratings

sources,

partners

and

Portfolio management of debt, derivatives and

investments

Ensure limits accurately reflected the borrowing

requirement (thus minimizing commitment fees)

Ensure contractual terms and covenants do

not constrain the business

Ensure hedging matches the funding profile (no

over hedging)

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Financial Risk Management

Key activities

Key benefits

Seek natural hedges and offsets within the

business

Visibility of financial risks on an enterprise basis

Interest Rate risk management

Minimize external hedging requirement

FX risk management

Minimize impact of external risk on P&L and

Balance Sheet

Commodity risk management

Reduce volatility

Counterparty risk management

Access to capital at the right time, price and

conditions

Credit risk management

Improve asset quality

Liquidity risk management

Create risk aware culture

Pension risk management

Certainty facilitates better decisions

Work with the business to de-risk contracts

and avoid bad debts

Scenario planning and stress testing avoid

surprises

Involvement in business insurance

Corporate Governance

Key activities
Ensure accurate
instruments

Key benefits
valuation

of

financial

Ensure the financial profile represents and true

and fair view

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Ensure accurate accounting of Treasury

transactions

Adequate internal controls

Implement and manage treasury policies and

procedures

Demonstrate preparedness

Provision of covenant tests and information to

investors

Reputational risk management

Provision of compliance information to

regulators
Ensure accurate transaction history and audit
trail
Work with internal and external auditors

Stakeholder Relations

Key activities

Key benefits

Provide performance and risk analytics to

Board

Access to capital at the right time, price and

conditions

Manage relationship with banks and other

investors

Relationship
communication

Manage relationship
agencies

Reputational risk management

with

credit

rating

benefit

from

proactive

Co-operate with Board and Investor Relations

on shareholder matters

Valuable knowledge and contacts from deep

involvement with financialMARKETS

Ensure the Treasury function is understood

and valued within the business

Tangible financial results in the form of cost

savings, efficiency gains, yield enhancement and
protecting profitability

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Internal Control Framework

There are a number of key components of the Internal Control Framework relating to Treasury
Management, namely: The CIPFA Code of Practice on Treasury Management
The Councils Constitution
The Councils Finance Procedure Rules
The Councils Financial Strategy
The Councils Treasury Management Strategy
Treasury Management Procedures
It is important to emphasise that financial policies and procedures are regularly reviewed, eg., in September
following the nationalisation of Northern Rock, a decision was taken to restrict investments with
counterparties to between three and six months to minimise default risk.
Currently, the Councils Treasury Management and Finance Strategies are being reviewed proposals will
refer to the risks associated with placing investments, how they are effectively managed and will seek to (a)
increase the limit for some investments to enable a greater proportion of investment funds to be placed in
AAA rated institutions and (b) consider investing in lower risk government-backed investments with the
associated lower returns.
These proposals are consistent with the rigorous financial controls in place, which are regularly reviewed by
both the Internal Audit Team and the External Auditors.
The Treasury Manager demonstrates a professional approach to the activities of the financial market
particularly in the light of the current economic turmoil.
This is evidenced in the statements prepared, which detail the rationale behind making any investment.
Investment totals are included along with ratings and interest rates. It is also stated on each report that: - To
safeguard Council Funds we try to invest with the top five institutions, if possible. Hertsmere Borough
Council endeavours to invest with blue chip institutions in accordance with our Finance Strategy.

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Conclusion

We have been able to achieve the objectives of this review and we are pleased to conclude that the actual
internal controls are adequate and effective and that the management is accurate and complete. The
Councils approved policies and procedures manage the risks and they are, wherever possible, responsive to
changes in the international and national financial markets and they follow expert advice. There are currently
no guarantees available to eliminate all of the inherent risks associated with the activity of placing
investments - especially in the current economic climate. Investments made to date during this financial year
have been made in accordance with the Councils approved policies and procedures. We would like to
emphasise that internal control should not be regarded as static. As the organisation, its objectives, activities
and environment change then the internal control framework should be adjusted to reflect the changes.

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