5_5-Internal Audit for Treasury Market Risk Management

7/24/2019 5_5-Internal Audit for Treasury Market Risk Management

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Internal Audit for Treasury

Market Risk Management


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Treasury Dealing Room

Authorized by the banks risk management committee.

Interface to international and domestic financial markets.

Clearing house for matching.

Managing and controlling market risk.

Provide funding, liquidity, investment support


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Internal Control System

Functional separation of trading, settlement, monitoring ,

control and accounting.

Functional separation of trading and back office

functions such as investment accounts of banks, clients

portfolio management scheme, brokers accounts.

External audit of portfolio management scheme of

clients.


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Internal Control System

Dealing slip for each transaction by the trading desk

Nature of deal

Number of counter parties

Direct deal or deal through a broker

Amount of securities traded

Price of securities traded

Contract date and time


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Reporting to Top Management

Reports on a weekly basis.

Details of transactions in securities.

Details of SGL transfer forms issued by other banks that

have bounced.

Bank receipts outstanding for more than one month.

Review of investment transactions.


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Monitoring by the Audit Committee

Total exposure of the bank to capital market (fund based

and non fund based).

Ensuring the compliance of RBI guidelines.

Monitoring of risk management system.

Monitoring of internal control system.

Ensure that stock brokers as directors in the bank Board

do not take part in investment committee decisions.


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Treasury Risk

Market risk

Risk to the banks earnings and capital through

changes in market rates, security prices, foreign

exchange and equity instruments

Liquidity risk

Ability of banks to meet its liabilities

Funding risk

Time risk

Call risk


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Treasury Risk

Interest rate risk

Possibility that interest rates adversely affects thebanks financial position

Banks earnings measured through net interest

margin

Economic valuation of banks


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Treasury Risk

Foreign exchange rate risk

Loss suffered by banks due to adverse movement of

exchange rate

Credit Risk

Possible loss of principal and or interest

Operational risk

Risk of direct or indirect loss from inadequate internal

processes, people, systems, external events


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Market Risk Limit

Past performance of the trading unit

Experience and expertise of the traders

Quality of internal control

Pricing, valuation and measurement systems in place

Projected level of trading activity

Liquidity of products and markets

Efficiency of systems in place to settle trades


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Market Risk Limits

Notional or volume limit

Stop loss limit

Gap or maturity band limit

Value-at-risk limit

Options limit

Delta limit

Gamma limit

Vega limit

Theta limit

Rho limit


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Guidelines on Internal Control System

Risk identification processes

Control environment

Reliability and integrity of management informationsystem

Statutory compliance of internal regulator

Budgetary control

Verification of investment trades

Compliance with the internal audit report


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Risk Based Internal Audit

Review of risk systems

Compliance with money laundering regulations

Identification of potential internal business risks

Identification of measures and systems to control risks

Establishment of corrective parameters

Follow up of review reports by the internal auditcommittee


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Stages of Internal Audit


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Checklist for Internal Audit

I. General

Policies for all treasury activities.

Policies in tune with the nature of operations.

Responsible persons are associated with the policies.


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I. General

Policy specifies types and purposes of the financial

instruments.

Policy specifies frequency of reporting and reporting

authority.

Maintenance of cash reserve ratio and statutory liquidity

ratio requirements.


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II. Organisation Structure

Treasury activities are supervised by an officerindependent of day-to-day activities.

Effective segregation of key duties (treasury dealing,

settlement of accounting, reconciliation of accounts).

Policies and procedures are documented and easily

accessible to all staff.


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II. Organisation Structure

Defined job descriptions and delegations for key treasurypositions.

Availability of sufficient resources to operate the treasury

effectively.

Segregation between functions of authorization,

execution and recording of transactions.


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IV. Deal Execution Process

Confirmation of transactions concluded by the dealingroom with the back office manager.

Systematic filing of procedure.

Examine third party payment.

Outward confirmations are recorded in a register.


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V. Limits

Counterparty exposure limit for all brokers, lenders, etc.

Dealing limits (maximum amount, a person can transact

without seeking higher level approval).

Product limits (maximum exposure in a particular

instrument or product).

Sector limits (maximum investment in a particular

sector).


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VI. Recording Control

i) Control over Documents

Timely and accurate execution of money marketdeals and recordings.

Receipt of all documents and statements fromconcerned parties (brokers, bankers, lenders,etc.).

Numbering and filing of copies for easereference.


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ii) Control over Accounting Procedures

Adequate systems to track all matured investments.

Accurate recording and accounting of positions.

Counter checking of records by an independentperson.


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ii) Control over Accounting Procedures

All deals are recorded in the General Ledger.

Account reconciliation has been done and time framehas been set for clearing all outstanding items.

Inspection of source documents.


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VII. Reconciliation of Bank Accounts and Treasury Records

with the General Ledger

Bank balance with bank statement.

Reconciliation of treasury records with the generalledger.


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VIII. Cash Management

Effective procedure for monitoring the daily cash

position.

Planning of the liquidity needs for normal operating

conditions and emergency situations by management.

Trend analysis of cash forecasting.

Bank statements.

Review of liquidity position.


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IX. Investment

Review and follow up of investment strategy.

Authority level and monetary limits set for investment in

different instrument.

Documentation of list of investments.

Analyse of investment portfolio statements.

Holding of investments in the banks name.

Documents with regard to ownership of investments.


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IX. Investment

Bank utilises third party investment managers.

Control of the investment managers activities.

Appraisal of investment managers

Compliance of investment policies by investment

managers.

Evaluation of internal / external investment managers

performance.


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X. Documentation for Derivative Transactions

(i) Usage of International Swaps and Derivatives

Association (ISDA) documentation, with suitable

modifications.

(ii) Confirmation for each derivative transaction withdetails of the terms of the contract such as gross

amount, rate, value date, etc.


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X. Documentation for Derivative Transactions

(iii) Individual transaction confirmation.

(iv) Evaluation of legal capacity, power and authority of the

counterparty to enter into derivative transactions.

(v) Documentation of the agreement with the counterparty

prior to undertaking any derivatives business with them.

(vi) Documentation regarding customer suitability,

appropriateness, etc.


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XI. Investment in Debt Securities

Frequency of interest payments.

Information about the issuer and the credit rating.

Terms of issue such as use of issue proceeds, monitoring

agency, formation of trustees, secured or unsecured nature ofbonds, assets underlying the security and credit-worthiness of

the organisation.

Comparison of the Yield To Maturity (YTM) of the debt

security with the YTMs of other comparable debt securities of

the same class and features.

5_5-Internal Audit for Treasury Market Risk Management

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