Technical Guide on Internal Audit of Treasury Function in Banks

DISCLAIMER: The views expressed in the Technical Guide are those of author(s). The Institute of Chartered Accountants of India may not necessary subscribe to the views of the author(s).

The Institute of Chartered Accountants of India

(Set up by an Act of Parliament) New Delhi

 The Institute of Chartered Accountants of India All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior permission, in writing, from the publisher.

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January, 2010

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Internal Audit Standards Board

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FOREWORD
With the significant developments that have taken place in the capital, money and foreign exchange markets in the recent years affecting volatility in exchange rates and accentuating liquidity constraints, organisations have started paying closer attention to the treasury management function. The globalization of the economy with mobilization and deployment of funds from/in other countries is also necessitating increased attention in the area of treasury management. Banking industry has been all long focusing on successful treasury management, which is extremely necessary for their strong, viable and profitable existence. In view of the complexity, volume and growth of treasury function in banks, internal auditors have a dynamic role to play to support the banks in helping to achieve the strategic goals. Internal auditors can strengthen the banks treasury functions by reviewing critical control systems and risk management processes and providing valuable suggestions. I am happy to note that the Internal Audit Standards Board of the Institute is issuing this publication Technical Guide on Internal Audit of Treasury Function in Banks containing extensive knowledge on this complex subject. I congratulate CA. Shanti Lal Daga, Chairman, Internal Audit Standards Board and the members of the Board on issuance of this publication. I am confident that this comprehensive publication would help the members as well as other readers in acquiring good knowledge of products, practices and regulations of treasury function in banks.

January 12, 2010 New Delhi

CA. Uttam Prakash Agarwal President

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iv

PREFACE
In this financially globalized volatile world, banks treasury groups which are ultimately responsible for keeping their banks in business are witnessing tremendous changes. The change is being forced with rapid economic developments, globalizing industries and competition, new technologies and revolutionary changes in the regulatory environment. Apart from responding to these changes, treasury functions of banks are under pressure to add value to the banks through their operations and contribute to achieve strategic goals. Internal audit helps the organisations to achieve their stated objectives. Carrying out an internal audit of treasury functions in banks requires an in-depth understanding of the applicable statutes, systems and processes since it operates under a very regulated and governed atmosphere. Specialist knowledge in certain areas of banking is also of equal importance. In the wake of these developments in the field of treasury management in banks, the Internal Audit Standards Board of the Institute is issuing this publication Technical Guide on Internal Audit of Treasury Function in Banks for the members of the Institute as well as bankers. This publication is aimed to help the readers in understanding the roles and responsibilities of the treasury function in banks as well as in determining the nature of internal audit procedures to be undertaken. The Technical Guide has been divided into various chapters covering aspects such as treasury products and services, treasury dealing room, organisational structure of a banks treasury, investment portfolio, asset liability management, treasury risks. The guide also deals with the fundamental controls and the internal audit procedures with special reference to treasury/ market risk segments. It also contains detail checklist on internal audit of treasury operations, foreign exchange operations and domestic operations of treasury. It also includes a compilation of relevant circulars issued by the Reserve Bank of India applicable to treasury operations of a bank. For better understanding of the readers, the guide also contains an introduction section and also a glossary of some technical terms used in the Guide. At this juncture, I am grateful to CA. Rajkumar S. Adukia, Central Council Member and convenor of the Group ably assisted by other members of the Group, viz., CA. Pankaj Adukia, CA. Abhay Arolkar and CA. Vijay Joshi for

squeezing out time out of their professional and personal commitments and preparing the basic draft of this Technical Guide. I would also take the opportunity of placing on record my gratitude to CA. Akeel Master for reviewing the draft and giving his valuable comments and suggestions. I also wish to thank CA. Uttam Prakash Agarwal, President and CA. Amarjit Chopra, Vice President for their continuous support and encouragement to the initiatives of the Board. I must also thank my colleagues from the Council at the Internal Audit Standards Board, viz., CA. Ved Jain, CA. Abhijit Bandyopadhyay, CA. Bhavna G. Doshi, CA. Pankaj I. Jain, CA. Sanjeev K. Maheshwari, CA. Mahesh P. Sarda, CA. S. Santhanakrishnan, CA. Vijay K. Garg, Shri Krishna Kant, Shri Manoj K. Sarkar and Shri K. P. Sasidharan for their vision and support. I also wish to place on record my gratitude for the coopted members on the Board, viz., CA. N. K. Aneja, CA. Verendra Kalra, CA. M. Guruprasad, CA. Dilip Kumar Vadilal Shah and CA. K. S. Sundara Raman as also special invitees on the Board, viz., CA. K. P. Khandelwal, CA. S. Sundarraman, CA. Ravi H. Iyer, CA. Rajiv Dave, CA. Pawan Chagti, CA. Ram Mohan Johri and CA. Arindam Guha for their devotion in terms of time as well as views and opinions to the cause of the professional development. I also wish to place on record the efforts put in by CA. Jyoti Singh, Secretary, Internal Audit Standards Board and CA. Arti Aggarwal, Senior Executive Officer, for their inputs in giving final shape to the publication. I am sure that the members of the Institute would find the Technical Guide immensely useful in understanding the intricacies of the subject matter and in carrying out their professional duties diligently.

January 29, 2010 Hyderabad

CA. Shantilal Daga Chairman Internal Audit Standards Board

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GLOSSARY
Arbitrage The purchase or sale of an instrument and simultaneous taking of an equal and opposite position in a related market, in order to take advantage of small price differentials between markets. Securities with identical risk/reward composition, attributes and features. An option contract with identical risk/ reward composition and features. Investment practice that divides funds among different markets to achieve diversification for risk management purposes and/or expected returns consistent with an investors objectives. A risk management technique designed to earn an adequate return while maintaining a comfortable surplus of assets beyond liabilities. Risk associated with the unique circumstances of a particular entity, as they might affect the price of that entitys securities. The departments and processes related to the settlement of financial transactions. Money in the form of authorised currency (including coins) and bank balances. The strategy by which a company administers and invests its cash.

Asset Class At-the-money Asset Allocation

Asset Liability Management (ALM)

Business Risk

Back-office Cash Cash Management

Technical Guide on Internal Audit of Treasury Function in Banks Cash Flow at Risk The Cash Flow at Risk approach answers the question of how large the deviation between actual cash flow and the planned value (or that used in the budget) is due to changes in the underlying risk factors. Cash Position in foreign exchange deals with all the transactions effecting Nostro account, funding of Nostro (in case of overdraft), utilization of surplus cash balance in Nostro and deployment of funds so as to ensure optimum utilization. Examples are delivery under forward contracts, inward/outward telex transfer, etc. It is also called fund position. The Centralised Funds Management System (CFMS) provides for a centralised viewing of balance positions of the account holders across different accounts maintained at various locations of the RBI. A protective options strategy that is implemented after a long position in a stock has experienced substantial gains. It is created by purchasing a put option while simultaneously writing a call option. (also known as hedge wrapper) Expenses incurred while a position is being held, for example, interest on securities bought on margin, dividends paid on short positions, and other expenses. Hedging a cash market position in a futures or option contract for a different but price-related commodity. Indias first credit information bureau. It is a repository of information, which contains viii

Cash Position

Centralised Funds Management System (CFMS)

Collar Option

Cost of Carry

Cross Hedge

Credit Information Bureau of India Ltd. (CIBIL)

Glossary the credit history of commercial and consumer borrowers. CIBIL provides this information to its members in the form of credit information reports. Currency Position It deals with daily sale/purchase of foreign currency/transaction. It could be excess, less or equal. In that case we call it overbought (more purchase) oversold (more sales) or square (purchase matches sales) respectively. The probability of an adverse change in exchange rates. Refers to positions which are opened and closed on the same trading day. A contract that changes in value in relation to the price movements of a related or underlying security, future or other physical instrument. An option is the most common derivative instrument. The weighted average term to maturity of a security's cash flows, where the weights are the present value of each cash flow as a percentage to the security's price. Outcome of notional interest rate shock on interest income.

Currency Risk Day Trading Derivative

Duration

Earnings at Risk Electronic Clearing Services (ECS) ECS (Credit)

Credit clearing ensures multiple repetitive credits to the accounts of constituents of banks situated at various branches of banks on the basis of a single debit to the account of a corporate customer called the user. Debit clearing ensures multiple repetitive debits to the accounts of constituents of ix

ECS (Debit)

Technical Guide on Internal Audit of Treasury Function in Banks banks situated at various branches of banks and a corresponding single debit to the account of a corporate customer called the user. Expected Loss Financial Risk Forward High frequency but low severity from any activity or risk. Uncertainty of results to the investor due to financial modality. The pre-specified exchange rate for a foreign exchange contract settling at some agreed future date, based upon the interest rate differential between the two currencies involved. Analysis of economic and political information with the objective of determining future movements in a financial market. An obligation to exchange a good or instrument at a set price on a future date. (The primary difference between a future and a forward is that futures are typically traded over an exchange (Exchange Traded Contracts ETC), versus forwards, which are considered Over the Counter (OTC) contracts. An OTC is any contract not traded on an exchange.) Growth Stock Stock of a company which is growing earnings and/or revenue faster than its industry or the overall market, and as compared to stock with similar risk features. This risk was in focus in 1974 when Herstattt Bank (a German bank) had to x

Fundamental Analysis

Futures Contract

Herstatt Risk or Systemic Risk

Glossary shutter down, as settlement of second leg of currency could not be completed due to time zone factors. Hedge Indian Financial Network (INFINET) A position or combination of positions that reduces the risk of your primary position. The Indian Financial Network (INFINET) is the communication backbone for the Indian Banking and Financial Sector. All banks, public sector undertakings, private sector organisations, co-operative, etc., and the premier financial institutions in the country are eligible to become members of the INFINET. An economic condition whereby prices for consumer goods rise, eroding purchasing power. The initial deposit of collateral required to enter into a position as a guarantee on future performance. Situation in which an option's strike price is below the current market price of the underlier (for a call option) or above the current market price of the underlier (for a put option). Such an option has intrinsic value. Statistics that are considered to predict future economic activity. An order with restrictions on the maximum price to be paid or the minimum price to be received. The ability of a market to accept large transaction with minimal to no impact on price stability. xi

Inflation

Initial Margin

In the Money

Leading Indicators Limit Order

Liquidity

Technical Guide on Internal Audit of Treasury Function in Banks

Liquidity Risk

The risk that arises from the difficulty of selling an asset. An investment may sometimes need to be sold quickly. Unfortunately, an insufficient secondary market may prevent the liquidation or limit the funds that can be generated from the asset. The closing of an existing position through the execution of an off-setting transaction. A position that appreciates in value if market prices increase. Exposure to changes in market prices. Process of re-evaluating all open positions with the current market prices. These new values then determine margin requirements. The date for settlement or expiration of a financial instrument. All clearings conducted in all clearing houses in all parts of the country will be settled in a single centralized location in central bank money. Negotiated Dealing System (NDS) is an electronic platform for facilitating dealing in Government Securities and Money Market Instruments. The rate at which a dealer is willing to sell a currency. A deal not yet reversed or settled with a physical payment.

Liquidation Long Position Market Risk Mark-to-Market

Maturity National Settlement System (NSS)

Negotiated Dealing System (NDS)

Offer Open Position

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Glossary

Operational Risk

The risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. It is used to describe any transaction that is not conducted over an exchange. A trade that remains open until the next business day. Exposure to changes in governmental policy which will have an adverse effect on an investors position. The netted total holdings of a given currency. In the currency markets, it describes the amount by which the forward or futures price exceed the spot price. Primary dealers can be referred to as Merchant Bankers to the Government of India, comprising the first tier of the government securities market. Satellite dealers work in tandem with the Primary dealers forming the second tier of the market to cater to the retail requirements of the market. An indicative market price, normally used for information purposes only. The price of one currency in terms of another, typically used for dealing purposes. Exposure to uncertain change, most often used with a negative connotation of adverse change.

Over the Counter (OTC) Overnight Political Risk

Position Premium

Primary Dealers

Quote Rate

Risk

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Technical Guide on Internal Audit of Treasury Function in Banks Risk Management The employment of financial analysis and trading techniques to reduce and/or control exposure to various types of risk. Process whereby the settlement of a deal is rolled forward to another value date. The cost of this process is based on the interest rate differential of the two currencies. The process by which a trade is entered into the books and records of the counterparts to a transaction .The settlement of currency trades may or may not involve the actual physical exchange of one currency for another. The risk that one party will fail to deliver the terms of a contract with another party at the time of settlement. Investments position that benefit from a decline in market price. The current market price. Settlement of spot transactions usually occurs within two business days. The difference between the bid and offer prices. SFMS allows intra/inter bank message transfer. This also provides for transfer of file attached in a secured mode. A currency swap is the simultaneous sale and purchase of the same amount of a given currency at a forward exchange rate. Probability of loss due to most unsecured market movements.

Roll Over

Settlement

Settlement Risk

Short Position Spot Price

Spread Structured Financial Messaging Solution (SFMS) Swap

Tail Risk

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Glossary Technical Analysis An effort to forecast prices by analyzing market data, i.e., historical price trends and averages, volumes, open interest, etc. The smallest increment in which the price for a futures contract can move. The cost of buying or selling a financial instrument. The date on which a trade occurs. The total money value of all executed transactions in a given time period. It is a measure of how the market value of an asset or of a portfolio of assets is likely to decrease over a certain time period under usual conditions. The percentage rate of return paid on a bond, note, or other fixed income security if the investor buys and holds it to its maturity date.

Tick Size Transaction Cost Transaction Date Turnover Value at Risk (VAR)

Yield to Maturity (YTM)

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CONTENTS
Foreward.............................................................................................................iii Preface................................................................................................................. v Glossary ............................................................................................................ vii Introduction...................................................................................................... xix

Chapter 1: Treasury An Introduction................................................... 1

Meaning................................................................................................................ 1 Treasury in Banks................................................................................................. 1 Integrated Treasury .............................................................................................. 2 Objectives of Treasury Management ................................................................... 3 Areas in Treasury Management............................................................................ 4

Chapter 2: Treasury Products and Services.......................................... 5

Money Market ....................................................................................................... 5 Forex Market......................................................................................................... 8 Capital Market..................................................................................................... 10 Regulatory Framework for Capital Markets in India............................................ 10

Chapter 3: The Treasury Dealing Room............................................... 12 Chapter 4: Organisational Structure of a Banks Treasury ................ 15
Front-office.......................................................................................................... 15 Mid-office ............................................................................................................ 16 Back-office.......................................................................................................... 17

Chapter 5: Investment Portfolio............................................................ 21

Merchant and Trading in Precious Metal ............................................................ 22 Investment Policy................................................................................................ 22 Internal Control System ...................................................................................... 24 Classification....................................................................................................... 26

Technical Guide on Internal Audit of Treasury Function in Banks Valuation ........................................................................................................... 28 Income Recognition ............................................................................................ 33

Chapter 6: Asset Liability Management ............................................... 35

ALM Models........................................................................................................ 36 Relationship between Treasury and ALM ........................................................... 39 RBI Guidelines on Asset Liability Management ................................................. 39

Chapter 7: Treasury Risks..................................................................... 41

Market Risk......................................................................................................... 41 Credit Risk ......................................................................................................... 43 Operational Risk ................................................................................................. 44 Market Risk Limits .............................................................................................. 45

Chapter 8: Treasury Unit Fundamental Controls ............................. 48

Risk Appetite....................................................................................................... 48 Governance ........................................................................................................ 48 Operating Controls.............................................................................................. 49 Monitoring Controls and Treasury Reporting ...................................................... 54

Chapter 9: Internal Audit of Treasury Operations............................... 56

Scope of Internal Audit with Special Reference to Treasury/Market Risk Segments .................................................................................................. 56 Functional Independence ................................................................................... 56 Code of Ethics and Internal Auditors .................................................................. 57 Stages of Internal Audit ...................................................................................... 57 Reporting ........................................................................................................... 66 Annexures ......................................................................................................... 69 Annexure I Annexure II Annexure III : Specimen Checklist for Internal Audit of Treasury Operations.............................................................................. 71 : Specimen Checklist for Internal Audit of Foreign Exchange Operations of Treasury.......................................... 77 : Specimen Checklist for Internal Audit of Domestic Operations of Treasury .......................................................... 88

Annexure IV : RBI Circulars Relevant to Treasury Operations of a Bank ... 105 xviii

INTRODUCTION
1. Preface to the Standards on Internal Audit issued by the Institute of Chartered Accountants of India defines internal audit as follows: Internal audit is an independent management function, which involves a continuous and critical appraisal of the functioning of an entity with a view to suggest improvements thereto and add value to and strengthen the overall governance mechanism of the entity, including the entitys strategic risk management and internal control system. Internal audit, therefore, provides assurance that there is transparency in reporting, as a part of good governance. 2. Internal audit objectives, with specific reference to treasury function in a bank, includes following important aspects: (a) To ensure that policies and procedures relating to all treasury activities have been framed and are periodically reviewed for adequacy and coverage. To determine whether management has planned for liquidity needs for both normal operating conditions and emergency situations. To ensure adequate physical and access control procedures are in place in the department. To verify existence of satisfactory controls in the processing of deals. To ascertain that the bank receives favorable rates for all its deals. To check authenticity and appropriateness of the sources of inputs used for valuation of unquoted treasury instruments. To check that there is accurate recording and accounting of positions. To ensure that proper documentation procedures and filing systems are in place. To ensure that limits are set for different procedures and they are adhered to in a consistent manner.

(b) (c) (d) (e) (f) (g) (h) (i)

Technical Guide on Internal Audit of Treasury Function in Banks (j) (k) To verify that any violations are promptly reported and properly dealt with. To ensure that reconciliation is being made timely and accurately, including daily reconciliation of the dealers profit and loss to the general ledger. To evaluate the adequacy and effectiveness of the internal control system and to suggest measures for improvement, if any. To indicate probable risk-prone areas within treasury, based on the prevailing external economic environment, and to offer views for safeguarding the interest of the bank. To aid and facilitate risk based supervision function of the RBI (Pillar 2 of the Basel Accord) in regard to a banks treasury/market risk business areas. To ensure compliance with the guidelines issued by the RBI, SEBI, FEMA, FEDAI, etc., and other guidelines issued from time to time. To verify that interest and dividend income is accounted for fully and correctly. To verify that all counterparty confirmations are received.

(l) (m)

(n)

(o) (p) (q)

3. The precise scope of risk-based internal audit of treasury transactions must be determined by each bank for low, medium, high, very high and extremely high risk areas. This Technical Guide contains matter relevant for domestic compliance only. In case of overseas treasury operations, the RBI guidelines on the subject and the domicile country requirements will also be required to be considered.

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CHAPTER 1

TREASURY - AN INTRODUCTION
Meaning
1.1 A treasury is any place where currency or items of high monetary value are kept. The term treasury was first used in classical times to describe the votive buildings erected to house gifts to the gods, such as the Siphnian Treasury in Delphi or other similar buildings erected in Olympia, Greece by competing citystates, to impress others during the ancient Olympic Games. 1.2 A treasury can either be: The part of a government which manages all money and revenue; The funds of a government or institution or individual; The government department responsible for collecting, managing and spending public revenues; A depository (room or building) where wealth and precious objects can be kept; or The center of financial operations within an organisation.

Treasury in Banks
1.3 Traditionally, the treasury function in banks was limited to Funds management, i.e., maintaining adequate cash balances to meet day-to-day requirements and deploying surplus funds from operations. The treasury in a bank is also responsible for maintenance of reserve requirements (Cash Reserve Ratio and Statutory Liquidity Ratio). Treasury was considered a service centre and liquidity management was its main function. The scope of treasury has now expanded beyond liquidity management and treasury has now evolved as a profit centre with its own trading and investment activity. 1.4 Presently, as per RBI circular on Guidelines Accounting Standard 17 (Segment Reporting) Enhancement of Disclosures dated April 18, 2007,

Technical Guide on Internal Audit of Treasury Function in Banks banks are required to report under the following business segments as primary reporting format and for the purpose of segment reporting under Accounting Standard (AS) 17, Segment Reporting: (a) (b) (c) (d) Treasury Corporate / Wholesale banking Retail banking and Other banking operations

Domestic and International segments will be the geographic segments for disclosure. Treasury activity in a bank depends on its size, complexity of operations, area of operations and risk profile.

Integrated Treasury
1.5 Traditionally, the domestic treasury operations were independent of forex dealings of a bank. The need for an integrated treasury rose in the backdrop of interest rate deregulations, liberalization of exchange control, development of forex market and advancement in the settlement systems and dealing environment. The integrated treasury besides performing the functions of the traditional roles also performs the following functions: (a) Reserve Management and Investment- This involves meeting Cash Reserve Ratio (CRR)/Statutory Liquidity Ratio (SLR) obligations and having an optimum mix of investment portfolio. Liquidity and Funds Management- This involves analysis of major cash flows; providing inputs to planning group on funding mix( currency, tenor and cost) and yield expected in credit and investment. Asset Liability Management and Term Money- This involves determining the optimum size and growth rate of the balance sheet; and also price the assets and liabilities in accordance with the prescribed guidelines. Risk Management- This involves managing all market risks associated with the banks assets and liabilities. Risk management also includes management of credit risks on treasury products and operations risks on payments and settlements. Transfer Pricing- Ideally , the integrated unit should provide benchmark rates after assuming market risks to various business groups and

(b)

(c)

(d)

(e)

Treasury - An Introduction product categories about adopting the correct business strategy to ensure that the funds are deployed optimally. (f) Derivative Products- Treasury can develop Interest rate swaps, and other derivative products to hedge the banks exposure and also sell such products to customers or other banks. Arbitrage- This involves simultaneous buying and selling of the same type of assets in two different markets in order to make risk-less profits. Capital Adequacy- This focuses on quality of assets and Return on investments is key criteria for evaluating the efficiency of deployed funds. Canalizing and managing other asset instruments into investment instruments e.g., instruments resulting out of Corporate Debt Restructuring, Asset Reconstruction, Pass Thru certificates, Asset Backed Securitization (ABS), Mortgage Backed Securitization(MBS), etc. To monitor the Rating Migrations on an on going basis and take timely corrective action. To minimize the level of provisional requirements due to non-performing investments.

(g) (h)

(i)

(j) (k)

1.6 Treasury operations play a pivotal role in not only improving the bottom line of banks but also in Balance Sheet management by reducing risks by hedging sensitive exposures. Treasury management would, normally, consist of management of its cash flows, banking, money market and capital market transactions, effective control of the risks associated with those activities, and the pursuit of optimum performance consistent with those risks keeping in mind the business objectives and in consonance with the regulatory framework.

Objectives of Treasury Management

1.7 (a) (b) The objectives of treasury management can be stated as under: To plan, organize and manage funds profitably and to ensure compliance with respect to regulatory requirements (SLR/CRR). Treasury services are also being utilized for Balance Sheet management (CRAR-Capital Risk weighted Adequacy Ratio, Asset and Liability product hedging, etc). 3

Technical Guide on Internal Audit of Treasury Function in Banks (c) (d) (e) (f) To optimize return on surplus funds invested and to keep cost of funds to the minimum. To keep investment portfolio healthy and liquid. To minimize non-performing investments. To take advantage of market volatility and trade/arbitrage in permitted products (including overseas) and avail arbitrage opportunities between rupee and forex treasury operations. To invest in tax free instruments as per the tax planning of the bank. To conduct derivative transactions to hedge banks own balance sheet gaps and exposure of the clients. To optimize returns from forex operations.

(g) (h) (i)

Areas in Treasury Management

1.8 (a) (b) (c) (d) (e) (f) From the viewpoint of a bank or a financial institution, treasury management covers the following major areas: Liquidity risk management Interest risk management Currency risk management Equity risk management Commodity risk management Investment management.

CHAPTER 2

TREASURY PRODUCTS AND SERVICES

Money Market
2.1 Money market desk is involved in management of assets and liabilities of the bank. The main function involves the following: (a) (b) (c) (d) 2.2 (i) Management of statutory reserves viz., Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) of the bank. Daily Funds Management for the bank. Balance Sheet Management. Debt Securities Trading. The Money Market Desk trades in the following Instruments: Treasury-Bills Treasury Bills (T-bills) are short-term debt instruments issued by the Central Government for maturities of 91, 182 and 364 days. Commercial banks, primary dealers, mutual funds, corporates, institutions, provident or pension funds and insurance companies can participate. RBI issues a calendar of T-bill auctions. Periodic auctions are held for their issue and these are tradable in the secondary market, which is quite active. T-bills are issued at a discount to face value and are redeemable at par on maturity. A Commercial Paper (CP) is an unsecured money market instrument through which corporate entities raise short-term money.

Range of Products

(ii)

Commercial Paper (CP)

Technical Guide on Internal Audit of Treasury Function in Banks It is issued as per RBI guidelines. (Refer Annexure IV for Master Circular on Guidelines for Issue of Commercial Paper dated July 1, 2009.) It is issued at a discount to face value It can be issued either in the form of a promissory note or in a dematerialised form. It attracts issuance stamp duty in primary issue. It has to be mandatorily rated for issuance by one of the four credit rating agencies. It can be issued for maturities between a minimum of seven days and a maximum upto one year from the date of issue. Corporates can participate both as lenders and borrowers. It can be issued for a maximum period of 89 days. Pricing is linked to a benchmark like, MIBOR. Flexible call or put option could be exercised. Certificate of Deposits (CDs) are unsecured, negotiable money market instrument usually issued at a discount on face value. (Refer Annexure IV for RBI Master Circular on Guidelines for Issue of Certificates of Deposit dated July 1, 2009.) The maturity period is from 7 days to 12 months. It attracts issuance stamp duty and is issued in dematerialised form or as a Usance Promissory note. . They are negotiable, and transferred by endorsement and delivery, after 15 days of issue. CBLO is a money market instrument designed to meet the borrowing and lending needs of banks, financial institutions, mutual funds, NBFCs and corporates.

(iii)

Call Linked Products

(iv)

Certificates of Deposit (CD)

(v)

Collateralised Borrowing and Lending Obligations (CBLO)

Treasury Products and Services (vi) Borrowing and lending is collateralised i.e., secured using G-Sec or T-Bills. Trades are screen based and with Clearing Corporation of India Limited (CCIL) being central counter party.

Repo/ Reverse Repo

The Reserve Bank of India (Amendment) Act, 2006 provides a legal definition of repo and reverse repo as an instrument for borrowing (lending) funds by selling (purchasing) securities with an agreement to repurchase (resell) the securities on a mutually agreed future date at an agreed price which includes interest for the funds borrowed (lent). Such a transaction is called a Repo when viewed from the perspective of the seller of the securities and Reverse Repo when viewed from the perspective of the buyer of the securities. Thus, whether a given agreement is termed as a Repo or Reverse Repo depends on which party initiated the transaction. Market participants may undertake repos from any of the three categories of investments, viz., Held for Trading, Available for Sale and Held to Maturity. (vii) Liquidity Adjustment Facility (LAF) with RBI Liquidity adjustment facilities are used to aid banks in resolving any shortterm cash shortages during periods of economic instability or from any other form of stress caused by forces beyond their control. All commercial banks (except RRBs) and Primary Dealers having current account and SGL account with RBI can use eligible securities as collateral through a repo agreement and will use funds to alleviate their short-term requirements, thus remaining stable. RBI has issued Circular Liquidity Adjustment Facility Revised Scheme on March 25, 2004 which lays down the revised scheme effective from March 29, 2009. Operation of LAF through repo by means of daily auctions has provided the benchmark for collateralised lending and borrowing in the money market. This mechanism has helped in providing liquidity to the government securities market.

Technical Guide on Internal Audit of Treasury Function in Banks (viii) Inter-Bank Participation Certificate (IBPC)

The objective behind introduction of this instrument is to even out the short term liquidity within the banking system. This instrument was introduced in 1988 and Scheduled commercial banks were permitted to share a portion of their eligible loan assets with other banks through issue of IBPC. RBI has vide Circular Inter-Bank Participations Scheduled Commercial Banks dated August 4, 2009 has allowed Regional Rural Banks (RRBs) to also issue IBPCs. The bank sharing its loan portfolio is known as issuing bank, and the bank which is buying the portion of loan portfolio through IBPC is known as participating bank. Both issuing and participating bank will have to execute participation contract. The loan asset which is to be shared with participating bank must be a standard loan asset and it cannot be more than 40 per cent of the outstanding advance at the time of issue of IBPC. As per the existing guidelines of the RBI, commercial banks have been permitted to issue two types of IBPCs which are as under: (a) With Risk Sharing Basis Under risk sharing participation certificate scheme, risk of default of the borrower is shared by the issuing bank and the participating bank. The participating bank has no recourse to the issuing bank if there is default by the borrower for that loan amount which is shared. The IBPC can be issued for a minimum period of 91 days and a maximum period of 180 days. (b) Without Risk Sharing Basis Under without risk sharing participation certificate scheme, the participating bank does not share any risk with the issuing bank and, therefore, participating bank has a right to receive the payment from the issuing bank even though the borrower has defaulted in its payment. Tenor of IBPC under this scheme cannot be more than 90 days.

Forex Market
2.3 Customers (exporters and importers) buy and sell their foreign exchange needs from the treasury in various currencies depending on their business exposure. Rates are quoted by the dealers depending on the amounts and delivery period. Dealers trade on these flows from the customers and try to maximize profits. Besides, customer flows, dealers take proprietary position in various currencies in Spot and Forward contracts for trading. 8

Treasury Products and Services

Range of Products
2.4 (i) The following are products traded in Foreign Exchange Market: Spot Contract

It is the simplest and most common foreign exchange transaction widely used by corporates to cover their receivables and payables. The commitment by the client is to buy and sell one currency against another at a fixed rate for delivery two business days after the transaction. This eliminates the possible risk due to exchange rate fluctuation for the client. Corporate can buy or sell foreign currency for genuine transactional purposes only. (ii) Forward Contract It is a contract between the bank and its customers in which the exchange/conversion of currencies would take place at future date at a rate of exchange in advance under the contract. The essential idea of entering into a forward contract is to peg the price and thereby avoid the price risk. Forward Rates = spot rate +/- premium/discount (iii) Currency Swaps It is an agreement between two parties to exchange obligations in different currencies at the beginning, during the tenure and at the end of the transaction. At the start, initial principal is exchanged, though it is not obligatory. Periodic interest payments (either fixed or floating) are exchanged throughout the life of the contract. The principal is exchanged invariably on termination at the exchange rate decided at the start of the transaction. By means of currency swap, the associated currency and interest rate risks on the underlying asset can be hedged. (iv) Interest Rates Swaps (IRS) It is a financial transaction in which two counterparties agree to exchange streams of cash flows throughout the life of contract in which one party pays a fixed interest rate on a notional principal and the other pays a floating rate on the same sum. The basic purpose of IRS is to hedge the interest rate risk of constituents and enable them to structure the asset/liability profile best suited to their respective cash flows.

Technical Guide on Internal Audit of Treasury Function in Banks (v) Options

It is a contract between the bank and its customers in which the customer has the right to buy/sell a specified amount of underlying asset at fixed price within a specific period of time, but has no obligation to do so. In this contract, the customer has to pay specified amount upfront to the counterparty which is known as premium. This is in contrast to the forward contract in which both parties have a binding contract. This is a facility offered to customers to enable them to book forward contracts in cross currencies at a target rate or price. This facility helps the customers to encash the currency movements in late European market, New York market and early Asian market (vi) Forward Rate Agreement (FRA) A Forward Rate Agreement (FRA) is an agreement between the bank and a customer to pay or receive the difference (called settlement money) between an agreed fixed rate (FRA rate) and the interest rate prevailing on stipulated future date (the fixing date) based on a notional amount for an agreed period (the contract period). In short, this is a contract whereby interest rate is fixed now for a future period. The basic purpose of the FRA is to hedge the interest rate risk. For example, if a borrower is going to borrow FC loan for 6 months at LIBOR rate after 3 months, he can buy an FRA whereby he can fix interest rate for the loan.

Capital Market
2.5 Funds are also invested through:

a)

Investment in units of Mutual fund- Mutual Fund is a trust that

pools the savings of a number of investors who share a common financial goal. Each scheme of a mutual fund can have different character and objectives. Mutual funds issue units to the investors, which represent an equitable right in the assets of the mutual fund.

b)

Investment in Equity IPO These are securities which were not

previously available and are offered to the investing public for the first time.

Regulatory Framework for Capital Markets in India

2.6 In India, the capital market is regulated by the Capital Markets Division of the Department of Economic Affairs, Ministry of Finance. The division is responsible for formulating the policies related to the orderly growth and development of the securities markets (i.e., share, debt and 10

Treasury Products and Services derivatives) as well as for protecting the interest of the investors. In particular, it is responsible for following: (i) (ii) (iii) (iv) institutional reforms in the securities markets; building regulatory and market institutions; strengthening investor protection mechanism; and providing efficient legislative framework for securities markets, such as Securities and Exchange Board of India Act, 1992 (SEBI Act 1992), Securities Contracts (Regulation) Act, 1956, and the Depositories Act, 1996.

The Division administers these legislations and the rules framed thereunder. 2.7 The Securities and Exchange Board of India (SEBI) is the regulatory authority established under the SEBI Act 1992. The Preamble of the SEBI describes the basic functions of the SEBI, as to protect the interests of the investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto. It involves regulating the business in stock exchanges; supervising the working of stock brokers, share transfer agents, merchant bankers, underwriters, etc; as well as prohibiting unfair trade practices in the securities market. The following departments of SEBI take care of the activities in the secondary market: Market Intermediaries Registration and Supervision Department (MIRSD) It is concerned with the registration, supervision, compliance monitoring and inspections of all market intermediaries in respect of all segments of the markets, such as equity, equity derivatives, debt and debt related derivatives. Market Regulation Department (MRD) It is concerned with formulation of new policies as well as supervising the functioning and operations (except relating to derivatives) of securities exchanges, their subsidiaries, and market institutions such as clearing and settlement organizations and depositories. Derivatives and New Products Departments (DNPD) It is concerned with supervising trading at derivatives segments of stock exchanges, introducing new products to be traded and consequent policy changes.

11

CHAPTER 3

THE TREASURY DEALING ROOM

3.1 The Treasury Dealing Room within a bank is, generally, the clearinghouse for matching, managing and controlling market risks. It may provide funding, liquidity and investment support for the assets and liabilities generated by regular business of the bank. The Dealing Room is responsible for the proper management and control of market risks in accordance with the authorities granted to it by the bank's Risk Management Committee. The Dealing Room is also responsible for meeting the needs of business units in pricing market risks for application to its products and services. The Dealing Room acts as the bank's interface to international and domestic financial markets and, generally, bears responsibility for managing market risks in accordance with the instructions received from the bank's Risk Management Committee. 3.2 The Dealing Room may also have allocated to it by the Risk Management Committee, a discretionary limit within which it may take market risk on a proprietary basis. For these reasons, effective control and supervision of bank's Dealing Room activities is critical to its effectiveness in managing and controlling market risks. 3.3 It is critical to effective functioning of the Dealing Room that the dealer has access to a comprehensive Dealing Room manual covering all aspects of their day-to-day activities. All dealers active in day-to-day trading activities must acknowledge familiarity with and provide an undertaking in writing to adhere to the bank's dealing guidelines and procedures. The Dealing Room procedures manual should be comprehensive in nature covering operating procedures for all the banks trading activities in which the Dealing Room is involved and, in particular, must cover the bank's requirements in respect of: a) Code of Conduct - All dealers active in day-to-day trading activities in the lndian market must acknowledge familiarity with and provide an undertaking to adhere to Foreign Exchange Dealers Association of India (FEDAI) code of conduct (and Fixed Income Money Market

The Treasury Dealing Room and Derivatives Association of India (FIMMDA) Code of Conduct where applicable). b) Adherence to Internal Limits - All dealers must be aware of, acknowledge and provide an undertaking to adhere to the limits governing their authority to commit the bank to risk exposures, as they apply to their own particular risk responsibilities and level of seniority. Adherence to RBI Limits and Guidelines - All dealers must acknowledge and provide an undertaking to adhere to their responsibility to remain within RBI limits and guidelines in their area of activity. Dealing with Brokers - All dealers should be aware of, acknowledge and provide an undertaking to remain within the guidelines governing the bank's activities with brokers, including conducting business only with brokers authorised by bank's Risk Management Committee on the bank's Brokers Panel. The following are important aspects in this regard: (i) Ensuring that their activities with brokers do not allow for the brokers to act as principals in transactions but remain strictly in their authorised role as market intermediaries. Requiring brokers to provide all brokers notes and confirmations of transactions before close of business each day (or exceptionally by the beginning of the next business day, in which case the note must be prominently marked by the broker as having been transacted the previous day, and the back office must recast the previous night's position against limits reports) to the bank's back office for reconciliation with transaction data. Ensuring all brokerage payments and statements are received. reconciled and paid by the bank's back office department and under no circumstances authorised or any payment released by dealers. Prohibiting acceptance by the dealers of gifts, gratifications or other favours from brokers, instances of which should be

c)

d)

(ii)

(iii)

(iv)

13

Technical Guide on Internal Audit of Treasury Function in Banks reported in detail to RBIs Department of Banking Supervision indicating the nature of the case. (v) (vi) Prohibiting dealers from nominating a broker in transactions not done through that broker. Rules should be framed for prompt investigation of complaints against dealers and malpractices by brokers and reporting to FEDAI and RBIs Department of Banking Supervision.

e)

Dealing Hours - All dealers should be aware of the bank's normal trading hours, cut-off time for overnight positions and rules governing after hours and off-site trading (if allowed by the bank). Security and Confidentiality - All dealers should be aware of the bank's requirements in respect of maintaining confidentiality over its own and its customers' trading activities as well as the responsibility for secure maintenance of access media, keys, passwords and PINS. Staff Rotation and Leave Requirements - All dealers should be aware of the requirement to take at least one period of leave of not less than 14 days continuously per annum, and the bank's internal policy in regards to staff rotation. Customer/User Appropriateness and Suitability Policy - Banks usually have a Customer/User Appropriateness and Suitability Policy in place for transacting in complex treasury instruments such as, derivatives. The objective of such policy is to protect the bank against the credit, reputation and litigation risks which may arise on account of misselling products to users who may not understand the nature of the risks inherent in these transactions or products. All front office sales team or dealers, must be aware of and be educated about such policy. Sales dealers should conduct proper due diligence regarding user appropriateness and suitability of products before offering derivative products or other complex treasury instruments to users.

f)

g)

h)

14

CHAPTER 4

ORGANISATIONAL STRUCTURE OF A BANKS TREASURY

4.1 The various functions handled by a bank treasury can be divided as under: (a) (b) (c) Front-office Mid-office Back-office : : : Dealing Risk taking Risk Management and Management Information Confirmations, Settlements, Accounting and Reconciliation.

Front-office
4.2 The scope of functions of front-office, as the name itself states, is to buy, sell and trade in money market instruments, securities, forex, equity, derivatives and precious metal. The decisions in regard to any restructuring, reorganizing, pre payment, etc. are taken at front-office. The front-office dealers keep track of and develop their views on different asset class, securities, currencies, derivative products which are put up to Department Head/Investment Committee for arriving at trading/strategic investment entry/exit decisions. 4.3 Front-office functions can be summarized as under: Significant interaction with various trading and delivery teams; Liquidity Management; ALM implementation; Striking of Deals (trading) and earning profits from trading; Maintenance of CRR and SLR; Follow When Issued Securities place order and square up the order well in time against future holding;

Technical Guide on Internal Audit of Treasury Function in Banks Manage short selling and square off the securities well in advance; and Reporting to respective authorities.

Mid-office
4.4 The mid-office can be considered to be the conscience keeper of the treasury. It is responsible for the critical functions of independent market risk monitoring, measurement, analysis and reporting for the bank's AssetLiability Management Committee (ALCO). Ideally, this is a full time function of reporting to, or encompassing the responsibility for, acting as Asset-Liability Management Committee (ALCO)'s secretariat. An effective mid-office provides independent risk assessment which is critical to Asset-Liability Management Committee (ALCO)'s key function of controlling and managing market risks in accordance with the mandate established by the Board/Risk Management Committee. It is a highly specialised function and must include trained and competent staff, and expert in market risk concepts. 4.5 The methodology of analysis and reporting will vary from bank to bank depending on their degree of sophistication and exposure to market risks. These same criteria will govern the reporting requirements demanded of the mid-office, which may vary from simple gap analysis to computerized VaR modeling. Mid-office staff may prepare forecasts (simulations) showing the effects of various possible changes in market conditions related to risk exposures. Banks using VaR or modeling methodologies should ensure that its Asset-Liability Management Committee (ALCO) are aware of and understand the nature of the output, how it is derived, assumptions and variables used in generating the outcome and any shortcomings of the methodology employed. Segregation of duties principles must be evident in this function which must report to Asset-Liability Management Committee (ALCO) independently of the treasury function. 4.6 (i) The main functions of mid-office can be summarized as under: Management of risks: (a) Market risk which arises on account of: Interest rate movement Foreign exchange rate movement Commodity prices Equity prices 16

Organisational Structure of a Banks Treasury (b) (c) (ii) (iii) (iv) Liquidity risk Country risk

Independent market risk monitoring, measurement, analysis and reporting for banks ALCO (Asset Liability Management Committee). Formation of Investment policy for banks treasury. Formation of ALM policy for the bank.

Back-Office
4.7 The back-office is responsible for delivery and settlement of all transactions concluded by the front-office officials. It is also responsible for reconciliation of securities portfolio with respective holding entity. Payment of brokerage to brokers, empanelment of brokers, reviewing performance of brokers and monitoring the volume of business passed on to each broker is also under the purview of back-office. 4.8 The main functions of back-office can be summed up as under: Co-ordination with front-office to ensure optimum usage of all treasury dealing systems; Internal control and check over treasury dealings, confirmation and settlement activities, and accounting thereof; Ensuring compliance with stated treasury procedures and stipulations; Monitoring of SLR/CRR maintenance and submission of compliances, MIS to Board of Directors and RBI; Audit facilitation (concurrent, statutory and AFI / RBI).

4.9 The key controls over market risk activities, and particularly over dealing room activities, exist in the back-office. It is critical that clear segregation of duties and reporting lines is maintained between dealing room staff and back-office staff, as well as clearly defined physical and systems access is also maintained between the two areas. It is essential that critical back-office controls are executed diligently and completely at all times including: a) The control over confirmations both inward and outward: All confirmations for transactions concluded by the dealing room must be issued and received by the back-office only. Discrepancies in 17

Technical Guide on Internal Audit of Treasury Function in Banks transaction details, non-receipts and receipts of confirmations without application must be resolved promptly to avoid instances of unrecorded risk exposure. b) The control over dealing accounts (vostros and nostros): Prompt reconciliation of all dealing accounts is an essential control to ensure accurate identification of risk exposures. Discrepancies, non-receipts and receipts of funds without application must be resolved promptly to avoid instances of unrecorded risk exposure. Unreconciled items and discrepancies in these accounts must be kept under heightened management supervision, and as such discrepancies may at times have significant liquidity impacts, represent unrecognised risk exposures, or at worst represent collusion or fraud. Revaluations and marking-to-market of market risk exposures: All market rates used by the bank for marking risk exposures to market or used to revalue assets or for risk analysis models such as, Value at Risk analysis must be sourced independently of the dealing room in order to provide an independent risk and performance assessment. One of the audit objectives with specific reference to treasury also includes verifying the authenticity and appropriateness of the sources of inputs used for valuation of unquoted treasury instruments and derivative products (such as swaps, options) which the bank has entered into. When quotations or rates are not directly available for treasury instruments, then usually such instruments are valued as at any reporting date using appropriate valuation techniques or models. Such valuation techniques involve an amount of subjectivity and also certain objective parameters such as, reference to any recent past market transaction in the underlying instrument or a like instrument. Such model based valuations require data feed or inputs (such as volatility in case of valuing options using Black-Scholes Model). The inherent risk here is the appropriateness of the input parameters fed into the valuation model/technique, stale quotes. For example, where the bank has positions in interest rate swaps then for the purpose of projecting the future floating interest rates (for projecting

c)

18

Organisational Structure of a Banks Treasury future cashflows) the appropriate interest rate curve should be used (this is usually the par curve). As per extant RBI guidelines, investments in unquoted equity shares should be valued at their break-up value, however, the latest financials of the respective companies may not be available to the banks for determining the break-up value. The risk of using inappropriate or stale quotes for valuation has a direct bearing not only on financial reporting but also on computing exposure limits. Thus, the scope of the auditor should include an evaluation of the control environment surrounding the valuation and marking-to-market of treasury instruments. If the bank has an established and independent mid-office function, the responsibility or soliciting quotes, rates, curves resides with the mid-office. Another related risk to valuation and marking-to-market of treasury investments is the timely monitoring of non-performing investments (NPIs). RBI has defined NPIs as investments where the interest/return or principal has been in arrears for a period exceeding 90 days. The important consideration for NPIs is that, banks should not reckon income on such investments and should provide for depreciation on them appropriately, such depreciation is further not allowed to be set-off against appreciation on other performing investments. The back-office of a bank should have appropriate procedures/controls instated for timely capturing of NPIs. d) Monitoring and reporting of risk limits and usage: Reporting of usage of risk against limits established by the Risk Management Committee (as well as Credit Department for Counterparty risk limits) should be maintained by the back-office independently of the dealing room. Maintenance of all limit systems must also be undertaken by the back-office and access to limit systems (such as counterparty limits, overnight limits, etc.) must be secure from access and tampering by unauthorised personnel. If the bank has an established and independent mid-office function, this responsibility may properly pass on to the mid-office. Control over payments systems: The procedures and systems for making payments must be under, at least, dual control in the backoffice independent from the dealing function. Payment systems

e)

19

Technical Guide on Internal Audit of Treasury Function in Banks should be at all times secure from access or tampering by unauthorised personnel. f) Reconciliation of dealers profit or loss account: All dealers at the end of day prepare their profit or loss account for the day and compute their net open position. The back-office personnel who are independent of the front-office dealer are responsible for recording and processing of the deals/transactions into the general ledger system or the core banking system. Banks should have in place a process of daily reconciliation of the dealers profit or loss vis--vis the profit or loss as per the general ledger system to avoid instances of unrecorded transactions. Controls in respect of financial reporting and MIS: A banks financial statements include many exhaustive disclosures with treasury related disclosures forming a significant portion thereof (such as, concentration risk for swaps, PV01 disclosures for derivatives, maturity pattern for investments, forex). The collation of information to be presented in these disclosures is tedious and requires liaisoning with several treasury sub-functions. Further, banks also have an exhaustive base of MIS (such as ALM, concentration exposures, VAR or other measures capturing market risk, net open positions) presented at the various senior management committees (such as ALCO, Risk, Board, Investment, Credit). Contents of an MIS pack or in a banks financials have a direct bearing on the management decision making and users of financial statements. The internal auditor should include within his scope the controls around information flow and data integrity for collation and preparation of the disclosures and MIS reports.

g)

20

CHAPTER 5

INVESTMENT PORTFOLIO
5.1 The primary function of banks is to accept deposits and to lend money. Earlier, the investments were made only to meet out the SLR requirements. By the span of time the face of banking has changed. Due to the recessionary conditions in the economy the credit demand decreased substantially. It forced the banks to invest the surplus medium to long term funds in SLR/NSLR securities and debts. The investments portfolio of a bank may have a number of varieties of instruments. Keeping in view the return from lending and surplus investments, dynamic decision making is required whereby return on deployment is optimized. 5.2 (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) The banks investment book may comprise the following: Central Government dated securities State Government developmental loans Treasury Bills Trust Securities Equity / Preference Shares Units of Mutual Funds Pass through Certificate/CDR/ARCIL Commercial Papers Corporate Bonds and Debentures Bonds and debentures of PSUs, Government / Semi-Government autonomous bodies, etc. Venture capital investments Investment in subsidiaries and joint ventures(Indian/overseas) Other Asset backed/Mortgage backed securities.

Technical Guide on Internal Audit of Treasury Function in Banks

Merchant and Trading in Precious Metal

5.3 The RBI launched the gold import scheme in September, 2000 and subsequently, included import of silver business in the same. Precious metal dealing desk functions is a part of inter-bank forex desk in the front office of the treasury. Presently, banks only deal in gold and silver in terms of approval obtained from the RBI. Gold and silver are imported on a consignment basis from the designated supplier on the terms and conditions agreed to with them by the bank. Precious metal consignment is kept in the vaults of designated branches or security agencies. As and when the parts of consignment are sold to the importers in India the remittances are being made to the suppliers for the gold quantity on spot payment basis. Similarly, trading in gold and silver is done with the agreement tied foreign banks.

Investment Policy
5.4 RBI has issued Master Circular on Prudential Norms for Classification,Valuation and Operation of Investment Portfolio by Banks (DBOD No. BP. BC.3 / 21.04.141 / 2009-10) on July 1, 2009 (Refer Annexure IV). The following is a gist of RBI guidelines issued to banks with respect to investment policy : (a) (b) Banks should frame Internal Investment Policy Guidelines and obtain the Boards approval. The investment policy guidelines should be implemented to ensure that operations in securities are conducted in accordance with sound and acceptable business practices. The size of the banks operations, composition of assets and liabilities, risk policy and risk appetite are to be considered while framing the policy. The broad structure of the Investment policy should be based on: (i) (ii) (iii) No sale transaction is to be completed without the bank actually holding the relative security. Banks may sell a government security already contracted for purchase subject to certain conditions. Banks successful in the auction of primary issue of government securities, may enter into contracts for sale of the allotted

(c)

(d)

22

Investment Portfolio securities in accordance with the terms and conditions given in the Master Circular. (iv) All the transactions put through by a bank, either on outright basis or ready forward basis and whether through the mechanism of Subsidiary General Ledger (SGL) Account or Bank Receipt (BR), should be reflected on the same day in its investment account and, accordingly, for SLR purpose wherever applicable. All brokerage deals have to be specifically approved by the delegated authorities in the bank and a separate account of brokerage paid, broker-wise, should be maintained. For issue of Bank Receipts (BRs), the banks should adopt the format prescribed by the Indian Banks' Association (IBA) and strictly follow the guidelines prescribed by them in this regard. The banks, subject to the above, could issue BRs covering their own sale transactions only and should not issue BRs on behalf of their constituents, including brokers. The banks should be circumspect while acting as agents of their broker clients for carrying out transactions in securities on behalf of brokers. Investment in equity shares and debentures must be undertaken after considering the following: Build up adequate expertise in equity research by establishing a dedicated equity research department, as warranted by their scale of operations; Formulate a transparent policy and procedure for investment in shares, etc., with the approval of the Board; and The decision in regard to direct investment in shares, convertible bonds and debentures should be taken by the Investment Committee set up by the bank's Board. The Investment Committee should be held accountable for the investments made by the bank. the level of authority to put through deals, 23

(v)

(vi)

(vii)

(viii)

(ix)

The banks Board of Directors should specify:

Technical Guide on Internal Audit of Treasury Function in Banks procedure to be followed for obtaining the sanction of the appropriate authority, procedure to be followed while putting through deals, various prudential exposure limits, and the reporting system.

Internal Control System

5.5 The abovementioned Master Circular issued by the RBI requires the banks to adopt the following guidelines for internal control system while undertaking investment transactions: (a) (b) There should be a clear functional separation of trading, settlement, monitoring and control, and accounting. There should be a functional separation of trading and back office functions relating to banks' own Investment Accounts, Portfolio Management Scheme (PMS) Clients' Accounts and other Constituents (including brokers') accounts. PMS Clients Accounts should be subjected to a separate audit by external auditors. For every transaction entered into, the trading desk should prepare a deal slip containing data relating to following: nature of the deal, name of the counter-party, whether it is a direct deal or through a broker, and if through a broker, name of the broker, details of security, amount, price, and contract date and time.

(c) (d)

The deal slips should be serially numbered and controlled separately to ensure that each deal slip has been properly accounted for. Once the deal is concluded, the dealer should immediately pass on the deal slip

24

Investment Portfolio to the back office for recording and processing. For each deal there must be a system of issue of confirmation to the counterparty. (e) Once a deal has been concluded, there should not be any substitution of the counter party bank by another bank by the broker, through whom the deal has been entered into; likewise, the security sold/purchased in the deal should not be substituted by another security. The Accounts Section should independently write the books of account on the basis of vouchers passed by the back office. Records of SGL and BR transactions should be maintained. Balances as per bank's books should be reconciled at quarterly intervals with the balances in the books of the Public Debt office (PDOs). The investment transactions should be reported to the top management, on a weekly basis covering the following: (j) (k) details of transactions in securities, details of bouncing of SGL transfer forms issued by other banks, BRs outstanding for more than one month, and a review of investment transactions undertaken during the period.

(f) (g) (h) (i)

Bankers' cheques/pay orders should be issued for third party transactions, including inter-bank transactions. In case of investment in shares, the surveillance and monitoring of investment should be done by the Audit Committee of the Board. In each of its meetings it shall review: the total exposure of the bank to capital market both fund based and non-fund based, in different forms, ensure that the guidelines issued by RBI are complied with, and adequate risk management and internal control systems are in place.

(l)

In order to avoid any possible conflict of interest, it should be ensured that the stockbrokers as directors on the Boards of banks or in any other capacity, do not involve themselves in any manner with the Investment Committee or in the decisions in regard to making investments in shares, etc., or advances against shares. 25

Technical Guide on Internal Audit of Treasury Function in Banks (m) (n) An on-going internal audit system should be in place to report the deficiencies directly to the management of the bank. The banks should get compliance in key areas certified by their statutory auditors and furnish such audit certificate to the Regional Office of Department of Banking Supervision of RBI under whose jurisdiction the HO of the bank falls.

Classification
5.6 The RBIs Master Circular on Prudential Norms for Classification, Valuation and Operation of Investment Portfolio by Banks lays down that the entire investment portfolio of the banks (including SLR securities and non-SLR securities) should be classified under three categories: (a) (b) (c) Held to Maturity Available for Sale and Held for Trading.

However, in the balance sheet, the investments will continue to be disclosed as per the following existing six classifications: (a) (b) (c) (d) (e) (f) Government securities, Other approved securities, Shares, Debentures and Bonds, Subsidiaries/ joint ventures, and Others (CP, Mutual Fund Units, etc.).

Held to Maturity
5.7 The securities acquired by the banks with the intention to hold them up to maturity will be classified under Held to Maturity (HTM). The investments included under Held to Maturity should not exceed 25 per cent of the banks total investments. The banks may include, at their discretion, under Held to Maturity category securities less than 25 per cent of total investment. The following investments will be classified under Held to Maturity but will not be accounted for the purpose of ceiling of 25% specified for this category:

26

Investment Portfolio a) Re-capitalisation bonds received from the Government of India towards their re-capitalisation requirement and held in their investment portfolio. This will not include re-capitalisation bonds of other banks acquired for investment purposes. Investment in subsidiaries and joint ventures. [A joint venture would be one in which the bank, along with its subsidiaries, holds more than 25% of the equity.] The investments in debentures/ bonds, which are deemed to be in the nature of an advance.

b)

c)

5.8 Banks are, however, allowed since September 2, 2004, to exceed the limit of 25 per cent of total investment under HTM category provided the excess comprises only of SLR securities; and the total SLR securities held in HTM is not more than 25 per cent of their DTL as on last Friday of the second preceding fortnight. Profit on sale of investments in this category should be first taken to the Profit & Loss Account and thereafter be appropriated to the Capital Reserve Account. Loss on sale will be recognised in the Profit & Loss Account.

Available for Sale and Held for Trading

5.9 The securities acquired by the banks with the intention to trade by taking advantage of the short-term price/interest rate movements will be classified under Held for Trading (HFT). The securities which do not fall within the above two categories will be classified under Available for Sale. The banks will have the freedom to decide on the extent of holdings under Available for Sale and Held for Trading categories taking into account various aspects such as basis of intent, , trading strategies, risk management capabilities, tax planning, manpower skills, capital position. HFT securities are to be sold within 90 days from the date of acquisition. Profit or loss on sale of investments in both the categories will be taken to the Profit & Loss Account.

Shifting among Categories

5.10 As per the RBI Guidelines, banks may shift investments to/from Held to Maturity category with the approval of the Board of Directors once a year. Such shifting will normally be allowed at the beginning of the accounting year. No further shifting to/from this category will be allowed during the remaining part of that accounting year. Banks may shift investments from Available for Sale category to Held for Trading category with the approval of their Board of 27

Technical Guide on Internal Audit of Treasury Function in Banks Directors/ ALCO/ Investment Committee. In case of exigencies, such shifting may be done with the approval of the Chief Executive of the bank/ Head of the ALCO, but should be ratified by the Board of Directors/ ALCO. 5.11 Shifting of investments from Held for Trading category to Available for Sale category is generally not allowed. However, it will be permitted only under exceptional circumstances with the approval of the Board of Directors/ ALCO/ Investment Committee. Transfer of scrips from one category to another, under all circumstances, should be done at the acquisition cost/ book value/ market value on the date of transfer, whichever is the least, and the depreciation, if any, on such transfer should be fully provided for.

Valuation
5.12 (a) RBI Guidelines for valuation for the three categories is as follows: Held to maturity (i) Investments classified under Held to Maturity category need not be marked to market and will be carried at acquisition cost, unless it is more than the face value, in which case the premium should be amortised over the period remaining to maturity. Banks should recognise any diminution, other than temporary, in the value of their investments in subsidiaries/ joint ventures which are included under Held to Maturity category and provide therefore. Such diminution should be determined and provided for each investment individually. The individual scrips in the Available for Sale category will be marked to market at quarterly or at more frequent intervals. While the net depreciation under each classification should be recognised and fully provided for, the net appreciation under each classification should be ignored. The book value of the individual securities would not undergo any change after the marking of market. The provisions required to be created on account of depreciation in the Available for Sale category in any year 28

(ii)

(b)

Available for sale (i) (ii)

(iii) (iv)

Investment Portfolio should be debited to the Profit & Loss Account and an equivalent amount (net of tax benefit, if any, and net of consequent reduction in the transfer to Statutory Reserve) or the balance available in the Investment Fluctuation Reserve Account, whichever is less, shall be transferred from the Investment Fluctuation Reserve Account to the Profit & Loss Account. In the event provisions created on account of depreciation in the Available for Sale category are found to be in excess of the required amount in any year, the excess should be credited to the Profit & Loss Account and an equivalent amount (net of taxes, if any, and net of transfer to Statutory Reserves as applicable to such excess provision) should be appropriated to the Investment Fluctuation Reserve Account to be utilised to meet future depreciation requirement for investments in this category. The amount debited to the Profit & Loss Account for provision and the amount credited to the Profit & Loss Account for reversal of excess provision should be debited and credited respectively under the head Expenditure Provisions & Contingencies. The amounts appropriated from the Profit & Loss Account and the amount transferred from the Investment Fluctuation Reserve to the Profit & Loss Account should be shown as below the line items after determining the profit for the year. (c) Held for Trading category The individual scrips in the Held for Trading category will be revalued at monthly or at more frequent intervals and provided for as in the case of those in the Available for Sale category. The book value of the individual scrip will change with the revaluation.

General
5.13 In respect of securities included in any of the three categories where interest/ principal is in arrears, the banks should not reckon income on the securities and should also make appropriate provisions for the depreciation in the value of the investment. The banks should not set-off the depreciation requirement in respect of these non-performing securities against the appreciation in respect of other performing securities.

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Technical Guide on Internal Audit of Treasury Function in Banks

Market Value
5.14 The market value for the purpose of periodical valuation of investments included in the Available for Sale and the Held for Trading categories would be the market price of the scrip as available from the trades/ quotes on the stock exchanges, SGL account transactions, price list of RBI, prices declared by Primary Dealers Association of India (PDAI) jointly with the Fixed Income Money Market and Derivatives Association of India (FIMMDA) periodically. In respect of unquoted securities, the procedure as detailed below should be adopted.

Unquoted Non-SLR Securities-Debentures/ Bonds

5.15 All debentures/ bonds other than debentures/ bonds which are in the nature of advance, should be valued on the YTM basis. Such debentures/ bonds may be of different companies having different ratings. These will be valued with appropriate mark-up over the YTM rates for Central Government securities as put out by PDAI/ FIMMDA periodically. The mark-up will be graded according to the ratings assigned to the debentures/ bonds by the rating agencies subject to the following: (a) The rate used for the YTM for rated debentures/ bonds should be at least 50 basis points above the rate applicable to a Government of India loan of equivalent maturity. The special securities, which are directly issued by Government of India to the beneficiary entities, which do not carry SLR status, may be valued at a spread of 25 basis points above the corresponding yield on Government of India securities, with effect from the financial year 2008 - 09. At present, such special securities comprise: Oil Bonds, Fertiliser Bonds, bonds issued to the State Bank of India (during the recent rights issue), Unit Trust of India, Industrial Finance Corporation of India Ltd., Food Corporation of India, Industrial Investment Bank of India Ltd., the erstwhile Industrial Development Bank of India and the erstwhile Shipping Development Finance Corporation. The rate used for the YTM for unrated debentures/ bonds should not be less than the rate applicable to rated debentures/ bonds of equivalent maturity. The mark-up for the unrated debentures/ bonds should appropriately reflect the credit risk borne by the bank.

(b)

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Investment Portfolio (c) Where the debenture/ bonds is quoted and there have been transactions within 15 days prior to the valuation date, the value adopted should not be higher than the rate at which the transaction is recorded on the stock exchange.

Investment Fluctuation Reserve

5.16 A reserve is to be maintained to guard against any possible reversal of interest rate environment on unexpected developments. It is prudent to transfer maximum amount of gains realised on sale of securities to the Investment Fluctuation Reserve (IFR). Banks are free to build IFR up to 10 per cent of the investment portfolio under HFT and AFS with the approval of the Board of Directors. The amount held under IFR arising out of gains on sale of investments will be reckoned for the purpose of TIER II capital.

Transactions through SGL Account

5.17 SGL or CSGL are a demat form of holding government securities with the RBI. SGL stands for 'Subsidiary General Ledger' account. It is a facility provided by RBI to large banks and financial institutions to hold their investments in Government securities and Treasury bills in the electronic book-entry form. Such institutions can settle their trades for securities held in SGL through a Delivery-versus-Payments (DVP) mechanism which ensures movement of funds and securities simultaneously. 5.18 As all investors in Government securities do not have an access to the SGL accounting system, the RBI has permitted such investors to hold their securities in physical stock certificate form. The RBI, being the R&T agent of all Government securities issued by Central and State Governments, keeps the records of holding of various investors in the securities issued. The SGL, in short keeps the names of all investor in a particular security at any point of time. The securities are held in electronic form in SGL accounts. They may also open a Constituent SGL account with any entity authorised by the RBI for this purpose and thus avail of the DVP settlement. Such client accounts are referred to as Constituent SGL accounts. 5.19 Securities kept on behalf of customers by banks or PDs in Constituent SGL account are kept in a segregated CSGL A/c with the RBI. Thus, if the bank or the PD buys security for his client, it gets credited to the CSGL account of bank or PD with the RBI. Successful bidders are allotted securities bid by them. The RBI can debit their current accounts for amount payable and credit their SGL account with the securities allotted to them. The amount debited to the current 31

Technical Guide on Internal Audit of Treasury Function in Banks account is placed to the credit of Government Account. In the same manner secondary market operations are also handled by the RBI. 5.20 The following are to be noted with regard to transactions through SGL Account: It is necessary for both the selling bank and the buying bank to maintain current account with the RBI. All transactions in Govt. securities for which SGL facility is available should be put through SGL A/c only. A SGL transfer form issued by a bank in favour of another bank should not bounce for want of sufficient balance of securities in the SGL A/c of seller or for want of sufficient balance of funds in the current A/c of the buyer. If a SGL transfer form bounces for want of sufficient balance in the SGL A/c, the (selling) bank which has issued the form will be liable to the penal action against it. If the bouncing of the SGL form occurs thrice, the bank will be debarred from trading with the use of the SGL facility for a period of 6 months from the occurrence of the third bouncing. The SGL transfer form received by purchasing banks should be deposited in their SGL A/c Immediately, i.e., the date of lodgment of the SGL Form with the RBI shall be within one working day after the date of signing of the Transfer Form. No sale should be effected by way of return of SGL form held by the bank. Participants must indicate the deal/trade/contract date in Part C of the SGL Form under Sale date. Where this is not completed the SGL Form will not be accepted by the RBI. SGL transfer forms should be signed by two authorised officials of the bank whose signatures should be recorded with the respective PDOs of the Reserve Bank and other banks.

Non-performing Investments
5.21 In respect of securities included in any of the three categories where interest/ principal is in arrears, the banks should not reckon income on the securities and should also make appropriate provisions for the depreciation in the

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Investment Portfolio value of the investment. The banks should not set-off the depreciation requirement in respect of these non-performing securities against the appreciation in respect of other performing securities. 5.22 A non-performing investment (NPI), similar to a non-performing advance (NPA), is one where: (a) (b) (c) Interest/ instalment (including maturity proceeds) is due and remains unpaid for more than 90 days. The above would apply mutatis-mutandis to preference shares where the fixed dividend is not paid. In the case of equity shares, in the event the investment in the shares of any company is valued at Re.1 per company on account of the nonavailability of the latest balance sheet, those equity shares would also be reckoned as NPI. If any credit facility availed by the issuer is NPA in the books of the bank, investment in any of the securities issued by the same issuer would also be treated as NPI and vice versa. The investments in debentures / bonds, which are deemed to be in the nature of advance would also be subjected to NPI norms as applicable to investments. In case of conversion of principal and / or interest into equity, debentures, bonds, etc., such instruments should be treated as NPA abinitio in the same asset classification category as the loan if the loan's classification is substandard or doubtful on implementation of the restructuring package and provision should be made as per the norms.

(d)

(e)

(f)

Income Recognition
5.23 Banks may book income on accrual basis on securities of corporate bodies/ public sector undertakings in respect of which the payment of interest and repayment of principal have been guaranteed by the Central Government or a State Government, provided interest is serviced regularly and as such is not in arrears. Banks may book income from dividend on shares of corporate bodies on accrual basis provided dividend on the shares has been declared by the corporate body in its Annual General Meeting and the owner's right to receive payment is established. Banks may book income from Government securities and bonds and debentures of corporate bodies on accrual basis, where interest rates on these instruments are pre-determined and provided interest is serviced 33

Technical Guide on Internal Audit of Treasury Function in Banks regularly and is not in arrears. Banks should book income from units of mutual funds on cash basis.

Broken Period Interest

5.24 Banks should not capitalise the Broken Period Interest paid to seller as part of cost, but treat it as an item of expenditure under Profit and Loss Account in respect of investments in Government and other approved securities. However, the banks should comply with the requirements of Income Tax Authorities in the manner prescribed by them.

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CHAPTER 6

ASSET LIABILITY MANAGEMENT

6.1 Asset Liability Management (ALM) defines management of all assets and liabilities (both off and on balance sheet items) of a bank. It requires assessment of various types of risks and altering the asset liability portfolio to manage risks. Asset Liability Management provides a comprehensive and dynamic framework for measuring, monitoring and managing liquidity, interest rate, foreign exchange, equity and commodity price risks of a bank that needs to be closely integrated with the banks' business strategy. It involves assessment of various types of risks and altering the asset-liability portfolio in a dynamic way in order to manage risks. 6.2 As per the RBI Guidelines on Asset Liability Management (ALM) System, the ALM process rests on following three pillars: (i) ALM Information Systems (ii) (iii) Management Information Systems Information availability, accuracy, adequacy and expediency. Structure and responsibilities Level of top management involvement Risk parameters Risk identification Risk measurement Risk management Risk policies and tolerance levels.

ALM Organisation

ALM Process

6.3 ALM has to be supported by a management philosophy which clearly specifies the risk policies and tolerance limits. This framework needs to be built

Technical Guide on Internal Audit of Treasury Function in Banks on sound methodology with necessary information system as back up. Thus, information is the key to the ALM process. It is, however, recognised that varied business profiles of banks in the public and private sector as well as those of foreign banks do not make the adoption of a uniform ALM System for all banks feasible. There are various methods prevalent world-wide for measuring risks. These range from the simple Gap Statement to extremely sophisticated and data intensive Risk Adjusted Profitability Measurement methods. 6.4 Successful implementation of the risk management process would require strong commitment on the part of the senior management in the bank, to integrate basic operations and strategic decision making with risk management. The Board should have overall responsibility for management of risks and should decide the risk management policy of the bank and set limits for liquidity, interest rate, foreign exchange and equity price risks. 6.5 The Asset - Liability Committee (ALCO) consisting of the bank's senior management including CEO should be responsible for ensuring adherence to the limits set by the Board as well as for deciding the business strategy of the bank (on the assets and liabilities sides) in line with the bank's budget and decided risk management objectives. The ALM Support Groups consisting of operating staff should be responsible for analysing, monitoring and reporting the risk profiles to the ALCO. The staff should also prepare forecasts (simulations) showing the effects of various possible changes in market conditions related to the balance sheet and recommend the action needed to adhere to bank's internal limits. 6.6 (a) (b) (c) (d) (e) The scope of ALM function can be described as follows: Liquidity risk management Management of market risks Trading risk management Funding and capital planning Profit planning and growth projection

ALM Models
6.7 Analytical models are very important for ALM analysis and scientific decision making. The basic models are as follows: (a) (b) GAP Analysis Model Duration GAP Analysis Model 36

Asset Liability Management (c) (d) Scenario Analysis Model Value at Risk (VaR) model

Gap Analysis Model

6.8 Gap analysis model measures the direction and extent of asset-liability mismatch through either funding or maturity gap. It is computed for assets and liabilities of differing maturities and is calculated for a set time horizon. This model looks at the repricing gap that exists between the interest revenue earned on the bank's assets and the interest paid on its liabilities over a particular period of time*. It highlights the net interest income exposure of the bank to changes in interest rates in different maturity buckets. 6.9 Repricing gaps are calculated for assets and liabilities of differing maturities. A positive gap indicates that assets get repriced before liabilities, whereas a negative gap indicates that liabilities get repriced before assets. The bank looks at the rate sensitivity (the time the bank manager will have to wait in order to change the posted rates on any asset or liability) of each asset and liability on the balance sheet. The general formula that is used is as follows: NIIi = R i (GAPi) While NII is the net interest income, R refers to the interest rates impacting assets and liabilities in the relevant maturity bucket and GAP refers to the differences between the book value of the rate sensitive assets and the rate sensitive liabilities. Thus, when there is a change in the interest rate, one can easily identify the impact of the change on the net interest income of the bank. Interest rate changes have a market value effect. The basic weakness with this model is that this method takes into account only the book value of assets and liabilities and hence ignores their market value. This method, therefore, is only a partial measure of the true interest rate exposure of a bank.

Duration Model
6.10 Duration is an important measure of the interest rate sensitivity of assets and liabilities as it takes into account the time of arrival of cash flows and the maturity of assets and liabilities. It is the weighted average time to maturity of all the preset values of cash flows. Duration basically refers to the average life of the asset or the liability.
* Saunders, 1997.

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Technical Guide on Internal Audit of Treasury Function in Banks 6.11 The following equation describes the percentage fall in price of the bond for a given increase in the required interest rates or yields: DP p = D ( dR /1+R) The larger the value of the duration, the more sensitive is the price of that asset or liability to changes in interest rates. As per the above equation, the bank will be immunized from interest rate risk if the duration gap between assets and the liabilities is zero. The one important benefit of duration model is that it uses the market value of assets and liabilities. 6.12 Under this technique assumptions were made on various conditions, for example: Several interest rate scenarios were specified for the next 5 or 10 years. These specified conditions like declining rates, rising rates, a gradual decrease in rates followed by a sudden rise, etc. Ten or twenty scenarios could be specified in all. Assumptions were made about the performance of assets and liabilities under each scenario. They included prepayment rates on mortgages or surrender rates on insurance products. Assumptions were also made about the firm's performance like, the rates at which new business would be acquired for various products, demand for the product, etc. Market conditions and economic factors like, inflation rates and industrial cycles were also included.

6.13 Based upon these assumptions, the performance of the firm's balance sheet could be projected under each scenario. If projected performance was poor under specific scenarios, the ALM committee would adjust assets or liabilities to address the indicated exposure. Let us consider the procedure for sanctioning a commercial loan. The borrower, who approaches the bank, has to appraise the banks credit department on various parameters like, industry prospects, operational efficiency, financial efficiency, management qualities and other things, which would influence the working of the company. On the basis of this appraisal, the banks would then prepare a credit grading sheet after covering all the aspects of the company and the business in which the company is in. Then the borrower would then be charged a certain rate of interest which would cover the risk of lending. The main shortcoming of scenario analysis was that it was highly dependent on the choice of scenarios. It also required that many 38

Asset Liability Management assumptions were to be made about how specific assets or liabilities will perform under specific scenarios. Gradually, the firms recognized a potential for different type of risks which was overlooked in ALM analysis.

Relationship between Treasury and ALM

6.14 The banking operations are confined to lending, accepting deposits and miscellaneous services. It is the treasury which operates in financial markets directly, establishing a link between core banking functions and market operations. Thus, the market risk is identified and monitored through treasury. Treasury uses derivatives and other means to bridge the liquidity and rate sensitivity gaps. Treasury products are marketable and liquidity can be infused at any point of time. Treasury monitors exchange rate and interest rate movements. Hence, risk management is an integral part of treasury. In many banks, either ALM desk is part of the dealing room or Asset Liability Management Committee (ALCO) support group is part of the treasury team. The head of the treasury is an important member of ALCO, thereby contributing not only to risk management but also to product pricing and other policy issues.

RBI Guidelines on Asset Liability Management

6.15 The RBI had issued guidelines on ALM system vide Circular No. DBOD. BP. BC. 8 / 21.04.098/ 99 dated February 10, 1999 (Refer Annexure IV), which covered, among others, interest rate risk and liquidity risk measurement, reporting framework and prudential limits. 6.16 RBI reviewed the above guideline and made the following changes vide Circular Guidelines on Asset Liability Management (ALM) System Amendments (DBOD. No. BP. BC. 38 / 21.04.098/ 2007-08) dated October 24, 2007 (Refer Annexure IV): As per the revised guidelines, banks must adopt a more granular approach to measurement of liquidity risk by splitting the first time bucket of 1-14 days in the Statement of Structural Liquidity into three time buckets next day, 2-7 days and 8-14 days. The net cumulative negative mismatches during the next day, 2-7 days, 8-14 days and 15-28 days buckets should not exceed 5 per cent, 10 per cent, 15 per cent and 20 per cent of the cumulative cash outflows in the respective buckets in order to recognise the cumulative impact on liquidity.

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Technical Guide on Internal Audit of Treasury Function in Banks Banks may undertake dynamic liquidity management and should prepare the Statement of Structural Liquidity on daily basis. The Statement of Structural Liquidity, may, however, be reported to RBI, once a month, as on the third Wednesday of every month. However, the frequency of supervisory reporting of the Structural Liquidity position shall be fortnightly, with effect from the fortnight beginning April 1, 2008.

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CHAPTER 7

TREASURY RISKS
7.1 Banks are highly sensitive to treasury risks, as the risks arrive out of high leverage treasury business enjoys. The risks of losing capital are much more than the credit business. Treasury faces broadly three types of risk, viz., market risk, credit risk, and operational risk.

Market Risk
7.2 Market risk may be defined as the possibility of loss to a bank caused by changes in the market variables. The Bank for International Settlements (BIS) defines market risk as the risk that the value of on or off-balance sheet positions will be adversely affected by movements in equity and interest rate markets, currency exchange rates and commodity prices. Thus, market risk is the risk to the banks earnings and capital due to changes in the market level of interest rates or prices of securities, foreign exchange and equities, as well as the volatilities of those prices. Market risk broadly covers liquidity risk, interest rate risk and foreign exchange risk.

Liquidity Risk
7.3 Liquidity risk is the potential inability to meet the bank's liabilities as they become due. It arises when the banks are unable to generate cash to cope with a decline in deposits or increase in assets. It originates from the mismatches in the maturity pattern of assets and liabilities. Measuring and managing liquidity needs are vital for effective operation of commercial banks. By assuring a bank's ability to meet its liabilities as they become due, liquidity management can reduce the probability of an adverse situation developing.The liquidity risk in banks manifest in different dimensions: (a) (b) Funding Risk - need to replace net outflows due to unanticipated withdrawal/non-renewal of deposits (wholesale and retail); Time Risk - need to compensate for non-receipt of expected inflows of funds, i.e., performing assets turning into non-performing assets; and

Technical Guide on Internal Audit of Treasury Function in Banks (c) Call Risk - due to crystallisation of contingent liabilities and unable to undertake profitable business opportunities when desirable.

Interest Rate Risk (IRR)

7.4 Interest rate risk is the risk where changes in market interest rates might adversely affect a bank's financial condition. The immediate impact of changes in interest rates is on the Net Interest Income (NII). A long term impact of changing interest rates is on the bank's net worth since the economic value of a bank's assets, liabilities and off-balance sheet positions get affected due to variation in market interest rates. The interest rate risk when viewed from these two perspectives is known as 'earnings perspective' and 'economic value perspective, respectively. 7.5 Management of interest rate risk aims at capturing the risks arising from the maturity and repricing mismatches and is measured both from the earnings and economic value perspective. (a) Earnings perspective involves analysing the impact of changes in interest rates on accrual or reported earnings in the near term. This is measured by measuring the changes in the Net Interest Income (NII) or Net Interest Margin (NIM), i.e., the difference between the total interest income and the total interest expense. Economic Value perspective involves analysing the changes of impact of interest on the expected cash flows on assets minus the expected cash flows on liabilities plus the net cash flows on off-balance sheet items. It focuses on the risk to networth arising from all repricing mismatches and other interest rate sensitive positions. The economic value perspective identifies risk arising from long term interest rate gaps.

(b)

Foreign Exchange Risk

7.6 Foreign exchange risk may be defined as the risk that a bank may suffer losses as a result of adverse exchange rate movements during a period in which it has an open position, either spot or forward, or a combination of the two, in an individual foreign currency. The banks are also exposed to interest rate risk, which arises from the maturity mismatching of foreign currency positions. Even in cases where spot and forward positions in individual currencies are balanced, the maturity pattern of forward transactions may produce mismatches. As a result,

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Treasury Risks banks may suffer losses due to changes in premium/discounts of the currencies concerned. 7.7 In the forex business, banks also face the risk of default of the counterparties or settlement risk. While such type of risk crystallisation does not cause principal loss, banks may have to undertake fresh transactions in the cash/spot market for replacing the failed transactions. Thus, banks may incur replacement cost, which depends upon the currency rate movements. Banks also face another risk called time-zone risk or Herstatt risk which arises out of time lags in settlement of one currency in one centre and the settlement of another currency in another time zone. The forex transactions with counterparties from another country also trigger sovereign or country risk. The three important issues that need to be addressed in this regard are: (a) (b) (c) Nature and magnitude of exchange risk; Strategy to be adopted for hedging or managing exchange risk; and Tools of managing exchange risk.

Credit Risk
7.8 Credit risk is defined as the possibility of losses associated with diminution in the credit quality of borrowers or counterparties. In a bank's portfolio, losses stem from outright default due to inability or unwillingness of a customer or counterparty to meet commitments in relation to lending, trading, settlement and other financial transactions. Alternatively, losses result from reduction in portfolio value arising from actual or perceived deterioration in credit quality. Credit risk emanates from a bank's dealings with an individual, corporate, bank, financial institution or a sovereign. 7.9

Credit risk may take the following forms: in the case of direct lending - principal/and or interest amount may not be repaid; in the case of guarantees or letters of credit - funds may not be forthcoming from the constituents upon crystallization of the liability; in the case of treasury operations - the payment or series of payments due from the counter parties under the respective contracts may not be forthcoming or ceases;

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Technical Guide on Internal Audit of Treasury Function in Banks

in the case of securities trading businesses - funds/ securities settlement may not be effected; in the case of cross-border exposure - the availability and free transfer of foreign currency funds may either cease or restrictions may be imposed by the sovereign.

Operational Risk
7.10 Britain's oldest merchant bank, Barings Bank, collapsed in 1995 due to unauthorised trading by a single trader, Nick Leeson, General Manager, Barings Futures (Singapore). The collapse of the bank was mainly attributed to failure of systems and procedures of control. The most serious failure was that Leeson controlled both the front and back offices and there was no middle office. There was no single person within Barings responsible for supervising Leeson. 7.11 Basel I defined operational risk as the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events. Basel II, however, defined operational risk as, the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. For emergence of such a risk four causes have been mentioned and they are people, process, systems and external factors. (a) People risk - Lack of key personnel, lack of adequate training/experience of dealer (measured in terms of opportunity cost/employee turnover), unauthorised access to the dealing room, tampering voice recorders, nexus between the front and back offices, etc. Process risk - Wrong reporting of important market developments to the management resulting in faulty decision making, errors in entry of data in deal slips, non-monitoring of exposure in positions, loss of interest owing to the liquidity beyond prescribed limits, non-revision of card rates in cases of volatility, non-monitoring of closing and opening positions, wrong funding of accounts (wrong currency, wrong way swap), lack of policies, particularly in respect of new products. Systems: Losses due to systems failure such as NDS not maintaining secrecy of system passwords. Legal and regulatory risk: Treasury activities should comply with the regulatory and statutory obligation.

(b)

(c) (d)

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Treasury Risks 7.12 It is necessary that formal policies are in place with respect to trigger limits; stop loss limits; prudential limits; well defined procedures and check lists; effective internal controls and audit; insurance, wherever possible; business process re-engineering to eliminate weak links in the process chain; prudential limits on investments in banks; cap on unrated issues and private placements; sub-limits for PSU bonds, corporate bonds and guaranteed bonds; same degree of credit risk analysis in the case of any loan proposal; and more stringent appraisal for non-borrower issuers.

Market Risk Limits

7.13 Market risk limits should be established at different levels of the entity, i.e., the entity as a whole, various risk-taking units, trading desk heads and individual traders. In determining how market risk limits are established and allocated, management should take into account following factors: (a) (b) (c) (d) (e) 7.14 (a) Past performance of the trading unit; Experience and expertise of the traders; Level of sophistication of the pricing, valuation and measurement systems; quality of internal controls; Projected level of trading activity having regard to the liquidity of particular products and markets; and Ability of the operating systems to settle the resultant trades. The following are some of the commonly used market limits: Notional or Volume Limits

Commonly Used Market Risk Limits

Limits based on notional amount of derivatives contracts are the most basic and simplest form of limits for controlling the risks of derivatives transactions. They are useful in limiting transaction volume, liquidity and settlement risks. However, these limits cannot take account of price sensitivity and volatility. (b) Stop Loss Limits These limits are established to avoid unrealized loss in a position from exceeding a specified level. When these limits are reached, the position will either be liquidated or hedged. Typical stop loss limits include those relating to accumulated unrealized losses for a day, a week or a month. Some institutions 45

Technical Guide on Internal Audit of Treasury Function in Banks also establish management action trigger (MAT) limits in addition to stop loss limits. These are for early warning purposes. For example, management may establish a MAT limit at 75 per cent of the stop loss limit. When the unrealized loss reaches 75 per cent of the stop loss limit, management will be alerted of the position and may trigger certain management actions, such as close monitoring of the position, reducing or early closing out the position before it reaches the stop loss limits. The above loss triggers complement other limits, but they are generally not sufficient by themselves. They are not anticipatory; they are based on unrealized losses to date and do not measure the potential earnings at risk based on market characteristics. They will not prevent losses larger than the stop loss limits if it becomes impossible to close out positions, e.g., because of market illiquidity. (c) Gap or Maturity Band Limits These limits are designed to control loss exposure by controlling the volume or amount of the derivatives that mature or are repriced in a given time period. For example, management can establish gap limits for each maturity band of 3 months, 6 months, 9 months, one year, etc. to avoid maturities concentrating in certain maturity bands. Such limits can be used to reduce the volatility of derivatives revenue by staggering the maturity and/or repricing and thereby smoothening the effect of changes in market factors affecting price. Maturity limits can also be useful for liquidity risk control and the repricing limits can be used for interest rate management. Similar to notional and stop loss limits, gap limits can be useful to supplement other limits, but are not sufficient to be used in isolation as they do not provide a reasonable proxy for the market risk exposure which a particular derivatives position may present to the institution. (d) Value-at-risk Limits These limits are designed to restrict the amount of potential loss from certain types of derivatives products or the whole trading book to levels (or percentages of capital or earnings) approved by the board and senior management. To monitor compliance with the limits, management calculates the current market value of positions and then uses statistical modeling techniques to assess the probable loss (within a certain level of confidence) given historical changes in market factors. There are three main approaches to calculating value-at-risk : the correlation method, also known as the variance/ co-variance matrix method; historical simulation and Monte Carlo simulation. The advantage of value-at-risk (VAR) 46

Treasury Risks limits is that they are related directly to the amount of capital or earnings which are at risk. The level of VAR limits should reflect the maximum exposures authorized by the board and senior management, the quality and sophistication of the risk measurement systems and the performance of the models used in assessing potential loss by comparing projected and actual results. A drawback in the use of such models is that they are only as good as the assumptions on which they are based (and the quality of the data which has been used to calculate the various volatilities, correlations and sensitivities). (e) Options Limits These are specifically designed to control the risks of options. Options limits should include Delta, Gamma, Vega, Theta and Rho limits. Delta is a measure of the amount an options price would be expected to change for a unit change in the price of the underlying instrument. Gamma is a measure of the amount delta would be expected to change in response to a unit change in the price of the underlying instrument. Vega is a measure of the amount an option's price would be expected to change in response to a unit change in the price volatility of the underlying instrument. Theta is a measure of the amount an option's price would be expected to change in response to changes in the options time to expiration. Rho is a measure of the amount an option's price would be expected to change in response to changes in interest rates.

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CHAPTER 8

TREASURY UNIT FUNDAMENTALCONTROLS

8.1 Every banking entity is different and the challenge lies in the integration of effective controls into the correct area of risk, i.e., how well controls are designed and executed. Thus, every entity has to identify its areas of risk and decide how much control is required. Unfortunately, there is no standard precedent for a treasury to simply follow. It is only with careful analysis and understanding of the business and its risks that controls can be implemented in a targeted and effective manner. In order to do this is real skill and expertise is required. Proper controls not only save a bank from financial loss, but also assist management in the running of the business more effectively.

Risk Appetite
8.2 It may be noted that before deciding on the control framework, it is necessary to determine risk appetite. This depends on the type of business and treasury operation. For instance, one would expect to see a tighter control framework around a business that runs a profit centre treasury and trades to make a return as opposed to a more simple transaction based (e.g., purely hedging) treasury. Similarly, a different framework is also required for a treasury that runs a more manual process as opposed to one that has a greater level of straight through processing.

Governance
8.3 The banks board has the ultimate responsibility for ensuring that an adequate system of internal controls is established and maintained. The importance of the board and senior management understanding the risks the business is facing, articulating its risk appetite and developing policies and procedures that reflect that position hardly needs to be stressed. Every bank should have a policy that covers the identification, measurement, management, monitoring and control of financial risk. The policy should be approved by the board. The board should also establish a Treasury Committee that meets every

Treasury Unit Fundamental Controls month or so. Members of this committee normally consist of the treasurer, chief financial officer (CFO), representatives from areas such as, tax or corporate finance, and perhaps a person from the business operations side. 8.4 The Treasury Committee should receive a report, along with minutes of the previous meeting. The report should include a review of the past month's treasury performance and also look into the future, to see what actions treasury will need to take (e.g., replacing funding facilities). However, treasury reports are often not particularly clear or meaningful and procedures should be adopted to developing a clear, concise, timely and relevant reporting process. Treasury Committee should also carry out a half yearly review of investment portfolio of treasury to vouch safe adherence of investment policy laid down by the bank as well as the applicable RBI guidelines.

Operating Controls
8.5 The first 'line of defense' is a set of operating controls around the processes undertaken in the treasury function. Some of the operating controls crucial to the functioning of a treasury are discussed in the following paragraphs.

Segregation of Duties
8.6 No two treasuries are the same. However, one thing is for sure, it is vital that different individuals within the front, middle (if there is one) and back offices are responsible for the different activities during the deal life cycle (such as, dealing, recording, confirmation, settlement, reporting and monitoring).The frontoffice should be responsible for the operation of the strategy approved by the board or treasury committee, and designing and executing transactions to manage the financial risks of the business. The back-office provides the necessary checks to prevent unauthorised trading and minimise the potential for error or fraud. The role of the back-office is to check, confirm, settle and reconcile trades conducted by the front-office and possibly provide management information. 8.7 It is ideal that the people who perform the respective duties of frontoffice and back-office have different reporting lines. If it is impossible to have total separation (as in the case of small treasuries) then at least the responsibilities should be segregated such that no two sequential steps are undertaken by the same person. These responsibilities include:

identification of positions and dealing;

49

Technical Guide on Internal Audit of Treasury Function in Banks

authorization of deals; confirmations; authorization of settlement; release of settlement; and accounting.

Dealing
8.8 It is market practice for dealers to select banks to be contacted on the basis of known competitiveness in the relevant instrument, creditworthiness and limit availability. Competitive quotes should always be sought, unless there is a specific reason not to do so. Records should be maintained of banks contacted and rates quoted, indicating those that have been accepted. This should ensure that no one bank or broker is favoured over another and the best returns are being achieved. Once the deal has been struck, the dealer should immediately input the details into the deal recording system, either a specialist treasury management system (TMS) or the bank's alternative to this. Normally, the system will automatically number the trades using a sequence of numbers. The TMS is the firm's official record of the trade, but the dealer may choose to have either paper deal tickets or a 'blotter'. These can be useful when confirming that all trades have been input into the system and that they are accurate. This would typically be conducted by the back-office. The phones of dealers should be taped to provide a record if there is a dispute with counterparty. These tapes should be checked regularly to ensure that the tapes are working and there is room to continue recording. Dealers should not have access to these tapes.

Access to the Front-office

8.9 There has been debate over the physical access to the dealing room within a treasury environment. It is common within a banking environment to have staff from the front and back offices physically separated. Otherwise, the entity will need to rely more heavily on IT controls, e.g., computers locked with password entry. House-keeping becomes extremely important with systems, ensuring old users are deleted and current users have the correct access profile.

System Security
8.10 Irrespective of the physical set-up of the treasury, it is important that systems have passwords that are regularly checked and that personal computers are locked if unattended. Timeout locks should assist this if a machine is not 50

Treasury Unit Fundamental Controls touched for a period of time. Control procedures within treasury usually depend to a great extent upon the correct usage of computer software packages. All authorized users should be assigned a unique user identification (ID) and personal password. Users should log out of the system when it is not being used and, particularly, when leaving their desks. All computers should have screen saver passwords that prevent access, other than by password, if the computer is left unattended. 8.11 The following are some of the important system controls implemented by banks in the present day treasury environment: (a) In a treasury system with online deal entry (usually referred to as a front-office dealing system), deals are entered directly in the system. The back-office support function has only view rights to the deals entered into such dealing system and every time they note a new deal they confirm the particulars of the deal with the back-office of the counterparty to the transaction. On confirmation, they approve the deal through their security ID in the system and only then the deal finally gets booked. In case of discrepancies, the back-office informs the front-office dealer and then the deal is not booked in the system. In case of foreign exchange transactions, the treasury system is configured to compare the rates at which the transactions are done by the bank with the market rate range and generate an exception report. This report is useful to note significant variations in rates which the dealers would have transacted at. Front-office systems in banks may be configured to compute limits on a real-time basis, such as, dealer limits, counterparty limits, broker limits, currency limits, exposure limits, etc. When a transaction is entered into the system these limits are automatically computed and flashed on the screen to prompt the dealer of a potential limit breach if the deal is executed. Systems may also be configured to perform automated nostro reconciliations whereby the system extracts the banks nostro account data from the general ledger and account statements of the counterparty bank and then matches the similar trades and generates an exception report for trade mismatches (or reconciling items). A designated backoffice team tracks the ageing of such reconciling items and follows up with the respective functions within the bank for resolving the same. 51

(b)

(c)

(d)

Technical Guide on Internal Audit of Treasury Function in Banks (e) As noted above, all authorized users are assigned a unique user identification (ID) and personal password. In any IT environment, usually, the user rights and entitlements to the various IT systems is clearly defined and documented and also subjected to a periodic review. In an instance when a user ID that does not have access to a particular set of information or command is trying to retrieve such information, then a modification log automatically gets saved in the system which gives details of the user ID trying to gain unauthorised access. Such controls are referred to as fraud risk controls. Some banks IT system are interfaced to the financial accounting or general ledger system. At the end of the day, usually, the balances and positions in all the systems is uploaded in the financial accounting system. At the time of such upload an exception report/log is automatically generated which gives the details of the balances which could not be uploaded correctly or completely. Banks have a dedicated team in their back-office who are only responsible for resolving the open items in such exception report on a timely basis. IT creates opportunities but also calls for a new genre of risks, such as: Logical or processing errors caused by the underlying program code. Systematic errors may be more difficult to detect. Unauthorised access to systems due to compromised controls over access IDs and passwords or non-discontinuance of system access for exit/transfer cases of staff members. Non-updation of master data fields leading to errors (such as, mailing address, customer name, staff account status, dormant/unclaimed account status). Loss of laptops, remote access control devices, blackberry, palmtops or personal digital assistants (PDAs) which may get misused for authorising certain transactions or initiating certain communication.

(f)

8.12 (a) (b)

(c)

(d)

8.13 The banking industry is one of the most significant users of technology as compared to other industries. The banks management also enforces controls such as, periodic reviews of access to the financial system resources and other confidential/critical data, to confirm the appropriateness of these access rights (access control matrix). An internal auditor should, therefore, have as a part of his scope the evaluation of the IT general control environment. IT general 52

Treasury Unit Fundamental Controls controls offers the backdrop on which various specific system controls operate, hence, the effectiveness of specific system controls depends on the effectiveness of IT general controls.

Confirmations
8.14 It is usually the responsibility of the back-office to confirm the details of all the treasury transactions before settlement is made so as to minimise the risk of error or fraud.

Settlement
8.15 Once transactions have been confirmed, the back-office is responsible for initiating any payment that may be required. Back-office will also usually be responsible for questioning 'failed' trades, i.e., if a trade is not settled correctly, the back office will try and resolve the query by contacting the counterparty or broker.

Disaster Recovery
8.16 Treasury should maintain and update a disaster recovery plan (DRP) operative in circumstances leading to partial breakdown of facilities or the inability to access the building. The DRP is to assist the treasury department to continue its daily responsibilities with immediate effect in such types of unforeseen conditions.

Personnel
8.17 The recruitment process that is followed by an organisation is important to ensure that people employed have the right skills and experience, as well as the outlook to match the organisation. Once a decision of hiring has been made, employees need ongoing training in accordance with their job requirements. This should be provided internally and externally to ensure people are kept up-to-date with market developments and leading practice. In addition, a good way of making it easier for newcomers is to have an up-todate and comprehensive procedures manual. By rotating the staff and forcing them to have one holiday of at least two weeks each year, a different person is allowed to carry out their duties on a day-to-day basis and this helps to prevent and detect fraud.

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Technical Guide on Internal Audit of Treasury Function in Banks

Document Security
8.18 All paper records should be filed in cabinets. Sensitive or valuable documents should be kept in locked and preferably fire proof storage.

Oversight Controls
8.19

The treasurer should receive the following reports on a daily basis. breached credit limits; list of deals done for the day; off-market trades, with an explanation; and changes to standing data.

8.20 Back-office management should also ensure that their controls are being conducted as they were designed. Some examples include a summary of unreconciled items, suspense account items and outstanding confirmations that have not been matched. It is very useful to see how numerous and large these amounts are, and also how long they have been outstanding. Needless to say, concurrent audit of treasury operations would ensure that these controls are in operation.

Monitoring Controls and Treasury Reporting

8.21 Regular reporting to management is the most common form of monitoring treasury activity. The purpose of treasury reporting is: (a) (b) (c) To inform senior management of financial exposure; To demonstrate to senior management that treasury activity is within parameters authorised by the board; and To promote the analysis of activities and performance measurement within treasury and so lead to improvements in efficiency and control.

8.22 The treasury report will include information on the major risks of the business and the performance of the treasury function over the past month. Examples of such information are: Economic update - based on market sources (e.g., relationship banks) giving details on the current economic environment and likely future scenarios and how these will impact the bank;

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Treasury Unit Fundamental Controls Foreign exchange - open positions, average forex rates achieved as compared to forecast, gains and losses on forex trading, translation exposure and steps to control that exposure; Long term funding - graph of funding horizon and plans to implement new funding to replace existing lines, headroom over existing facilities, cost of funds, loan covenants and compliance; Interest rate exposure - sensitivity to interest rate movement, proportion of fixed and floating debt; Cash management and investments - returns on funds over the month as compared to a benchmark, cash forecasts over the short and long term; Bank relationships and credit exposure - how bank relationships are being managed, exposures as compared to limits, headroom; and A record of outstanding guarantees and the costs involved.

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CHAPTER 9

INTERNAL AUDIT OF TREASURY OPERATIONS

Scope of Internal Audit with Special Reference to Treasury/Market Risk Segments
9.1 The precise scope of risk-based internal audit must be determined by each bank for low, medium, high, very high and extremely high risk areas. However, at the minimum, it must review/report on the following aspects:(a) Process by which risks are identified and managed in various areas; (b) Control environment in various areas; (c) Gaps, if any, in control mechanism which might lead to frauds, identification of fraud prone areas; (d) Data integrity, reliability and integrity of Management Information system; (e) Internal, regulatory and statutory compliance; (f) Budgetary control and performance reviews; (g) Transaction testing/verification of assets to the extent considered necessary; (h) Monitoring compliance with the internal audit report; and (i) Variation, if any, in the assessment of risks under the audit plan vis--vis the risk-based internal audit.

9.2 The scope of risk-based internal audit should also include review of the systems in place for ensuring compliance with money laundering controls; identifying potential inherent business risks and control risks, if any; suggesting various corrective measures and undertaking follow up reviews to monitor the action taken thereon.

Functional Independence
9.3 The internal auditor should be independent from the internal control process in order to avoid any conflict of interest. He should be given an

Internal Audit of Treasury Operations

appropriate standing within the bank to carry out the assignments. He should not be assigned the responsibility of performing other accounting or operational functions. The internal audit staff should perform their duties with objectivity and impartiality. The internal audit head should not report to any authority below the level of the Board of Directors/Audit Committee.

Code of Ethics and Internal Auditors

9.4 A code of ethics is necessary and appropriate for the profession of internal auditing, as it is founded on the trust placed in its objective assurance about risk management, control, and governance. A member of the Institute of Chartered Accountants of India, carrying out an internal audit activity, would apart from other requirements, additionally be governed by:(i) (ii) (iii) the requirements of the Chartered Accountants Act, 1949; the Code of Ethics issued by the Institute of Chartered Accountants of India; and other relevant pronouncements of the Institute of Chartered Accountants of India.

Internal auditor has to uphold the golden principles of integrity, objectivity, confidentiality and competence.

Stages of Internal Audit

9.5 The internal audit of treasury operations can be broadly divided into following five stages: Pre-commencement Work Knowledge of the Entity and its Environment Overall Audit Plan Audit Programme Audit Documentation Audit Procedures Internal Audit Report 57

Technical Guide on Internal Audit of Treasury Function in Banks

Pre-commencement Work
9.6 The following points have to be considered before commencing the internal audit: (a) Decision on whether the engagement should be accepted. This will be based on: (b) (c) (d) (e) Consider whether capability, time and resources are available; and Consider whether it satisfies ethical requirements.

Internal auditor cannot be the statutory auditor for the same financial year or the same bank. The decision for acceptance or rejection of assignment has to be communicated to the concerned authority. The objective and scope of work has to be considered with specific considerations to time available for conducting internal audit. The internal auditor and the auditee should agree on the terms of the engagement before commencement. The agreed terms should be recorded in an engagement letter. Standard on Internal Audit (SIA) 8, Terms of Internal Audit Engagement establishes standards and provides guidance in respect of terms of engagement of the internal audit activity whether carried out in house or by an external agency.

Knowledge of the Entity and its Environment

9.7 The next step is that the internal auditor should obtain knowledge of the entitys business and its operating environment, including its regulatory environment and the industry in which it operates, sufficient to enable him to review the key risks and entity-wide processes, systems, procedures and controls. Standard on Internal Audit (SIA) 15, Knowledge of the Entity and its Environment establishes standards and provides guidance on these aspects. It also sets out the guidelines regarding the application, usage and documentation of such knowledge by the internal auditor. 9.8 The internal auditor should specifically obtain knowledge on following aspects: (a) (b) Relevant laws and regulations Circulars/Guidelines issued by the RBI 58

Internal Audit of Treasury Operations

(c) (d) (e) (f) (g) Circulars/Guidelines issued by the head office of the bank Organisational structure Type/nature of transactions Accounting system Internal control framework (h) (i) Risk assessment Monitoring Risk tolerance Back-up system

Risk Management

Reporting requirements

9.9 Knowledge of the entitys business is a frame of reference within which the internal auditor exercises professional judgment in reviewing the processes, controls and risk management procedures of the entity. Understanding the business and using this information appropriately assists the internal auditor in: (a) (b) (c) (d) Assessing the risks and identifying key focus area. Planning and performing the internal audit effectively and efficiently. Evaluating audit evidence. Providing better quality of services to the client.

Overall Internal Audit Plan

9.10 The success of any internal audit is dependent upon an appropriate audit plan and its timely execution. The internal audit plan should be comprehensive enough to ensure that it helps in achieving of the overall objectives of an internal audit. The following are some of the important aspects in this regard: (a) (b) The annual audit plan, approved by the Board, should include the schedule and the rationale for audit work planned. The plan should include all risk areas and their prioritization based on the level of risk.

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Technical Guide on Internal Audit of Treasury Function in Banks 9.11 Internal audit plan should cover areas such as: Obtaining the knowledge of the legal and regulatory framework within which the entity operates. Obtaining the knowledge of the entitys accounting and internal control systems and policies. Determining the effectiveness of the internal control procedures adopted by the entity. Determining the nature, timing and extent of procedures to be performed. Identifying the activities warranting special focus based on the materiality and criticality of such activities, and their overall effect on operations of the entity. Identifying and allocating staff to the different activities to be undertaken. Setting the time budget for each of the activities. Identifying the reporting responsibilities.

The internal audit plan should also identify the benchmarks against which the actual results of the activities, the actual time spent, the cost incurred would be measured. 9.12 Adequate planning ensures that appropriate attention is devoted to significant areas of audit. Planning also ensures that the work is carried out in accordance with the applicable pronouncements of the Institute of Chartered Accountants of India. The ICAI has, till date, issued 17 Standards on Internal Audit (SIAs) and the same are as follows. (a) (b) (c) (d) (e) (f) Standard on Internal Audit (SIA) 1, Planning an Internal Audit Standard on Internal Audit (SIA) 2, Basic Principles Governing Internal Audit Standard on Internal Audit (SIA) 3, Documentation Standard on Internal Audit (SIA) 4, Reporting Standard on Internal Audit (SIA) 5, Sampling Standard on Internal Audit (SIA) 6, Analytical Procedures 60

Internal Audit of Treasury Operations

(g) (h) (i) (j) (k) (l) (m) (n) (o) (p) (q) Standard on Internal Audit (SIA) 7, Quality Assurance in Internal Audit Standard on Internal Audit (SIA) 8, Terms of Internal Audit Engagement Standard on Internal Audit (SIA) 9, Communication with Management Standard on Internal Audit (SIA) 10, Internal Audit Evidence Standard on Internal Audit (SIA) 11, Consideration of Fraud in an Internal Audit Standard on Internal Audit (SIA) 12, Internal Control Evaluation Standard on Internal Audit (SIA) 13, Enterprise Risk Management Standard on Internal Audit (SIA) 14, Internal Audit in an Information Technology Environment Standard on Internal Audit (SIA) 15, Knowledge of the Entity and its Environment Standard on Internal Audit (SIA) 16, Using the Work of an Expert Standard on Internal Audit (SIA) 17, Consideration of Laws and Regulations in an Internal Audit

Internal Audit Procedures

9.13 After completing the preliminary review, the internal auditor performs the procedures outlined in the audit program. These procedures usually test the internal controls and the accuracy and the propriety of the transactions. The audit procedures would include: (a) (b) (c) (d) (e) Inspection Observation Inquiry and confirmation Computation Analytical Procedures

9.14 While selecting the internal audit tests and procedures that meet the internal audit objectives with regard to internal control and risk assessment, the internal auditor should consider the following items: (a) (b) The requirements to meet internal audit objectives. The relative materiality of matters to be investigated. 61

Technical Guide on Internal Audit of Treasury Function in Banks (c) (d) The effectiveness of system of accounting and internal control. The estimates of costs of implementing internal audit test plans in relation to likely benefits to be derived. The risk assessment process should, inter alia, include the following: Identification of inherent business risks in various activities undertaken by the bank. Evaluation of the effectiveness of the control systems for monitoring the inherent risks of the business activities. Drawing up a risk matrix for taking into account both the factors, viz., inherent business risks and control risks. The basis for determination of the level (high, medium, low) and trend (increasing, stable, decreasing) of inherent business risks and control risks should be clearly spelt out. The risk assessment may make use of both quantitative and qualitative approaches. While the quantum of credit, market, and operational risks could largely be determined by quantitative assessment, the qualitative approach may be adopted for assessing the quality of controls in various business activities. In order to focus attention on areas of greater risk to the bank, identification of activity-wise and location-wise risks should be undertaken. The risk assessment methodology should include, inter alia, the following parameters: Previous internal audit reports and compliance; Proposed changes in business lines or change in focus; Significant change in management/key personnel; Results of latest regulatory examination report; Reports of external auditor; Industry trends and other environmental factors; Time lapsed since last audit; Volume of business and complexity of activities; and Substantial performance variations from the budget. 62

Risk Assessment Process and Methodology

9.15 (a) (b) (c) (d)

(e)

Internal Audit of Treasury Operations

9.16 For the risk assessment to be accurate, it will be necessary to have in place proper MIS and data integrity. The internal audit function should be kept informed of all developments such as introduction of new products, changes in reporting lines, changes in accounting practices/policies, etc. The risk assessment should invariably be undertaken on a yearly basis. The assessment should also be periodically updated to take into account changes in business environment, activities and work processes, etc.

Risk Perspectives
9.17 Inherent business risks indicate the intrinsic risk in a particular area/activity of the bank and could be grouped into low, medium and high categories depending on the severity of risk. Control risks arise out of inadequate control systems, deficiencies, gaps and/or likely failures in the existing control processes. The control risks could also be classified into low, medium and high categories.

Risk and Audit Matrix

9.18 In the overall risk assessment both the inherent business risks and control risks should be factored in. The overall risk assessment as reflected in each cell of the risk matrix is explained below:

RISK MATRIX High A High Risk D Medium Risk G Low Risk Low B Very High Risk E High Risk H Medium Risk Medium Control Risks C Extremely High Risk F Very High Risk I High Risk High

Medium
Inherent Business Risks

Low

63

Technical Guide on Internal Audit of Treasury Function in Banks A. B. C. High Risk: Even though the control risk is low, this is a high risk area due to high inherent business risks. Very High Risk: The high inherent business risk coupled with medium control risk makes this a Very High Risk area. Extremely High Risk: Both the inherent business risk and control risk are high which makes this an Extremely High Risk area. This area would require immediate audit attention, maximum allocation of audit resources besides ongoing monitoring by the banks top management. Medium Risk: Although the control risk is low this is a Medium Risk area due to medium inherent business risks. High Risk: Although the inherent business risk is medium this is a High Risk area because of control risk also being medium. Very High Risk: Although the inherent business risk is medium, this is a Very High Risk area due to high control risk. Low Risk: Both the inherent business risk and control risk are low. Medium Risk: The inherent business risk is low and the control risk is medium. High Risk: Although the inherent business risk is low, due to high control risk this becomes a High Risk area.

D. E. F. G. H. I.

9.19 The banks should also analyse the inherent business risks and control risks with a view to assess whether these are showing a stable, increasing or decreasing trend. Illustratively, if an area falls within cell B or F of the Risk Matrix and the risks are showing an increasing trend, these areas would also require immediate audit attention, maximum allocation of audit resources besides ongoing monitoring by the banks top management (as applicable for cell C). The Risk Matrix should be prepared for each business activity/location.

Internal Audit Documentation

9.20 Internal auditor should have proper working papers that will enable him to substantiate his results. The internal auditors work papers serve as the connecting link between the audit assignment, the auditor's fieldwork, and the final report. Work papers contain the records of planning and preliminary surveys, audit procedures, fieldwork, and other documents relating to the internal audit. Most importantly, the work papers document the internal auditor's 64

Internal Audit of Treasury Operations

conclusions and the reasons those conclusions were reached. As each audit step in the audit procedures is satisfied, the internal audit supervisor should request review of the related work papers. 9.21 Standard on Internal Audit (SIA) 3, Documentation establishes standards and provides guidance on the documentation requirements in an internal audit. Internal auditors working papers serve the following purposes:

Aid in planning, performance, and review of internal audit. Document whether the internal audit objectives were achieved. A support for internal audit reports. Record information. Document internal audit findings and accumulate evidence Basis for supervisory review. Support and evidence for issues like fraud, lawsuits, etc. Basis /reference for subsequent internal audit. Document whether the internal audit objectives were achieved. Facilitate third party reviews. Aid to peer review. Provide a basis for evaluating the internal audit's quality assurance programme.

9.22 The internal audit documentation should cover all the important aspects of an engagement, viz., engagement acceptance, engagement planning, risk assessment and assessment of internal controls, evidence obtained and examination/evaluation carried out, review of the findings, communication and reporting and follow-up. The internal audit documentation would, therefore, generally, include:

Planning documents and internal audit procedures. Controls questionnaires, flowcharts, checklists and narratives. Notes and minutes resulting from interviews. Organisational data such as charts and job descriptions.

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Technical Guide on Internal Audit of Treasury Function in Banks

Copies of important documents. Information about operating and financial policies. Results of control evaluations. Letters of confirmation and representation. Analysis and test of transactions, processes, and account balances. Results of analytical review procedures. Audit reports and management responses. Audit correspondence that documents the audit conclusions reached.

9.23 Internal audit documentation should be sufficiently complete and detailed for an internal auditor to obtain an overall understanding of the audit.

Reporting
9.24 The internal auditors report should contain a clear written expression of significant observations, suggestions/recommendation based on the policies, processes, risks, controls and transaction processing taken as a whole and managements responses. Standard on Internal Audit (SIA) 4, Reporting establishes standards on the form and content of the internal auditors report. 9.25 The internal auditors report includes the following basic elements, ordinarily, in the following layout: (a) (b) (c) (d) (e) Title; Addressee; Report Distribution List; Period of coverage of the Report; Opening or introductory paragraph; (i) (ii) (f) identification of the processes/functions and items of financial statements audited; and a statement of the responsibility of the entitys management and the responsibility of the internal auditor;

Objectives paragraph - statement of the objectives and scope of the internal audit engagement;

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Internal Audit of Treasury Operations

(g) Scope paragraph (describing the nature of an internal audit): (i) (ii) a reference to the generally accepted audit procedures in India, as applicable; a description of the engagement background and the methodology of the internal audit together with procedures performed by the internal auditor; and a description of the population and the sampling technique used.

(iii) (h) (i) (j) (k) (l) (m) (n)

Executive Summary, highlighting the key material issues, observations, control weaknesses and exceptions; Observations, findings and recommendations made by the internal auditor; Comments from the local management; Action Taken Report Action taken/ not taken pursuant to the observations made in the previous internal audit reports; Date of the report; Place of signature; and Internal auditors signature with Membership Number.

A measure of uniformity in the form and content of the internal auditors report is desirable because it helps to promote the readers understanding of the internal auditors report and to identify unusual circumstances when they occur.

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ANNEXURES

ANNEXURE I

SPECIMEN CHECKLIST FOR INTERNAL AUDIT OF TREASURY OPERATIONS

The internal auditors procedures with respect to the following specific areas of treasury operations would include: S. No. Description Remarks

I.
a b

General
Check whether the bank has policies for all treasury activities. Check whether the policy commensurate with the nature of operations and adequately covers all the activities. Check whether the policy include a list of responsible persons. Check whether the policy specifies types and purposes of the financial Instruments. Check whether the policy specifies frequency of reporting and reporting authority. Check whether the Cash Reserve Ratio and Statutory Liquidity Ratios has been maintained.

c d e f

II.
a b

Organisation Structure
Check whether treasury activities are over sighted by an officer independent of day-to-day activities. Check whether there is an effective segregation of key duties including dealing, settlement and accounting/reconciliation.

Technical Guide on Internal Audit of Treasury Function in Banks c d e f Check whether the policy and procedures are properly documented and easily accessible to all staff. Check whether there is a job descriptions or delegations for key treasury positions. Check whether sufficient resources are available to operate the treasury effectively. Check whether there is segregation between functions of authorization, execution and recording of transactions.

III.
a b c

Personnel: Performance

Training,

Compliance

and

Check whether all personnel are appropriately trained. Check whether all employees references are properly checked. Check whether all the employees signs an ethics policy at the time of joining.

IV.
a b c d

Deal Execution Process

Check whether transactions concluded by the dealing room are confirmed by the back office manager. Check whether there is a systematic procedure of filing. Examine third party payment and verify that a letter of instruction to that effect is filed. Check whether outward confirmations are recorded in a register.

V.
a b

Limits
Check counterparty exposure limit for all brokers, lenders, etc. Check deal limits i.e., maximum amount, a person can transact without seeking higher level approval. 72

Annexure I c Check product limits i.e., maximum exposure, the entity should have in a particular instrument or product. Check sector limits i.e., maximum investment in a particular sector.

VI.
a b

Recording Control
i) Control over Documents
Check whether all money market deals have been timely carried out and accurately recorded. Check whether all the documents and statements have been received from concerned parties (brokers, bankers and lenders, etc.) and properly filed in a logical sequence. Check whether filed copies are pre-numbered and continuous for ease of reference and filing.

ii) Control over Accounting Procedures

a b c d e Check whether adequate systems are in place to track all matured investments. Check whether there are accurate recording and accounting of positions. Check whether an independent person checks the recording of postings. Check whether all deals are recorded in the General Ledger. Check whether account reconciliation has been done and time frame has been set for clearing all outstanding items. Inspect source documents and verify that they are initialed by the checkers.

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Technical Guide on Internal Audit of Treasury Function in Banks

VII.
a b

Reconciliation of Bank Accounts and Treasury Records with the General Ledger
Verify the bank balance with bank statement. Check whether the treasury records is reconciled to the General Ledger.

VIII.
a b

Cash Management
Check whether there is an effective procedure for monitoring the daily cash position. Check whether the management has planned the liquidity needs for normal operating conditions and emergency situations. Check whether cash forecasting has been done after trend analysis. Obtain Bank statements. Review the liquidity position.

c d e

IX.
a b c d e f g h

Investment
Review the investment strategy and verify whether the investment strategy is followed in letter and spirit. Check whether authority level are set for investment in different instrument monetary limits. Obtain the list of investments. Analyse the investment portfolio statements. Check whether all investments are in name of the bank. Check whether the bank has all the documents with regard to ownership of investments. Check whether the bank utilises third party investment managers and verify the reasons for such selection. How does the entity control the investment managers activities. 74

Annexure I i Check whether the investment managers are apprised of the investment policies of the entity. How does the entity ensure compliance with them. How is the performance of internal/external investment managers evaluated.

X.
a

Documentation for Derivative Transactions

Check whether derivative contracts are properly documented. Note: The following instructions in this regard may, therefore, be strictly adhered to: (i) For the sake of uniformity and standardisation in respect of all derivative products, participants may use ISDA documentation, with suitable modifications. Counterparties are free to modify the ISDA Master Agreement by inserting suitable clauses in the schedule to the ISDA Master to reflect the terms that the counterparties may agree to, including the manner of settlement of transactions and choice of governing law of the Agreement. Besides the ISDA Master Agreement, participants should obtain specific confirmation for each transaction which should detail the terms of the contract such as gross amount, rate, value date, etc. duly signed by the authorised signatories. It is also preferable to make a mention of the Master Agreement in the individual transaction confirmation.

(ii)

(iii)

(iv) Participants should further evaluate whether the counterparty has the legal capacity, power and authority to enter into derivative transactions.

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Technical Guide on Internal Audit of Treasury Function in Banks

(v)

Participants must ensure that ISDA Master Agreement is signed with the counterparty prior to undertaking any derivatives business with them.

(vi) Participants shall obtain documentation regarding customer suitability, appropriateness, etc. as specified.

XI.
a b c

Investment in Debt Securities

Verify the frequency of interest payments. Check whether the bank has obtained information about the issuer and the credit rating. Check whether the bank has checked the terms of the issue like the use of the issue proceeds, the monitoring agency, the formation of trustees, the secured or unsecured nature of the bonds, the assets underlying the security and the credit-worthiness of the organisation. Check the Yield To Maturity (YTM) of the debt security with the YTMs of other comparable debt securities of the same class and features.

76

ANNEXURE II

SPECIMEN CHECKLIST FOR INTERNAL AUDIT OF FOREIGN EXCHANGE OPERATIONS OF TREASURY

The internal auditors procedures with respect to the following specific areas of foreign exchange operations would include: S. No. Particulars Remarks

I.
a b c

Interbank Deal
Check whether the bank has specified the dealing hours for the dealers operating in foreign exchange market. Check whether adequate care is exercised in selecting and grooming the dealers. Check whether dealers operate in the interbank market according to the guidelines lay down by the management. Check whether there is a system of rotation of duties of dealers. Check whether dealers have furnished an undertaking to conform to the code of conduct prescribed by Foreign Exchange Dealers Association of India (FEDAI). Check whether the trading date, time and the transaction serial number are entered automatically in the system and the same can not be altered by the dealer after a contract is finalised. In case of deviations in the transaction data, check whether approval of the competent official is taken.

d e

Technical Guide on Internal Audit of Treasury Function in Banks h i J k Check whether late deals are marked and included in days position. Check whether the access to the equipment and tapes are subject to strict control. Check whether a dealers pad is maintained by the front office to record the inter bank and merchant deals. Check whether any delay of more than half an hour was observed between striking the deal and entering the same in K+. Check whether deal confirmations are stamped in case of phone deals which do not have a REUTERs screen. Check whether a default register as prescribed by RBI vide its letter no. ECS: 95/86(SPL)-82/83 dated January 30, 1982 is maintained. Check whether deal slips are serially numbered. Check whether all required particulars are furnished therein and slips are checked / signed / initialed by the dealer. Check whether the deal slips are immediately prepared and passed on to back office immediate after conclusion of the deals. Check whether accounting department keeps the receipt of confirmations/Reuters screen/telex message of the deals received from counterparty banks and checks the correctness thereof. Check whether the deal slips, contract notes, etc. are maintained in proper sets and in sequential order to facilitate control and further reference. Check whether back office prepares monthly bank wise lists of all, unconfirmed outstanding exchange contracts and the outstanding are followed-up with the counterparty banks expeditiously to finally settle the deals. 78

l m

n o

Annexure II t Check whether any unusual features are noticed in inter bank / inter-office dealings, e.g., transactions concluded for window dressing in the books. Check whether any swap deal has been undertaken at level rate and if so, the reasons thereof. Check whether the base rates at which the deals were concluded and the swap differences were realistic and reflect the prevailing conditions in the interbank market. Check whether there is any deal that not reflect in dealers pad but found subsequently. Check whether specimen signature of counter party Banks is kept for verification of deals. Check whether accounting entries are promptly booked, and payments committed under the deals are promptly advised and effected. Check whether receipts are suitably recorded in the Nostro Account. Check whether exchange confirmatory message over telex are obtained where business with other authorised dealers is done, directly over telephone. Check whether dealers nominate brokers after the deals of the above nature have been struck.

u v

w x y

aa

II.
a

Merchant
Check whether the profit/ loss on cancellation of merchant deals has been correctly calculated and accounted for. Check whether statement of overnight position including late deals is submitted. Check whether reconciliation of the positions between the dealers records and the accounting system is done. Check whether the position and the Fund Registers are continuously updated on the basis of deal slips and the reports of business flowing in from the Branches (CPC & NRI). 79

b c d

Technical Guide on Internal Audit of Treasury Function in Banks e Check whether the rates for the foreign currencies are being taken thrice a day (viz. at opening hours, afternoon and closing hours). Check whether crystallization of export bills are promptly resorted on respective due dates. Check whether there is any overdue merchant contract outstanding without utilization / cancellation. (as per the latest FEDAI guidelines, contracts will automatically have to be cancelled, if not utilized by due date / within delivery period.) Check whether forward purchase/sales (FP/FS) cancellation charges are collected on due date.

f g

III.
a b c

Brokerage
Check whether branch is maintaining panel of brokers approved by the management . Check whether substitution of one bank by another in inter-bank contract by brokers is noticed. Check whether provisions of Income Tax Act regarding the tax deducted at source (TDS) on brokerage have been complied with. Check whether all brokerage claims are being verified from the above broker-wise register. Check whether the back office is preparing a monthly summary of brokerage paid to each broker in the abovementioned register and the contents thereof are being submitted to head office. Check whether back office department ensures that all broker notes have been received expeditiously and particulars therein including the dates thereof agree with relative deal slips. In case of discrepancies in the brokers note, check whether the same are brought to the dealers attention

d e

80

Annexure II and clarification/rectification obtained promptly from the dealer and/or broker directly by the Accounting Department. h Check whether brokers, with whom no hotlines are established, are also encouraged over extra telephone lines. Check whether brokerage bills received by the backup department from the brokers, are sent to the dealers for certification. Check whether brokerage on outright and swap deals has been paid as per revised rates prescribed in terms of FEDAI Rules.

IV.
a

Limits
Check whether limit is fixed for the exposure to other banks in respect of interbank dealings. If so, check whether the dealings are within the limits. If not, verify the procedure followed for regularizing it. Check whether day light limits have been exceeded and if so, check the extent. Ascertain and indicate the reasons for same and verify whether higher authorities ratified the same. Check whether the overnight open position limits in various currencies, as fixed by the management, have been exceeded at any time and if so,verify the time and extent. Indicate the action taken to regularize the position. Check whether the gap limits are adhered to. If not, indicate the details and the steps taken to comply with the requirements in this regard. Check whether statements of maturities are being submitted to higher authorities / RBI by accounting department and check the intervals of the submission also.

81

Technical Guide on Internal Audit of Treasury Function in Banks f g Check whether particulars reported in Gap statements are correct as per the office records. Check whether any dealing limits have been fixed for the dealer. Check the date when these limits were fixed. Check whether they have been exceeded, and if so, check the time and extent. Also indicate action taken by the division for obtaining ratification / confirmation. Check whether there is any exceeding in respect of single country exposure. Check whether off credit countries exposure are monitored on a daily basis.

h i

V. POS Register
a b Check whether daily currency position report (Form IC-5 of guidelines) is being submitted to higher authorities. Check whether statement of currency positions in each currency as on the last Friday of each month computed after taking into account the effect of all pipeline transactions, is submitted to the management indicating the steps to be taken for reducing the distortions, if any. Check whether the particulars reported in the last statement of true currency positions prepared and submitted to the management are correct as per records maintained. Check whether there is any alteration / correction at the dates of the contracts in order to manipulate currency position. Check whether dealers have maintained position pads, funds chart and maturity pattern of the contracts. Check whether currency wise position and funds position is communicated and / or updated in the system frequently to enable the dealer to have updated position.

e f

82

Annexure II g h Check whether positions are taken purely for covering positions. Check whether positions are also taken in advance.

VI.
a

Nostro Reconciliation
Check whether accounting entries are promptly booked and payments committed under the deals are promptly advised and effected. Check whether receipts are suitably recorded in the Nostro account. Check whether a separate department / section, under the charge of a separate official, is there for reconciliation work. Check whether the officials attached to the reconciliation department have been entrusted with the operation of Nostro Accounts or passing of entries in the Mirror Account. Check whether statement of accounts are received at least once in month by the reconciliation department and the department is: (a) Watching the receipt of statement (b) Ensuring that there are no unauthenticated alterations, erasures, etc.

b c

e f g

Check whether the reconciliation work is undertaken expeditiously and is upto date. Check whether the credits are advised to the concerned branches immediately. Check whether the follow up action on the entries, especially debit items appearing in the statements and/or mirror account is promptly initiated / taken. Check whether the department is submitting a report once a month to the higher authorities indicating the progress of reconciliation work and the special features, such as large non reconciled items etc., and if so, check the action taken on such reports by the branch.

83

Technical Guide on Internal Audit of Treasury Function in Banks i Check whether large balance has been held in an inoperative account, for a long period and if so, the reasons thereof. Indicate the details of arrangement, if any made for automatic transfer of funds to secure benefit of interest for overnight idle funds. Check whether overdrawn balance of US $ 5 lacs and above for continuous period of more than 5 days have been observed and if so, give details, also indicate whether the matter has been reported to RBI for post facto approval as required under Exchange Control Manual (ECM). Check whether bank has been submitting the BAL Statements promptly and regularly to RBI and the particulars reported in the last BAL statements submitted to RBI are correct as per bank's records. Check whether any new Nostro account opened during the month is under review. If so, check whether the same has been reported to RBI? Check whether any large overdrafts observed in Nostro accounts during the month and if so, check whether conductive / monitoring method are initiated. Check whether proper registers are maintained regarding the rupee postings in Nostro account.

VII. R- Returns
a b Check whether timely, accurate and comprehensive management information system is in place. Check whether monitoring and reporting is undertaken by officials who are not directly concerned with trading activities. Check whether R-Returns are submitted to RBI within the stipulated due-date.

84

Annexure II

VIII. Forex Profits/ Losses

a b Check whether dealer-wise profit targets are fixed. Check whether the bank is reckoning only the Nostro balances for adjustment of the profits / losses revealed in the mirror accounts or check whether it also consider the forward transactions as at the date of evaluation. Check rates used to liquidate the month-wise positions. Check whether any departure is noticed in this regard. Check whether this work is entrusted to a department / person independent of the dealing function.

IX.
a

Trading Operations Done by the Division

Check whether the position taken by the dealer is in tune with the prevailing rates in the market, the loss or profitability of the trading transactions. Check whether the dealer has exceeded the cut-loss prescribed by the head office. Check whether the profit arrived by the division on trading operations is correct. Check whether the trading operations does not exceed and are within the IGL / AGL prescribed by the head office.

b c

X.
a

Dealing Room: System/Ethics/ Profit Evaluation

Check brief description of organizational set-up and check whether the dealing function is separated from the accounting, funding and other back-up functions. Check whether, before the dealer starts the work for the days, he confers on the trend in the overnight markets and markets still operating in the same time zone and keep the management informed of the conclusion. Check whether dealer is allowed to sign contract notes, passing accounting entries and sending payment instructions/receipt intimations to correspondents / brokerage claims.

85

Technical Guide on Internal Audit of Treasury Function in Banks d e Check whether the deals are done from outside the dealing rooms / hours. Check whether a Rate Scan report is: Prepared for each day showing the days market spread for each currency dealt by it during the day both spot and forward and submits it to an official independent of the dealing department. On a test verification of such reports with relative deal slips check whether there was any aberration detected in the rates and if so what is explanation given by the dealer and where the aberrations few by exception or were they quite frequent. Check procedure / policy followed for posting / rotation of staff. Check whether consideration of knowledge and experience of the foreign exchange department are taken into account while posting the staff.

XI.
a

Internal Control
Check whether data processing system is adequate to the nature / volume of activities and is designed to functional separation. Check whether back up facilities are available for deployment in case of system failure and other emergencies. Check whether job rotation is provided to the dealers as well as back office personnel. Check whether clear functional separation of dealing, back office, settlement / accounting / reconciliation is being observed. Check whether the bank has the system of internal audit of the Forex Department. Check whether the bank has proper system of receiving, distributing and filing all relevant RBI circulars.

c d

e f

86

Annexure II g Check whether the bank has sufficient number of Exchange Control Manuals with all the amendments.

XII. Overnight Placement of Orders in Trading

a Check whether there are any instances that the bank has invested funds in overseas markets above $10 million (or 25% of Unimpaired Tier 1 capital) or borrowed above $ 10 million (or 25% of Unimpaired Tier 1 Capital) whichever is higher, from the correspondents. Check whether the limit for placement of overnight orders is exceeded during the month. Check whether the dealers place overnight orders only with correspondent banks with which they maintain Nostro accounts and other approved counter party banks, for which exposure limits are fixed by the competent authority from time to time. Check whether exit points for the position, i.e., stop loss are clearly mentioned. Check whether the division is submitting the details of overnight orders placed to higher authorities in their daily report on trading. Check whether the amount placed as overnight orders is within the IGL / AGL limits fixed by the head office. Check whether the amount placed as overnight orders is shown as VaR as VaR Trading position. Check whether the overall overnight position includes the amount of overnight orders.

b c

d e

f g h

87

ANNEXURE III

SPECIMEN CHECKLIST FOR INTERNAL AUDIT OF DOMESTIC OPERATIONS OF TREASURY

The internal auditors procedures with respect to the following specific areas of domestic operations of treasury would include: S. No Particulars Remarks

I.
a b c d

Investment Policy
Check whether bank has framed an investment policy. Check whether the policy is revised periodically and is in accordance with the RBI guidelines. Check whether the policy after approval by Board is sent to RBI. Check whether the investment activity of the bank is in consonance with the policy.

II.
a b

Internal Control System

Check whether there is functional separation of trading, settlement, monitoring, control and accounting. Check whether the deal slips contain the requisite particulars such as nature of the deal, name of the counterparty, category (HTM/AFS/HFT). Check whether it is a direct deal or through a broker, and if through a broker, name of the broker, brokerage amount, details of security, amount, price, yield, contract date and time has been recorded.

Annexure III c Check whether there is a functional separation of trading and back office functions relating to banks' own Investment Accounts, Portfolio Management Scheme (PMS), Clients' Accounts and other constituents (including brokers) accounts. Check whether there is a system to ensure that no sale transactions are put without actually holding the security in its investment account by the bank. Check whether all the deals as per the Kondor (FO) tally with the deal details as per ITMS. Check whether deal slips are serially numbered and controlled separately to ensure that each deal slip has been properly accounted for. Check whether there is a system of issue of confirmation to counter party and check whether timely receipt of requisite written confirmation from counter party is monitored. Check whether any modifications were made in the deal tickets. Check whether there has been any change in the security / counterparty after conclusion of the deal. Check whether the back office monitors the essential details on the counterparty confirmation. Check whether a dealers pad/deal blotter is maintained in respect of all transactions. Check whether any discrepancies were observed in the dealers pad / deal blotter. Check whether there is proper system for signature verification in respect of the confirmations received from the counterparty. Check whether there was any instance of substitution of the counterparty bank by another bank by the broker.

e f

h i j k l m

89

Technical Guide on Internal Audit of Treasury Function in Banks o Check whether there was any instance of security sold/purchased in the deal been substituted by another security. Check whether the accounts section independently writes the books of account on the basis of the vouchers received from the back office. Check whether profit or loss on sale is arrived at by applying weighted average cost as required by the investment policy of the bank. Check whether a written contingency plan is in place to ensure that in the event of a breakdown of the equipment, back up facilities can be deployed at a short notice. In case of a sale transactions entered into on basis of the corresponding purchase contract, check whether the purchase contract is confirmed prior to the sale contract and whether the same is guaranteed by CCIL or else the security is contracted for purchase from the RBI. Also check whether the same transaction settles in the same settlement cycle as per the preceding purchase contract or in a subsequent settlement cycle. In case of securities purchased from RBI through OMO, check whether the same transaction is entered into only on receiving the confirmation of buy deal or the allotment advises recieved from RBI.

III.
a

SGL Forms
Check whether there is a system of control, accounting and verification of authenticity of SGL transfer forms issued / received. Check whether SGL transfer forms are issued on semi/security paper in the prescribed format. Check whether the same are serially numbered.

b c

90

Annexure III d Check whether SGL forms are signed by two authorised signatories whose signatures are placed on record with the PDO. Check whether there is a system of verification of SGL forms received from other banks and confirmation of the authorised signatories. Check whether proper records of SGL forms issued are maintained. Check whether there were any instances of bouncing of SGL forms. If yes, check whether these instances were reported to RBI immediately. Check whether SGL forms received are deposited in the SGL account immediately (within 24 hours). Check whether any sales are affected by return of SGL forms held. Check whether it is ensured that there is sufficient balance in the SGL account before issuing SGL forms. Check whether there were instances where Bank held an oversold position, i.e., selling the security without the adequate balance in investment account. Check whether the SGL balances are reconciled at monthly intervals with balances in the books of PDO. Check whether the settlement of transactions as per banks books is reflected correctly in the RBI statements. Check whether the bank has drawn cheques on their account with the RBI for third party transactions, including inter-bank transactions. Check whether any sale was made of security allotted to bank in the auction for primary issues. If yes, check whether the contract of sale was entered once only and on the basis of an authenticated allotment advice by RBI.

f g

h i j k

l m

91

Technical Guide on Internal Audit of Treasury Function in Banks p Check whether there is a system of reporting exceptions in securities transactions like bouncing of SGL transfer forms to the top management. Check whether the RBI guidelines on Delivery Versus Payment (DVP) III system are adhered to. Check whether the RBI guidelines on Portfolio Management Scheme (PMS) operations are adhered to.

q r

IV.
a b

Negotiated Dealing Systems (NDS)

Check whether the deals are put through by the dealers and settled by the back office. Check whether the settlement of transactions in Government securities and Repo transactions are settled in electronic form as per RBI guidelines. On completion and approval of the deal by the buyer and seller, check whether the same is taken over by Clearing Corporation of India Ltd. (CCIL) for settlement via electronic mode. Check whether the report on settlements received from Clearing Corporation of India Ltd. (CCIL) at the end of the day is reconciled with the books. Check whether all the call deals are reported on Negotiated Dealing Systems (NDS) as required.

V.
a

Ready Forward Deals

Check whether the bank has entered into any ready forward deal other than in the permitted securities (i.e., Treasury Bills and other approved securities). Check whether all the ready forward contracts are settled through the SGL account maintained with RBI with CCIL acting as a central counterparty for all such transactions.

92

Annexure III c Check whether any ready forward deal was entered into without actually holding the security in the portfolio of the bank. In case of sale, check whether the corresponding amount is deducted from the investment account of the bank and its SLR assets for the entire period of holding by purchasers/ counterparty. Check whether any forward or double ready forward deals were put through in any securities on behalf of PMS Clients and other constituents including brokers. Check whether any ready forward transactions were undertaken by the bank with parties other than banks, financial institutions and mutual funds notified by RBI during the period under review. Check whether the existing ready forward deals in dated securities have been completed on due dates without resorting to any roll over or extension. Check whether the ready forward deals are correctly accounted for. Check whether the bank has followed the guidelines issued by the RBI (RBI Master circular dated 2nd July 2007) in respect of ready forward transactions. Check whether the securities contracted for repurchase are sold on the basis of the settlement cycle coinciding with the second leg of ready forward deal or a subsequent settlement cycle. Check whether any double ready forward transactions have been put through.

h i

VI.
a b

Transactions with Constituents

Check whether the bank is providing a facility to its customers for opening of constituent account. Check whether the bank maintains the separate account in respect of constituents. 93

Technical Guide on Internal Audit of Treasury Function in Banks c Check whether requisite instructions in respect of settlements are received from the constituent account holders. Check whether the deal details are correctly recorded in the ITMS system. Check whether the Constituent Subsidiary General Ledger (CSGL) balances are reconciled at monthly intervals with balances in the books of Public Debt Office (PDO). Check whether the signature in the requisition letter received from the constituent match with the list of authorised signatories. Check whether the bank obtains independent confirmation from the constituents of the holdings held by the bank on their behalf.

d e

VII.
a b c d e

Call Money Transactions

Check whether call borrowal/deposit receipts are acknowledged by the counterparty. Check whether cheques received from counterparties were deposited on the same day. Check whether cheques received from counter parties were routed through clearing channels. Check whether there were any defaults on settlement. Check whether interest paid on call borrowings and interest received on call lending were computed correctly. Check whether the transactions of borrowing by the bank during the month are correctly accounted.

VIII. Bankers Reciepts

a Check whether bank receipts have been issued or received.

94

Annexure III b Check whether the bank has any outstanding bankers receipts.

IX.
a

Dealings Through Brokers

Check whether criteria have been laid down for empanelment and delisting of brokers andit is being reviewed annually. Check whether the brokers are the members of specified stock exchanges. Check whether services of broker(s), who are not empanelled with the bank, are taken. Check whether broker note is received for each deal entered through broker containing relevant details. Check whether the details given in the broker's note agree with the details as per the deal ticket. Check whether the brokers contract note clearly indicates the name of the counterparty. Check whether broker-wise record is being maintained of deals put through brokers and brokerage is paid. Check whether the bills received from brokers are checked and reviewed by the staff independent of trading prior to payment. Check whether the brokers role is restricted to bring the two parties to deal together (i.e. broker is not involved in funds settlement and delivery of securities). Check whether the transactions entered into through individual brokers exceed 5% of the total transactions. If yes, check whether such excesses have been reported to the Board through half yearly review. Check whether accounting for brokerage is correct.

b c d e f g h

95

Technical Guide on Internal Audit of Treasury Function in Banks

X.
A
a

Non-SLR Investments
General
Check whether banks aggregate capital market exposure is within the limit of 40 per cent of its net worth on a solo and consolidated basis as per RBI circular no: DBOD. No. Dir. BC. 47/13.07.05/2006-2007 dated 15th December 2006. Check whether the bank is monitoring the exposure limits in respect of the investment transactions in NonSLR securities. Check whether the bank has framed an investment policy in respect of investments in Non SLR investments including prudential limits on investments in bonds and debentures, caps on unrated issues, private placements, sub-limits for PSU bonds, corporate bonds and guaranteed bonds, etc. Check whether the bank has exceeded the limit of 25% of the total Investment portfolio for investments under Held to Maturity category. Check whether the credit exposure in respect of investments in corporate is being monitored. Check whether the physical verification of investments was conducted. In case where the stock is held in Demat form, check whether the same have been checked with the holding statement received from the Depository Participants (DP). Check whether the investment of the bank in unlisted securities is in consonance with RBI circular no. DBOD.BP.BC. 44/21.04.141/ 2003-04 dated November 12, 2003 and DBOD. NO. BP.BC. 53/ 21.04.141 /2003 dated December 10, 2003. Check whether original maturity period is not less than 1 year, except for those exempted category given in RBI Circular dated December 10, 2003. 96

e f

Annexure III Check whether prudential limits were complied with as on 31st March of previous year. Check whether the security (except for those exempted category) has been rated. Check whether rating is as per RBI guidelines prescribed vide circular dated December 10, 2003. Check whether the investments are made in listed debt securities of companies, which have complied with SEBI guidelines.

In case investment is in privately placed security, check whether copy of offer document has been filed with Credit Information Bureau (India) Ltd. (CIBIL). Check whether total investments in unlisted non-SLR securities exceed 10% of total investment in non-SLR securities as on March 31 of the Previous Year. Check whether excess over 10%, if any, is on account of investment in securitization papers issued for infrastructure projects, bonds/debentures/Pass through certificates issued by Securitization Companies and Reconstruction Companies. Check whether excess over 10% as mentioned above, if any, is within 20% of total investment in non-SLR and is in prescribed instruments. Check whether internal credit analysis and internal rating system is referred to the Credit Committee/ Independent authority for their assessment. Check whether quarterly review of investments in nonSLR has been undertaken as per RBI guidelines and placed before the Board. Check whether there is any default (of privately placed security) with regard to interest/ installment. If yes, check whether matter reported to Credit Information Bureau (India) Ltd. (CIBIL) along with a copy of the offer document.

97

Technical Guide on Internal Audit of Treasury Function in Banks o p Check whether any investment is non-performing investment (NPI). Check whether extent of non-performing investment in non-SLR category has been placed before Board for review at least at quarterly intervals. Check whether all trades other than spot transactions in listed security are executed through stock exchange. Check whether transition time frame, as detailed below, is being adhered to: RBI guidelines with regard to investment in units of mutual fund schemes where the entire corpus is invested in debt securities will be applicable from 31-12-2004. With effect from January 1, 2005 only investment in units of such mutual fund schemes which have an exposure to unlisted securities of less than 10 per cent of the corpus of the fund will be treated on par with listed securities for the purpose of compliance with the prudential limits prescribed in the above guidelines.

q r

A) Investments in the existing unlisted securities (those issued on or before November 30, 2003). B) With effect from April, 2004, investments in above category of unlisted securities until 31-12-2004 provided the issuers have applied to the stock exchange(s) for listing and the security is rated minimum investment grade. C) Investment in unlisted securities issued after November 30, 2003 provided it is up to 10% of incremental Non-SLR investments over the outstanding Non-SLR investments as on November 30, 2003 up to December 31, 2004.

B
a

Bonds and Debentures

Check whether the bank has invested in any securities,

98

Annexure III which do not have the minimum rating as prescribed by the investment policy of the bank. If so and where the external rating is not available, Check whether the bank has obtained the waiver from the appropriate authority for the same. b Check whether any delay was observed in receipt of stock or any instance of delivery of stock with late receipt of funds.

C
a b c d e

Equity Shares
Check whether there were any investments in equity shares during the month under review. Check whether separate broker notes are received for each transaction. Check whether the investments and dis-investments are done in respect of scripts approved by the Board. Check whether all the scripts are listed on the stock exchange. Check whether all purchases and sales result in actual receipt/ delivery and no arbitrage operation is undertaken. Check whether the Investment Committee reviews the investments in equities. Check whether the investments in shares in a company exceed 30% of the paid up capital of that company or 30% of its own share capital and reserves, whichever is less, as required by Section 19(2) of the Banking Regulation Act. Check whether transaction in equities are reflected in the DEMAT statement within reasonable period and there are no instances of abnormal delays in the debit/credit of the instrument to the Banks demat account.

f g

99

Technical Guide on Internal Audit of Treasury Function in Banks i Check whether the Closing Stock Report tallies with the DP Holding Statement.

D
a

Mutual Funds
Check whether any transaction undertaken in mutual funds during the month is under review. If yes, appropriate documents were kept on record. Check whether there are any transaction put through by the branches. If yes, check whether required documents such as the e-mail containing approval of the appropriate authority and the transaction statement are attached with the deal ticket. Check whether in case of sale, the Net Asset Value (NAV) at which the sale is made matches with the statement of account received from the mutual fund. Check whether accounting for purchases and sales including profit or loss on sale is correctly done. Check whether dividend has been received on the mutual fund units. Check whether any amount lying in the application money as on month ending is outstanding for more than 30 days. If yes, verify the details of the same.

d e f

E
a

Commercial Paper
Check whether the tenors of the Commercial Papers are not less than 7 days and not exceeding one year from the date of issue? Check whether the denominations of Commercial Papers are in multiples of Rs.5 lakhs. Check whether bank is holding letter from issuing and Paying Agent (IPA) that they are holding in custody certified copies of: Credit Rating Certificate Letter of offer of CP 100

b c

Annexure III Board resolution authorising issue of the CP Declaration from the issuer that the amount proposed to be raised is within the ceiling mentioned by the credit rating agency or as approved by the Board whichever is lower, and also state the amount of CP issued and subscribed so far on the strength of the credit rating under reference.

Check whether maturity date of Commercial Paper is not beyond the date upto which the credit rating of the issuer is valid. Check whether the transactions have been accounted for correctly. Check whether the interest on Commercial paper is accrued in accordance with the RBI guidelines dated 13 July, 2006.

e f

F
a b

Certificate of Deposit (CD)

Check whether the maturity period of the CDs is in accordance with the RBI Circuilar. Check whether the denomination of CDs is in multiples of Rs. 1 lakh.

XI.
A
a

Accounting and Valuation

Accounting
Check whether the bank has classified its investments into Held to Maturity (HTM), Available for Sale (AFS) and Held for Trading (HFT) as per RBI guidelines. Check whether the category of the investment is decided at the time of acquisition of the security and the same is mentioned on the deal ticket. Check whether cost associated with acquisition of securities such as brokerage, commission and stamp charges, etc. are recognised as expenses and not as part of cost of investment. 101

Technical Guide on Internal Audit of Treasury Function in Banks d Check whether the shifting of investment to/from Held to Maturity is done by the bank at the beginning of the year with the approval of the Board of Directors. Check whether there was an instance of an investment in the Held for Trading category not sold off within the stipulated period of 90 days. Check whether approval has been obtained from the appropriate authority for transfer of security from Available for Sale to Held for Trading or vice versa. Check whether the shifting between categories has been done at the least of market value of security, acquisition cost or book value as on the day of transfer. Check whether loss is recognised on transfer of security from one category to another. Check whether all the transactions have been correctly accounted. Check whether income on securities was accounted correctly. Check whether the investment in the nature of advance are in accordance with the guidelines issued by RBI. Check whether the broken period interest paid at the time of acquisition of security is taken as part of cost of the investment. Check whether broken period interest has been correctly calculated. Check whether the bank has been accruing interest on securities at monthly intervals or at more frequent intervals.

h i j k l

m n

102

Annexure III

B
a

Valuation
i. Held to Maturity Category Check whether investments under the HTM category are carried at their acquisition cost and are not marked to market. Check whether any premium on the acquisition of a security is amortised over the balance period. ii. Available for Sale Category Check whether the valuation of investments has been done at quarterly intervals or at more frequent intervals as required by RBI guidelines. Check whether necessary accounting entries for valuation are passed in accordance with the RBI guidelines. Check whether investments are revalued at cost or market price which ever is lower. Check whether the net depreciation, if any, under each classification has been provided for. iii. Held for Trading Category Check whether investments are marked to market at monthly intervals as required by RBI guidelines. Check whether the net depreciation, if any, under each classification has been provided for. Check whether equity investments under each of the above three categories are marked to market at monthly or more frequent intervals as required by the RBI Guidelines on. Check whether treasury bills are valued at carrying cost by the bank.

c d

a b c

XII.
a

Audit, Review and Reporting

Check whether half-yearly review of investment portfolio indicating and certifying an adherence to the laid down 103

Technical Guide on Internal Audit of Treasury Function in Banks investments policy and procedures and RBI guidelines is undertaken and check whether the same has been placed before the Board within a month and a copy of the same was forwarded to RBI. b c Check whether periodical returns are submitted to RBI on due dates. Check whether the returns submitted to RBI are accurate. Check whether due date diary for interest and redemption is maintained by the back office. Check whether redemption money due is received during the month on due dates. Check whether there are cases of overdue redemptions in investments. If yes, verify the details. Check whether interest due is received during the month for all investments as per coupon dates falling within that month. Check whether there are any cases of overdue interest on investments. If yes, verify the details. Check whether the interest on delayed payment is received. Check whether interest accrued on investments is correctly computed. Check whether TDS on interest is accounted for properly. In case the interest/principal on the debentures/ bonds is in arrears, check whether the provisions for the same are made.

XIII. Income
a b c d

e f g h i

104

ANNEXURE IV

RBI CIRCULARS RELEVANT TO TREASURY OPERATIONS OF A BANK

S. No. 1. Circular Link

RBI Guidance Note on Market Risk http://www.rbi.org.in/scripts/Notif Management icationUser.aspx?Mode=0&Id=9 07 RBI Guidelines on Asset Liability Management System in Banks Circular No. DBOD. BP. BC. 8 / http://www.rbi.org.in/scripts/Notif 21.04.098/ 99 dated February 10, icationUser.aspx?Mode=0&Id=1 1999 6 Circular No. DBOD. BP. BC. 38 / http://www.rbi.org.in/scripts/BS_ 21.04.098/ 07-08dated October 24, CircularIndexDisplay.aspx?Id=3 2007 896 Circular No. DBOD. BP. BC. 68 / http://www.rbi.org.in/scripts/Notif 21.04.098/ 2007-08 dated April 09, icationUser.aspx?Mode=0&Id=4 2008 112

2.

3.

Master Circular - Operational http://www.rbi.org.in/scripts/BS_ Guidelines to Primary Dealers ViewMasCirculardetails.aspx?id =5099 Master Circular on Capital http://www.rbi.org.in/scripts/BS_ Adequacy Standards and Risk ViewMasCirculardetails.aspx?id Management Guidelines for =5100 Standalone Primary Dealers Master Circular on Call/Notice http://www.rbi.org.in/scripts/BS_ Money Market Operations ViewMasCirculardetails.aspx?id =5101

4.

5.

Technical Guide on Internal Audit of Treasury Function in Banks 6. Master Circular on Guidelines for http://www.rbi.org.in/scripts/BS_ Issue of Certificates of Deposit ViewMasCirculardetails.aspx?id =5102 Master Circular on Guidelines for http://www.rbi.org.in/scripts/BS_ Issue of Commercial Paper ViewMasCirculardetails.aspx?id =5128 Master Circular Prudential Norms http://www.rbi.org.in/scripts/BS_ for Classification, Valuation and ViewMasCirculardetails.aspx?id Operation of Investment Portfolio by =5061 Banks

7.

8.

106