TREASURY ORGANIZATION AND STRUCTURE 2 TREASURY ORGANIZATION AND STRUCTURE Slides prepared by KP Gwachha Sainik College

STRUCTURE OF TREASURY DEPARTMENT

STRUCTURE OF TREASURY DEPARTMENT

FRONT - OFFICE Front office is the dealing room of the treasury department and responsible to take the decisions regarding the trading and investment. In front office, dealers conduct the deal; take current market positions, and management market risks. The dealing room is headed by chief dealer, who is in charge of the front office. The dealer working under him buys and sells in the markets. The basic functions of front office are given by following points.

FRONT – OFFICE (Functions) 1. Performs the preliminary functions of treasury operation 2. Maintains the limit of individual deals and dealers. 3. Deals in interbank transactions, currency trading, placement decisions and funds management. 4. Maintains the balance of position of currency. 5. Determination of exchange rate and interest rate for money and capital market securities. 6. Maintain the liquidity position of the bank including cash reserve ratio management. 7. Determination of the daily foreign exchange rate for cash, tom, spot and forward transactions. 8. Assessment of periodic risk exposure.

MID - OFFICE Mid office is created exclusively to provide information to the management and to implement risk management system. Middle office monitors exposure limits and stop loss limits to treasury and reports to the management on key parameter of performance. Transfer pricing mechanism may also be implemented through middle office. Mid office is responsible for analyze and control the risk of treasury dealings. Mid office take care of market and credit risks. It ensures that the functions of front office dealers and back office are as per approved norm and limits. The functions of this department are as follows:

MID – OFFICE (Functions) 1. Limit setting and monitoring exposures in relation to limits. 2. Assessing likely market movement based on internal assessments and external/internal research. 3. Evolving hedging strategies for assets and liabilities. 4. Interacting with the bank’s risk management department. 5. Monitoring open currency position. 6. Calculating and reporting value at risk 7. Stress testing and back testing of investment and trading portfolio. 8. Risk and return analysis 9. Market open position to market to access unrealized gain and losses.

BACK - OFFICE The back office is responsible for verification and settlement of the deals concluded by the dealers. The back office staff also confirms the deals independently with the counterparties (banks and other institutions) over phone and verifies the authenticity of the confirmation document. The back office takes care of all related book-keeping and submission of periodical returns to NRB. Settlement refers to receipt and payment of accounts following deals made by dealers (i.e. sale and purchase of foreign currency, lending and borrowing, sale and purchase of securities etc.). Settlement is a key function of back office as all payment and receipts must take place on value date. The functions of back office are as follows:

BACK – OFFICE (Functions) 1. Check the details of deal slip. 2. Issuance of deal confirmation to the counter party/obtain deal confirmation from counter parties. 3. Match the deal confirmation received from counter party, if any alterations immediately settle the differences. 4. Issuance of payment instructions. 5. Pass necessary accounting entries. 6. File the deal ticket, both confirmations issued by counter party and by bank systematically. 7. Settlement on value date. 8. Keep track of payments made/received in Nostro Account. 9. Maintain up to date records and registers of all transaction.

MEANING OF DEALERS Dealers do a host of transactions in different currencies in the interbank market or for customers. In view of the large volumes, transactions offset one another leaving net open (uncovered) positions in various currencies. The Treasury Front-Office maintains and manages all the forex positions of the bank. Dealers may or may not cover customer’s deals immediately, depending upon the market situation, movements and dealers views on the markets. If not covered, they add to the bank’s open position. Thus, the forex deal book of the bank is the portfolio of long and short forex positions in different currencies. These positions vary in amount and maturity. Spot deals mature in two working days (as of trade day) and forwards may mature any time up to six months or even a year.

DEALERS ROOM Dealers room is the dealing room in which activities of front office is conducted. This room is also known as trading room. A dealing room is a centralized establishment, usually of a commercial bank, which is willing to offer a two way dealing price for different currencies (and asset classes instruments) at all times even when they may not wish to deal, all but during the prescribed business hours. Basically a dealer has to maintain two positions, funds position and currency (or asset) position. Any successful dealing room operations manual will contain detailed deal process or standard operating procedures. The more clear this manual, the more enabled dealer leading to better operations – control, monitoring and management.

ROLES AND RESPONSIBILITIES OF DEALERS Treasury dealer assist to manage cash surpluses generated from operating activities. A treasury dealer also prepares daily or weekly cash position and forecast reports for senior management and endures an accurate analysis of corporate treasury holdings with banks. The roles and responsibilities of dealers are given by following points:

ROLES AND RESPONSIBILITIES OF DEALERS 1. Maintains the limit of individual deals and dealers. 2. Deals in interbank transactions, currency trading, placement decisions and funds management. 3. Maintains the balance of position of currency. 4. Determination of exchange rate and interest rate for money and capital market securities. 5. Maintain the liquidity position of the bank including cash reserve ratio management. 6. Determination of the daily foreign exchange rate for cash, tom, spot and forward transactions. Tom contract is the delivery is to take place on the next business day when the banks are open for business. 7. Maximizing returns on cash investments.

ROLES AND RESPONSIBILITIES OF DEALERS The dealers enter into transactions on the basis of current market price, which is ascertained by them through the information network made available. Reuters and Bloomberg are companies which make available market information on a real time basis. In making deals, the dealers will have to adhere to the various limits such as counterparty exposure, day dealing limit etc. that have been prescribed.