Iswar Padhan

1. Treasury Management: Rupee and Forex Iswar Padhan

2. Agenda for the Session • Role & Rationale for Treasury • Need for a Well-organised treasury • Set up of a Good Treasury System • Various segments of Treasury • Functions of various segments

3. Banking – Definition • Banking is defined as the business of accepting of deposits for the purpose of lending …………….. • Core activity, combined with the rapid growth of modern day banking activities necessitates a well organised Treasury.

4. Objectives: • Earn Profit • Enhance Value of Equity Depositors / Investors Financial Intermediation & Risk Profile Bank • Risk Associated are: • Credit Risk • Liquidity Risk • Int. Rate Risk • Forex Risk • Operational Risk Borrowers [ Corporates / Individuals ] ALM mainly deals with liquidity, Int Rate & Forex Risks

5. 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 bank’s inability to meet financial commitments when due • Interest Rate Risk :Risk of loss in the bank’s NII or Economic Value of Capital arising out of changes in the level of interest rates • Currency Risk : Risk of loss due to changes in forex rates • Operational Risk: Risk of loss due to failure in system / deficiencies in process and procedures

6. Banking: Regulatory Requirements – • Connected with Treasury • Statutory Pre-emption : • a) Cash Reserve Ratio – 4% of NDTL • b) Statutory Liquidity Ratio – 23% of DTL • ALM Guidelines : • a) Liquidity Gap Limits • b) Interest Rate Risk Limits • Capital Adequacy Guidelines : • a) Basel II Guidelines • b) Basel III Guidelines • Authorised Dealership : • a) Forex Services to Merchant • b) FX Interbank Dealing

7. Management of Statutory Pre-emption (CRR & SLR) • CRR Requirement : • CRR requirement : Daily average of 4% of NDTL to be maintained in the RBI account on fortnightly basis with individual day’s minimum at 95% of the CRR requirement • Issues & Challenges : • a) Zero return on CRR balance, hence avoid excess • b) Regulatory penalty in case of default in CRR maintenance • SLR Requirement : • 23% of DTL on fortnightly basis to be maintained mainly in the form of SLR eligible Central, State Govt & other approved securities • Issues & Challenges : • To optimize the balance between liquidity, return and risk

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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 the domestic market • To manage assets and liabilities in the various currencies and time buckets • Provide foreign currency risk management products and services to clients • Undertaking Trading in forex market • To raise Capital in Foreign Currency

14. 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

15. FOREX MARKET: Objective & Players • Objectives: • Remittance • Hedge • Arbitrage • Trading / Speculation • Major Players : • Corporates • Banks • FIIs • Hedge Funds • Pension Funds • Central Banks • Resident / Non-resident Individuals

16. SPECIAL FEATURES OF FX MARKET IN INDIA • MANAGED FLOAT • FLOW DRIVEN • TRADE FLOWS • CAPITAL FLOWS • OPTIONS HEDGING • REER / RBI • MONTH END SYNDROME • GLOBAL DOLLAR VALUE • IMPACT OF US DATA RELEASE • INFLUENCE OF NDF MARKET

17. Derivative Market • A contract whose price depends on the price of the underlying instrument like : • a) Foreign Currency • b) Interest rate • c) Equity • d) Index • e) Commodity etc… • Products Traded : Options , Currency Swaps , Interest rate Swaps, FRA , Range accruals, Futures, etc…..

18. 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

19. 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

20. Broad Classification of Treasury • Front Office - To Strike Deals • Mid Office - Risk Management Policies, Monitoring, MIS etc. • Back Office - Settlement and Accounting

21. FX Sales FX Interbank Product Structuring TREASURY Money Market Equities SLR & Non-SLR Commodities, Bullion, Metals, ……

22. Money Market Desk • Maintenance of CRR and SLR • Investment of Surplus funds - • Call / Notice Money , Mutual Funds , USD/INR Swaps, Commercial Papers, Certificate of Deposit, T Bills , G Secs , • Raising Short Term Funds – • Call / Notice Money , USD/INR Swaps, Term Money, MIBOR Linked Deposits, • Quoting rates for Bulk Deposits • Monitoring of Maturity of Bulk Deposits • Keeping track of outflow on account of loan disbursement • Maintenance of RBI balances in various centres • Proprietary Trading

23. Forex Sales Desk • Preparation of Card rates • Quoting of rates Export , Import , Remittances • Booking of forward contracts • Acceptance and monitoring of Customer Orders • Apprising customers of currency movements and views on various currencies • Structuring and Sale of Derivative products • Always on the look out for new business opportunities

24. FX Interbank Desk • Providing liquidity in the market by quoting in USD/INR Spot , Forward and Cross Currency • Running proprietary trading position • Enabling cover operation for deals done by Sales and Derivatives Desk • Management of Nostro Balances • Providing information on market developments and currency views

25. Product Structuring Desk • Covering of Deals concluded by Sales desk in interbank market • Structuring and pricing of new derivative products • Running USD/INR Option Book • Running Interest Rate Swap Book • Interact with Other banks in India and abroad to devise new products

26. Derivative Products • Exchange Rate products • USD / INR options • Cross currency options • Put Options, Call Options • European , American • Interest Rate Products • Interest Rate Swaps • Currency Swaps – Principal , coupon

27. Thank YOU Wish You All Good Luck