Treasury Forex Mgmt Mr.iswar Padhan 1st Dec 2013

8/12/2019 Treasury Forex Mgmt Mr.iswar Padhan 1st Dec 2013

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Iswar Padhan


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Agenda for the Session

1. Role & Rationale for Treasury

2. Need for a Well-organised treasury

3. Set up of a Good Treasury System

4. Various segments of Treasury

5. Functions of various segments


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BankingDefinition

Banking is defined as the business of

accepting of deposits for the purpose of

lending ..

Core activi ty, combined with the rapid growth of

modern day banking activities necessitates a

well organised Treasury.


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Financial Intermediation & Risk Profile

Depositors /

Investors

Bank

Borrowers[ Corporates /

Individuals ]

Risk Associated are:

Credit Risk

Liquidity Risk

Int. Rate Risk

Forex Risk

Operational Risk

ALM mainly deals with liquidity, Int Rate & Forex Risks

Objectives:Earn Profit

Enhance Value of Equity


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Risk Profile

Credit Risk : All risks related to a borrower/

counterparty not fulfilling his obligations on time Liquidity Risk : All risks arising out of the banks

inability to meet financial commitments whendue

Interest Rate Risk :Risk of loss in the banks NIIor Economic Value of Capital arising out ofchanges in the level of interest rates

Currency Risk : Risk of loss due to changes inforex rates

Operational Risk: Risk of loss due to failure insystem / deficiencies in process and procedures


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Banking: Regulatory Requirements

Connected with Treasury

Statutory Pre-emption :a) Cash Reserve Ratio4% of NDTLb) Statutory Liquidity Ratio23% of DTL

ALM Guidelines :

a) Liquidity Gap Limitsb) Interest Rate Risk Limits

Capital Adequacy Guidelines :a) Basel II Guidelinesb) Basel III Guidelines

Authorised Dealership :a) Forex Services to Merchantb) FX Interbank Dealing


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Management of Statutory Pre-emption (CRR & SLR)

CRR Requirement :CRR requirement : Daily average of 4% of NDTL to be maintained inthe RBI account on fortnightly basis with individual days minimumat 95% of the CRR requirement

Issues & Challenges :

a) Zero return on CRR balance, hence avoid excessb) Regulatory penalty in case of default in CRR maintenance

SLR Requirement :23% of DTL on fortnightly basis to be maintained mainly in the formof SLR eligible Central, State Govt & other approved securities

Issues & Challenges :To optimize the balance between liquidity, return and risk


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Money Market Operations

RBI Liquidity Supports : Liquidity Adjustment Facility (LAF) : Repo, Reverse Repo, MSF Open Market Operation Refinance FC INR Swap facility Lender of last resort

Money Market Products : Call / Notice / CBLO Market Repo Term Money Certificate of Deposits

Short term investments TBs, CP, CD, MFs


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Investment Operations

Objectives: Regulatory compliance for SLR Liquidity Management Maximise Return on Investments Make trading income Manage risk credit, liquidity, interest rate, operational

Investment Products : Risk Free Securities TBs and G-Secs Bank , FI and PSU securities CP, CD, Bonds & Equity Corporate Debts CP, Bonds and Equity

Issues & Concerns: Underdeveloped Debt Market Underdeveloped derivatives market for hedging Migration to IFRS


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Investment Guidelines

Classification: 3 Categories HFT, AFS & HTM HFT & AFS treated as trading Defeasance period of 90 days for HFT HTM is treated as permanent limit on HTM

Valuation & MTM Provisioning: Fixed income securities valuation as per FIMMDA Price / rates Equity as per exchange price HFT valuation on monthly AFS valuation on quarterly HTM valuation for MIS and RBI reporting

MTM loss on HFT & AFS to be provided

Shifting between Categories : Shifting to / from HTM permitted once in a year , at beginning Shifting from HFT to AFS in exceptional situation Shifting from AFS to HFT with ALCO approval


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Investment Risk Management & Control

Policy and Monitoring Framework: Board approved Investment Policy and Framework Segregation of book into banking and trading Segregation of functions into dealing, back office and mid office Board approved limit structure: Book Size, Duration, Loss Limit Dealing in secured and recorded platform

Policy with dealings through brokers Dealer-level control and monitoring On-line, end-of-the day and periodic monitoring and reporting Overall supervision and control by ALCO


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FOREX MANAGEMENT

Forex Regulation FEMA Act 1999 FEMA Guidelines by RBI FEDAI Rules & Regulations Banks Act as Authorissed Dealer (AD) FX Brokers and Money Changers act as limited AD

FOREX Transactions All FX remittances to be routed through Authorised Dealers RBI based on FEMA sets rules, regulations and limits on FX

transactions

Nature of FX Market Closely regulated by RBI Rupee is market determined , RBI regulates to control volatility Rupee is not fully convertible


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FOREX OPERATIONS OF BANKS

Forex Services To provide services to exporters, importers and remittance

facilities to resident & non-residents To channelise foreign currency funds in deposits, borrowings

and investments to meet foreign currency needs on thedomestic market

To manage assets and liabilities in the various currencies andtime buckets

Provide foreign currency risk management products andservices to clients

Undertaking Trading in forex market To raise Capital in Foreign Currency


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Forex Accounts / Terms / Products

Forex Accounts

Nostro Accounts Vostro Accounts Loro Account

FOREX Quotations Direct quote USD / INR

Indirect Quote CHF / INR through USD / CHF & USD / INR Bid (Buy) & Offer (Sell)

Forex Transactions Cash, Tom & Spot Forward / Swap

Non-deliverable Forward (NDF)

FX Rates Interbank Rates Domestic Currency Rate & Cross Currency Rate Merchant Rates

TT & Bills Rates


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FOREX MARKET: Objective & Players

Objectives:

RemittanceHedge

Arbitrage

Trading / Speculation

Major Players :

Corporates

Banks

FIIsHedge Funds

Pension Funds

Central Banks

Resident / Non-resident Individuals


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SPECIAL FEATURES OF FX MARKET IN INDIA

MANAGED FLOAT FLOW DRIVEN

TRADE FLOWSCAPITAL FLOWS

OPTIONS HEDGING REER / RBI MONTH END SYNDROME GLOBAL DOLLAR VALUE IMPACT OF US DATA RELEASE INFLUENCE OF NDF MARKET


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Derivative Market

A contract whose price depends on the price of theunderlying instrument like :a) Foreign Currencyb) Interest rate

c) Equityd) Indexe) Commodity etc

Products Traded : Options , Currency Swaps ,Interest rate Swaps, FRA , Range accruals, Futures,etc..


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Forex Risk Management & Control

Policy and Monitoring Framework: Board approved Policy and Framework Segregation of functions into dealing, back office and mid office Segregation of dealing into inter-bank and merchant desks Client Appropriateness & Suitability for Derivatives Board approved limit structure:

Net Open Overnight Open Position (NOOP) Day Light Open Position Aggregate Gap Limit (AGL) Dealer & Book wise Loss limit

Credit Risk Limit Structure for Clients (LER) Dealing in secured and recorded platform

Policy with dealings through brokers Dealer-level control and monitoring Month-end valuation as per FEDAI rates On-line, end-of-the day and periodic monitoring and reporting Overall supervision and control by ALCO Concurrent Audit of regular day-to-day activity


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Need for Treasury in Banks

1. Maintenance of CRR and SLR

2. Judicious Funds Management

3. Quoting of Rates for Forex transactions

4. Management of Nostro Funds

5. Structuring and Selling of Derivatives

6. Proprietary Trading

7. Contribute Profit as a Profit Centre


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Broad Classification of Treasury

1. Front Office - To Strike Deals

2. Mid Office - Risk Management Policies,

Monitoring, MIS etc.

3. Back Office - Settlement and Accounting


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TREASURY

FX SalesProduct

StructuringFX Interbank

Money Market Equities SLR & Non-SLR

Commodities, Bullion, Metals,


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Money Market Desk

1. Maintenance of CRR and SLR

2. Investment of Surplus funds -

Call / Notice Money , Mutual Funds , USD/INR Swaps,

Commercial Papers, Certificate of Deposit, T Bills , G Secs ,

3. Raising Short Term FundsCall / Notice Money , USD/INR Swaps, Term Money,

MIBOR Linked Deposits,

4. Quoting rates for Bulk Deposits

5. Monitoring of Maturity of Bulk Deposits6. Keeping track of outflow on account of loan disbursement

7. Maintenance of RBI balances in various centres

8. Proprietary Trading


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Forex Sales Desk

1. Preparation of Card rates

2. Quoting of rates Export , Import , Remittances

3. Booking of forward contracts

4. Acceptance and monitoring of Customer Orders5. Apprising customers of currency movements and

views on various currencies

6. Structuring and Sale of Derivative products

7. Always on the look out for new businessopportunities


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FX Interbank Desk

1. Providing liquidity in the market by quoting in

USD/INR Spot , Forward and Cross Currency

2. Running proprietary trading position

3. Enabling cover operation for deals done by Salesand Derivatives Desk

4. Management of Nostro Balances

5. Providing information on market developments and

currency views


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Product Structuring Desk

1. Covering of Deals concluded by Sales desk in

interbank market

2. Structuring and pricing of new derivative products

3. Running USD/INR Option Book4. Running Interest Rate Swap Book

5. Interact with Other banks in India and abroad to

devise new products


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Derivative Products

Exchange Rate products

USD / INR options

Cross currency options

Put Options, Call Options

European , American

Interest Rate ProductsInterest Rate Swaps

Currency SwapsPrincipal , coupon


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Thank YOU

Wish You All Good Luck

Treasury Forex Mgmt Mr.iswar Padhan 1st Dec 2013

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Transcript of Treasury Forex Mgmt Mr.iswar Padhan 1st Dec 2013