Introduction to Treasury and Funds

Management
November 27, 2018

Faisal Sarwar
Deputy Director
State Bank of Pakistan
 THE ECONOMIC CYCLE
Lending Cycle

Lenders Financial Financial Borrowers

Intermediaries Markets
Individuals Banks Stock Exchange Individuals
Companies Asset Management Money Market Companies
Companies Bond Market Government
Real Estate Agents Real Estate Public
Corporations

Return Cycle
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 PRESENTATION OUTLINE
Section - 1 :
Overview of Treasury Management
Section - 2:
Comprehensive overview of Money Market
Section - 3:
Comprehensive overview of Foreign Exchange
Section - 4:
Types of inherent Risk associated with Treasury will
partially be covered in section 1,2,3
 TREASURY STRUCTURE

Country Treasurer

Head of Trading Head of Sales

FX Desk Money Markets Securities Trading Institutional Corporates

Position Clerk
Funding Gapping IR Swaps Securities

Spot FWD / Swaps

 Treasury Management?

• It is Central location where a firm manages its money

• Management of an enterprise’s holdings with the ultimate
goal of managing the firms liquidity and mitigating its
operational, Financial & Reputational Risk.

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 Treasury Management Includes

• Firm’s Collection
• Disbursements
• Concentration
• Investment & Funding activities

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 TREASURY DEPT FUNCTIONS

• Asset & Liability Management

• Net interest income (NII)
• Managing the Bank Reserve Requirement
• Manage Market Volatility
• Exchange Risk Management
• Manage Regulatory Risk
• Ensure Surprise-Free Earnings
• Market Analysis
• Product Development

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 Treasury Management Objectives

LOAA MCBMM
• Liquidity management
• Optimizing cash resources
• Access to short term financing
• Access to medium to long term financing
• Managing Risks
• Coordinating Financial Functions
• Banking relationship management
• Management of interest rate exposures
• Management of foreign currency exposures
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ROLE OF TREASURY

– Risk Management
– Market Risks
– Regulatory Risks
– Balance Sheet Risks
– Balance Sheet Management
– Liquidity Management
– Product Development
– Profitability

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Treasury Division – Heart of the bank
Responsibilities
– Managing Asset & Liabilities of the bank – ‘The
Balance Sheet Management’. Thereby enhancing the
risk-adjusted return on equity
TRADE BRANCHES

CORPORATE
RISK TREASURY BANKING

Financial
Consumer Banking
Institutions Group
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Treasury Management

– Manage risk inherent in Asset / Liabilities of the bank

Assets:
i. Cash
ii. Running Finance & ERF
iii. Advances linked with
KIBOR, T Bills – Short Term
iv. Advances linked with PIBs
- Long Term Fixed
Liabilities:
i. Current Deposits
ii. Savings Deposits
iii. Term Deposits (TDRs)
iv. Interest Payables

v. Advances linked with PIBs v. Others

- Long Term Floating

vi. Investments – Advances

converted into Bonds
vii. Others
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Treasury Management

• Assets & Liabilities Management

– To avoid situations of unfavorable movements in

interest rates, will require:
– Longer-Term view on IR
– Cash flow implications
– Identifying IR sensitivity
– Hedging Tools

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Treasury Management
• Assets & Liabilities Management
• Alco Charter (Assets & Liability Committee)
» The ALCO’s specific responsibility are:
• Risk Management
 Market Risk Oversight
 Regulatory/Operating Risk Oversight.
• Liquidity & Funding Management
• Investment Decisions
• Regulatory Compliance
• Product Pricing
• Fund Transfer Pricing
• New Product Approvals

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NEED FOR TREASURY DEPARTMENT

– Globalization
• Daily FX Market Turnover in Excess of USD 5.5 Trillion.
• Technological Developments
• Open Market Economies / Deregulation

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Major Participants

– Commercial Banks /NBFIs.

– State Bank of Pakistan.
– Corporate Treasuries.
– Public Sector/Government.
– Inter-Bank Brokerage Houses-Playing the role of
facilitators.
– Exchange Companies

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Brokerage house

• A person who acts as an agent or go between, bringing

together principals who wish to deal e.g. borrower & lenders
in MM at mutually agreed prices, but who does not act as a
principal to any transaction.

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Brokers

• Provide good accurate information

• Facilitate fast execution of trade
• Confidentiality
• Up to date indicative interest rates, Price & FX rates
• Neutral in the market

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Functionality….
Lending to Branches
Borrower Borrowing
Funding

Excess

Spread
Branch
Liquidity
TREASURY Investment
Front Office

Treasury
Reserve
Depositor Back Office
Requirement
Functions
• Branches Receive Deposits
• Branches Lend To Customers
• Branches Remit Excess liquidity to try at an average rate (Pool Rate)
• Try maintenance reserve with SBP.
• Invest in MM Instruments
• Invest in Govt. Securities
• Invest in Debt Securities
• Capital Market
• Fund FCY Trade Nostro Account
• Lend to Other Branch
Organizational Set Up

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Organizational Set Up
• Front Office
– Deal analysis
– Pricing analysis
– Deal execution
– Managing cash flows

• Middle office
– Monitoring of limits on counterparties & dealers
– Monitoring of limit on amount & tenor
– Compliance to laws
– Validation of deals

• Back office
– Book keeping
– Deal validation, confirmation
– Execution & Settlement
– Reconciliation

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MARKET MECANISM

• Arbitrage
• Process of buying something in one market and then selling it in
another market for a risk free profit (offsetting position).
• Lock profit, no risk & no investment.
• Hedging
– Reduce the risk of an investment by making offsetting investment in
forward.
– Cover or protect risk arising from potential market
– Transfer Risk
• Speculator
– Betting on future price movement.
– Risk taking investor, highly liquidity

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Common Treasury Terms
• Overnight
• Tom-next
• Spot-next
• Mine, yours & squares
• Long, short & square
• Bid, Offer & Spread
• Deal Ticket ( Globus)
• Dealing System
– Reuters
– Bloomberg
• Basis point (100 basis =1%)
• Banking book
• Trading Book
• Eurocurrency

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 Common Treasury Terms
• Following
• Preceding
• End of month
• Day count conversion methods
– A/A
• Sterling Bond, EUR Bond
– A/365
• GBP, Pakistan rupees, Singapore Dollar etc
– Domestic
» Yen, Canadian dollar, Australian, new Zealand dollar
– A/360
• USD & EURO
– 30/360
• European Bond market
– 30/365

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 Financial Market
• Markets for trading financial instruments
including money, bonds, stocks, and derivative
are referred to as Financial Markets.
• Developed financial markets can play a key role of
intermediating between the lenders (savers) and
the borrowers (investors).
• It reduce information asymmetries and allow
central banks to implement and achieve
objectives of monetary and exchange rate
policies.
Financial Markets
• Money and Bond Market
• Money market refers to the market wherein business entities borrow or
lend in local currency from each other in different tenors. Bond or Debt
Market facilitates the trading of government and private debt/bond
trading. Government and/or private businesses can raise debt from the
public through bond market.
• Foreign Exchange Market
• As the name signifies this market helps in bringing the
buyer and seller of FX in touch with each other. Importer
needs to buy FX and Exporter wants to sell its FX proceeds.
Both can use the FX market for their respective needs.
• Equity / Stock Market
• Trading of stocks or shares of listed business/companies

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 Financial Markets
• Derivatives Market
• Derivatives are Financial Instruments/Contracts whose
values depend upon the value of any other cash market
instrument like Equity, Bond or Foreign Exchange.
Technically there can be any underlying instrument,
however most common are stocks, FX, Bonds, Interest
Rate etc.
• Commodities Market
• Financial Institutions actively trade in commodities
like Gold, Silver and other precious metals and also
Food commodities like Grains, coffee, etc.
• Real Estate Market
Money Market

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Money Market
• The money market is the financial market for short-term borrowing and
lending. It provides short term liquid funding (readily cashable) for the
financial system

• The money market is a wholesale market for low risk, highly liquid, short-
term & long term debt instruments.

• It serves as an avenue through which banks and financial institutions can

offload their excess liquidity or meet their funding requirements.

• A major portion of their liabilities are demand deposits. Another large

portion of bank liabilities are time deposits.

• On the asset side, in addition to loans banks have part of their assets
invested in marketable securities.

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M.M Objective….
• Managing liquidity and interest risk.

• Coordinating with corporate/retail banking departments for assets/liability

pricing.

• To deploy excess funds in order to save liquidity wastage

• To manage funding requirements which may arise from time to time

keeping in view the cost and interest scenario.

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Purpose of Money Market
• The need for financial institutions to indulge in money market
transactions arises primarily from the statutory reserve and liquidity
requirements imposed by the State Bank.
Statutory Liquidity
Statutory Cash Reserve Requirement
Requirement

Bi-Weekly average 5% of DTL

( Minimum Daily 3% of DDL) 19% of DTL
in Eligible Liquid Assets

1. Treasury Bills
A/C with SBP 2. PIBs Not More Than 15% of DTL
Rate of Return = 0% 3. Reverse Repos - Repos
Opportunity Cost = Av. Weekly 4. Other Approved Assets i.e. NIT,
O/N Rate Cash in Vault, Foreign Currency Held,
Excess in CRR etc.

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 Major Players in Money Market
• Central Bank & Government
• Primary Dealer/ Market Makers
• Bank
• Non-bank Financial Institution
• Money Market Funds & Corporate
• Money Market Brokers
PRIMARY DEALERS
– The PDs are Price makers, quoting two-way prices reflective of market
sentiment and actively participating in trading of all marketable securities.

– PD must be a Bank/ DFI/ Investment Bank/ Listed Brokerage House.

– The PD status is assigned by the SBP.

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Primary Dealers For The Year 2018-19
1. Habib Bank Limited
2. United Bank Limited
3. Allied Bank Limited
4. MCB Bank Limited
5. National Bank Limited
6. Bank Alfalah Limited
7. Pak Oman Investment Company Limited
8. JS Bank Limited
9. Faysal Bank Limited
10. Standard Chartered Bank (Pakistan) Limited
11. Citibank NA (Pakistan Operations)

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Non Primary Dealer vs Primary Dealer
WITHOUT PD WITH PD

 Auction bidding not compulsory  Auction bidding mandatory

 Auction participation open for all.  Auction participation limited to

PDs only.

 Government debts have no  PDs are assigned market makers

assigned market maker with for Government Debt with good
limited liquidity liquidity

 No long term Yield curve available  Long term yield curve will be in
place

 Retail sales of bonds very limited  Retail sales - Major objective

 Limited secondary market in  Larger secondary market volumes

outright leading to Repos in outright buying/selling
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Market
• Primary Market:
The market in which new issues of financial instruments/ securities are sold initially.
• Secondary Market:
A market for buying and selling securities in the period between their issue and maturity.
A liquid secondary market enhances the attractiveness of financial instruments/securities to
investors.
• Over The Counter (OTC)
A secondary market in which dealers at different locations who have an inventory of securities
stand ready to buy and sell securities “ over the counter ” to anyone who comes to them and
is willing to accept their prices.
• Delivery Versus Payment (DVP):
Clearing and settlement of transactions in money market instruments (MMIs) is through
book-entry system of transferring ownership with delivery of the securities against payment
Subsidiary General Ledger Account (SGLA): Is a securities account of Banks/FIs with SBP. SGLA
was extended to banks and FIs in March 1991 for settlement of Government securities.

• Investor Portfolio of Securities (IPS) Account:

It is a securities account of Clients with Banks/FIs.

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 Money Market Instruments(MMIs)/Transactions

• Call/Term lending/borrowing
• Clean lending/borrowing
• Outright Sale/Purchase Treasury Bill and Bond
• Repo/ Reverse Repo (Repurchase Agreement)
• Certificate of Deposit (CD) /CoI
• Term Deposit Receipt (TDR)
• Commercial Paper
• Providing KIBOR as a benchmark for term lending to the corporate sector

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 MM Transactions-Tenors
• Overnight and Weekend Money
• Term Money
• Intra –Day Money

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Factors influencing MM Market
– Demand for risk-free fixed-income securities in general—For example,
a "flight to safety" caused by concerns about default or liquidity risk in
other financial markets may cause investors to shift to T-bills to avoid risk.
– Supply of T-bills by the government--for example, federal budget
surpluses reduce the supply of some Treasury securities issues
– Economic conditions may influence rates--for example, T-bill rates
typically rise during periods of business expansion and fall during
recessions.
– Monetary policy actions by the Central Bank--SBP actions that affect
the Discount rate likely will influence interest rates for other close
substitutes, including short-term T-bills.
– Inflation and inflation expectations also are factors in
determining interest rates--for example, periods of relatively high (low)
rates of inflation usually are associated with relatively high (low) interest
rates on T-bills

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 Call & Clean Transaction
• Call Money
– Call transactions consist of non-collateralized lending
and borrowing of Funds.
– Transaction between Banks

• Clean Money
– Clean funds are similar to call funds in the sense that
this is unsecured lending/ borrowing of funds. The
only difference is that this sort of borrowing is done
by investment banks and leasing companies.
– Transaction between banks & NBFI/DFI

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 Example

• If HBL lend to UBL 10 million rupees is made

for 7 days at a rate of 7% per annum, how
much interest would be received? What is the
total amount repayable at the end of the
period?
– Interest = A*R*D/365
– I = 10,000,000*0.07*7/365
– I= 13,424.66
FV= Pv(1+i*D/365) = 10,013,424.66

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Screen Shot
Outright Purchase/Sale of Securities
• Purchase of government securities i.e. Treasury Bills and
Pakistan Investment Bonds (PIBs) for portfolio management.

• Purchase/Sale of securities is based on the portfolio strategy

and market conditions.

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Market Treasury Bills
• 3, 6 and 12 months maturity, zero coupon
instruments priced at discount.
• Issued by Govt. to finance current expenditure.
• Sold by SBP through auctions.
• Risk free, highly liquid and reserve eligible.
• Pricing of T-Bills;
Assume a 6 month T-Bill with a par value of Rs. 100 and a yield of 6.48% is
to be sold in an auction. Its price would be calculated in the following
manner:
Price (P) = 100/(1+i*n/365)
=100/(1+6.48%*181/365)
=96.89

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Repurchase Agreement -Repo

• A repurchase agreement is the sale of a security with a

commitment by the seller to buy the security back from the
purchaser at a specified price at a designated future date.
Basically repurchase agreement is a collateralized loan, where
the collateral is a security.
• Securities usually repurchased are T Bills, PIBs etc.

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Reverse Repo

• A Reverse Repo is the purchase and resale of a security at a

specific price and a specific future date. It is the mirror image
of a Repo transaction.
• Provider of funds do Reverse Repo transaction.

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 Repo Transactions

• Overnight Repo:
– When the term of a loan is one day it is called an
overnight Repo.
• Term Repo:
– A Loan for more than one day is called a Term
Repo

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Example Of Repo

• Security : :Market Treasury Bills

• Days to Maturity: 182
• Deal Rate :11% p.a.
• Repo Period :30 Days
• Calculate P1 & P2

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Example Of Repo Cont….

• P1
= (365/Deal Rate*Bill Maturity Days+365)*100

• P2
=(First Price*Deal Rate/365)*Repo Days + F.Price

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Example Of Repo

• P1 Price Calculation
• P1 =100/ ( (1+ (11% * 182/365))
• = 94.80
• P2 Price Calculation
• P2 = 94.80* (( 1+ (11% * 30 /365))
• =95.66

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Price Calculation of Repo Securities

• With effect from 19-05-2007

• Market Rate (PKRV) would be used to
calculate Ist. price of securities involved in
repo transactions ( OMOs- Mop-Up/injection
& Ceiling/Floor) between SBP and market
participants.

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 PKRV-REVALUATION RATES FOR TREASURY BILLS*
(APPLICABLE FOR 31-08-2015)
Tenor BMA C&M ICON ICSL IONE JSCM MCPL SCPL AVG
RATE

0-7 days 6.2 6.3 6.3 6.4 6.2 6.2 6.35 6.18 6.26

8-15 days 6.2 6.2 6.19 6.2 6.19 6.2 6.2 6.19 6.2

16-30days 6.18 6.2 6.21 6.2 6.2 6.2 6.2 6.19 6.2

31-60days 6.18 6.18 6.17 6.2 6.2 6.2 6.18 6.19 6.19

61-90days 6.2 6.18 6.17 6.2 6.18 6.18 6.17 6.19 6.18

91-120days 6.2 6.19 6.17 6.18 6.2 6.18 6.19 6.2 6.19

121-180days 6.2 6.19 6.17 6.2 6.2 6.17 6.19 6.2 6.19

181-270days 6.2 6.2 6.17 6.2 6.21 6.2 6.2 6.21 6.2

271-365days 6.2 6.2 6.19 6.2 6.21 6.21 6.2 6.21 6.2

10years 9.18 9.11 9.16 9.29 9.21 9.2 9.1 9.17 9.17
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15years 10.45 10.4 10.5 10.47 10.4 10.6 10.4 10.46 10.45

20years 10.85 10.8 10.85 10.85 10.85 11 10.8 10.86 10.84