Introduction to Treasury
Management
Compiled by Ms Gumbo L
1.1 Definition of Treasury management
• Treasury management is the art of managing, within
the acceptable level of risk, the consolidated fund of
the bank optimally and profitably.
• It includes management of an enterprise holdings, with
the ultimate goal of managing the firms liquidity and
mitigating its operational, financial and reputational
risk.
• It is the window through which banks raise funds or
place funds for its operations.
• The treasury acts as the custodian of cash and other
liquid assets.
Ms Gumbo: Lecturer and Personal
Financial Management Advisor
1.2 Scope and role of convectional
treasury management.
• The treasury department is responsible for a
company’s liquidity.
• The treasurer must monitor current and
projected cash flows and special funding needs,
and use this information to correctly invest excess
funds, as well as be prepared for additional
borrowings or capital raises.
• department must also safeguard existing assets,
which calls for the prudent investment of funds,
while guarding against excessive losses on
interest rates and foreign exchange positions.
Ms Gumbo: Lecturer and Personal
Financial Management Advisor
1.2 Scope and role of convectional
treasury management.
• The treasurer needs to monitor the internal
processes and decisions that cause changes in
working capital and profitability, while also
maintaining key relationships with investors and
lenders
• Firms treasury management includes a firm's
collections, disbursements, concentration,
investment and funding activities.
• In larger firms, it may also include trading in
bonds, currencies, financial derivatives and the
associated financial risk management.
Ms Gumbo: Lecturer and Personal
Financial Management Advisor
1.2 Role of convectional treasury
management.
• Cash Forecasting
• Working Capital Management
• Cash Management
• Investment Management
• Treasury Risk Management
• Management Advice
• Bank Relationships
• Fund Raising
• Credit Granting
• Other Activities
Ms Gumbo: Lecturer and Personal
Financial Management Advisor
1.2 Role of convectional treasury
management.
Cash forecasting
• The accounting staff generally handles the receipt and
disbursement of cash, but the treasury staff needs to
compile this information from all subsidiaries into short -
range and long - range cash forecasts.
• These forecasts are needed for investment purposes, so the
treasury staff can plan to use investment vehicles that are
of the correct duration to match scheduled cash outflows.
• The staff also uses the forecasts to determine when more
cash is needed, so that it can plan to acquire funds either
through the use of debt or equity.
• Cash forecasting is also needed at the individual currency
level, which the treasury staff uses to plan its hedging
operations.
Ms Gumbo: Lecturer and Personal
Financial Management Advisor
1.2 Role of convectional treasury
management.
Working Capital Management
• A key component of cash forecasting and cash
availability is working capital, which involves
changes in the levels of current assets and
current liabilities in response to a company’s
general level of sales and various internal
policies.
• The treasurer should be aware of working capital
levels and trends, and advise management on the
impact of proposed policy changes on working
capital levels.
Ms Gumbo: Lecturer and Personal
Financial Management Advisor
1.2 Role of convectional treasury
management.
Cash Management
• The treasury staff uses the information it
obtained from its cash forecasting and
working capital management activities to
ensure that sufficient cash is available for
operational needs.
• The efficiency of this area is significantly
improved by the use of cash pooling systems
Ms Gumbo: Lecturer and Personal
Financial Management Advisor
1.2 Role of convectional treasury
management.
Investment management
• The treasury staff is responsible for the
proper investment of excess funds.
• The maximum return on investment of these
funds is rarely the primary goal.
• Instead, it is much more important to not put
funds at risk, and also to match the maturity
dates of investments with a company’s
projected cash needs.
Ms Gumbo: Lecturer and Personal
Financial Management Advisor
1.2 Role of convectional treasury
management.
Treasury risk management
• The interest rates that a company pays on its debt
obligations may vary directly with market rates,
which present a problem if market rates are
rising.
• A company’s foreign exchange positions could
also be at risk if exchange rates suddenly worsen.
• In both cases, the treasury staff can create risk
management strategies and implement hedging
tactics to mitigate the company’s risk
Ms Gumbo: Lecturer and Personal
Financial Management Advisor
1.2 Role of convectional treasury
management.
Management Advice
• The treasury staff monitors market conditions
constantly, and therefore is an excellent in -
house resource for the management team should
they want to know about interest rates that the
company is likely to pay on new debt offerings,
the availability of debt, and probable terms that
equity investors will want in exchange for their
investment in the company.
Ms Gumbo: Lecturer and Personal
Financial Management Advisor
1.2 Role of convectional treasury
management.
Bank Relationships.
• The treasurer meets with the representatives of any
bank that the company uses to discuss the company’s
financial condition, the bank’s fee structure, any debt
granted to the company by the bank, and other
services such as foreign exchange transactions, hedges,
wire transfers, custodial services, cash pooling, and so
forth.
• A long - term and open relationship can lead to some
degree of bank cooperation if a company is having
financial difficulties, and may sometimes lead to
modest reductions in bank fees
Ms Gumbo: Lecturer and Personal
Financial Management Advisor
1.2 Role of convectional treasury
management.
Fund raising
• A key function is for the treasurer to maintain excellent
relations with the investment community for fund - raising
purposes.
• This community is composed of the sell side, which are
those brokers and investment bankers who sell the
company’s debt and equity offerings to the buy side, which
are the investors, pension funds, and other sources of cash,
who buy the company’s debt and equity.
• While all funds ultimately come from the buy side, the sell
side is invaluable for its contacts with the buy side, and
therefore is frequently worth the cost of its substantial fees
associated with fund raising.
Ms Gumbo: Lecturer and Personal
Financial Management Advisor
1.2 Role of convectional treasury
management.
Other activities
• If a company engages in mergers and acquisitions on a
regular basis, then the treasury staff should have expertise
in integrating the treasury systems of acquires into those of
the company.
• For larger organizations, this may require a core team of
acquisition integration experts.
• Another activity is the maintenance of all types of
insurance on behalf of the company. This chore may be
given to the treasury staff on the grounds that it already
handles a considerable amount of risk management
through its hedging activities, so this represents a further
centralization of risk management activities.
Ms Gumbo: Lecturer and Personal
Financial Management Advisor
1.3 Treasury Management in Banks
• The treasury department of a bank is responsible
for balancing and managing the daily cash flow
and liquidity of funds within the bank
• The department also handles the bank's
investments in securities, foreign exchange,
asset/liability management and cash instruments;
and the treasury acts as the custodian of cash
and other liquid assets.
• It is the window through which banks raise funds
or place funds for its operations
Ms Gumbo: Lecturer and Personal
Financial Management Advisor
1.3 Treasury Management in Banks:
Objectives
• To take advantage of the attractive trading and arbitrage
opportunities in the bond and forex markets.
• To deploy and invest the deposit liabilities, internal generation and
cash flows from maturing assets for maximum return on a current
and forward basis consistent with the bank’s risk policies/appetite.
• To fund the balance sheet on current and forward basis as cheaply
as possible taking into account the marginal impact of these
actions.
• To effectively manage the forex assets and liabilities of the bank.
• To manage and contain the treasury risks of the bank within the
approved and prudential norms of the bank and regulatory
authorities
Ms Gumbo: Lecturer and Personal
Financial Management Advisor
1.3 Treasury Management in Banks:
Objectives
• To assess, advise and manage the financial risks associated with the
non-treasury assets and liabilities of the bank.
• To adopt the best practices in dealing, clearing, settlement and risk
management in treasury operations.
• To maintain statutory reserves – Cash Reserve Ratio and Statutory
Liquidity Ratio – as mandated by The reserve Bank on current and
forward planning basis.
• To deploy profitably and without comprising liquidity the clearing
surpluses of the bank.
• To identify and borrow on the best terms from the market to meet
the clearing deficits of the bank.
• To offer comprehensive value-added treasury and related services
to the bank’s customers.
• To act as a profit centre for the bank.
Ms Gumbo: Lecturer and Personal
Financial Management Advisor
1.4 Structure of an Integrated treasury
of a Bank
• The treasury organisation structure should
facilitate the handling of all market operations
from dealing to settlement, custody and
accounting, in both the domestic and foreign
exchange markets.
• 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.
Ms Gumbo: Lecturer and Personal
Financial Management Advisor
1.4 Structure of an Integrated treasury
of a Bank
• Front Office
• Dealing and Risk taking
• Constituted by Dealers and Traders
• 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 Head and also interact amongst
themselves to explore arbitrage opportunities.
• It has a responsibility to manage investment and market risks in
accordance with instructions received from bank’s ALCO
• The dealing room is the centre for market and risk management
activities in the bank
Ms Gumbo: Lecturer and Personal
Financial Management Advisor
1.4 Structure of an Integrated treasury
Mid Office
of a Bank
• 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.
• Responsible for limit setting and monitoring exposures in relation to limits.
• Assessing likely market movements based on internal assessments and
external/internal research.
• Evolving hedging strategies for assets and liabilities.
• Interacting with bank’s Risk management department on liquidity and
market risk.
• Monitoring open currency positions.
• Calculating and reporting VAR.
• Stress testing and back testing of investment and trading portfolios.
• Risk-return analysis.
• Marking open positions to market to assess unrealized gain and losses.
Ms Gumbo: Lecturer and Personal
Financial Management Advisor
1.4 Structure of an Integrated treasury
of a Bank
Back office
• The back office undertakes accounting, settlement and
reconciliation operations. Its major functions includes;
• Deal slip verification.
• Generation and dispatch of interbank confirmations.
• Monitoring receipt of confirmations from counterpart
banks.
• Monitoring receipt of confirmations of forward contracts.
• Effecting / receiving payments.
• Monitoring receipt of forex funds in interbank contracts.
• Statutory reports to the central bank
Ms Gumbo: Lecturer and Personal
Financial Management Advisor
1.4 Structure of an Integrated treasury
of a Bank
• Back-office functions (contd..)
• Management of nostro funds-to advise latest
funds position to enable the Finance Officer to
take the decision for the surplus/short fall of
funds.
• Reconciliation of nostro / other accounts.
• Monitoring approved exposure and position
limits.
• Accounting
Ms Gumbo: Lecturer and Personal
Financial Management Advisor
1.4 Structure of an Integrated treasury
of a Bank
Audit Group
• The audit group independently
inspects/audits daily operations in the
treasury department to ensure adherence to
internal/regulatory systems and procedures.
Ms Gumbo: Lecturer and Personal
Financial Management Advisor
ADVANTAGES OF INTEGRATING
TREASURY OPERATIONS
• Is to improve portfolio profitability, risk insulation and also to synergize
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 maximise its currency portfolio and free transfer of funds from
one currency to another so as to remain a proactive profit centre.
Ms Gumbo: Lecturer and Personal
Financial Management Advisor
