implication of coso in treasury function

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IMPLICATION OF COSO IN TREASURY FUNCTION

BY: RAHUL MAGAN , CORPORATE TREASURER EXL SERVICES (INDIA)

91-99899242978 , SKYPE ~ RAHUL5327

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MODULE INDEXATION – PART ( A – F )

Evolution of Treasury Function ( Part A)

Global Treasury Markets & Models ( Part C)

Treasury Theories ( Part D) Forces Drive Treasury & Cash Management

( Part E )Cash Flow Forecasting ( Part F )

Page No - 4

Page No - 12

Page No - 16

Page No - 23

Page No - 28

Treasury Function – Types & Responsibilities ( Part B) Page No - 6

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MODULE INDEXATION – PART ( G – L )

Treasury Risk Management (Part G)

Treasury Biggest Risks ( Part I)

Treasury Corporate Governance ( Part J)

Page No - 37

Page No - 54

Page No - 60

Treasury Management Systems ( Part H) Page No - 47

Citi Bank FX Survey ( Part K) Page No - 71

Glossary ( Part L) Page No - 81

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MODULE 1 ( PART A) - EVOLUTION OF TREASURY FUNCTION – PART I

Evolution of Treasury Function :-The combined effects of ongoing global liquidity constraints, turbulence in the Eurozone and a raft of regulatory change continue to cast a shadow over treasury management. The need to address these challenges is fuelling the corporate drive for a more strategic approach to treasury management, along with the closer integration of the treasury function with other business units. As a result, corporate treasury is becoming increasingly sophisticated and treasurers are making their presence felt throughout their organizations and — in many cases — at board level.

Treasury & Technology :- Optimal treasury management has long been a question of technology, as it is the key to improved cash visibility and best-practice transaction data management. Technology is proving to be a vital tool in improving intercompany integration, as well as streamlining reporting. As breaking down internal silos and meeting regulatory reporting requirements become increasingly important, there are many new trends centered on these concepts. These include the centralization of payments — to improve connectivity between billing, accounts payable/receivable and financial reporting — and virtual account solutions to reduce costs and simplify structures.

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MODULE 1 ( PART A) - EVOLUTION OF TREASURY FUNCTION – PART II

Evolution of Treasury Function

Global Liquidity Crisis

Regulatory Changes

Technological Advancements

Global Liquidity & FX Crisis :- The world is facing Global Liquidity and FX Crisis. Almost all the Central banks of the world are facing Liquidity crisis and because of the same they are signing “ Swaps Agreements “ with each other which would help them the flow of liquidity in the system and also the flow of Foreign Exchange.

Regulatory Changes:- Today we are living in the world when there are millions of regulatory changes covering Liquidity , Foreign Exchange and Reporting's. The prime example regarding the same is Basel III , Volker Rule , ISDA & CSA agreements and FACTA compliances.

Technological Advancements :- Well we are living in the world when Technology is changing at fastest pace and because of the same Corporate Treasuries have to amend their structures in terms of Liquidity management , FX management and Cash pooling and netting.

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MODULE 1 ( PART B ) - TREASURY AS A FUNCTION – TYPES & RESPONSIBILITIES

Treasury as a Function is divided into three parts – Front , Middle & Back Office

Treasury as a Strategic Function

Treasury – Front Office

Treasury – Middle Office

Treasury – Back Office

Treasury Front Office covers FX exposure

& Investments exposures of the

Organization within Onshore and

Offshore entities

Treasury Middle Office covers Risk

Management Policies of the

Organization which covers Hedging &

Investments policies

Treasury Back Office covers

documentation pertaining to various FX &

Investments deals in the Organization

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TREASURY FUNCTION - FRONT OFFICE

Treasury Front Office is further divided into three parts – FX , Money Market & ISDA Agreements (including CSA Agreements )

Treasury Front Office

Foreign Exchange Debt / Money Market Investments

ISDA / CSA Agreements

Foreign Exchange covers

receivables , payables , Buyers credit , Supplier

Credit & Revolver loans

Investments in debt & Equity

markets , FMP , Certificate of

Deposits , G Sec & Interest rate

curves

ISDA , CSA ( Credit Support Annex ) ,

ISDA master Agreements ,

Schedule & Dodd Frank Act

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TREASURY FUNCTION - MIDDLE OFFICE

Treasury Middle office is further divided into three parts – Onshore Risk , Offshore Risk & SOX & CFO Compliance

Treasury Middle Office

Onshore Enterprise Risk Management

Offshore Enterprise Risk Management

Board Deck , SOX & CFO controls

Onshore Risk Management

policies covering compliance of local central banks like

RBI


policies covering compliance of foreign central banks like Fed,

SEC, FSA

Liaison with Sox and CFO tracker covering various

controls.

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TREASURY FUNCTION – ONSHORE , NEAR SHORE & OFFSHORE RISK MANAGEMENT

The following is the categorization of Treasury Onshore and offshore Risk Management

Treasury Risk Management

Onshore Enterprise Risk Management

Near shore Enterprise Risk Management

Offshore Enterprise Risk Management


policies covering compliance of local central banks like

RBI

Near Shore Risk management enables organization not to be

dependent on Onshore as well as

Offshore Risk entities to manage their Treasury Risks.

Off shore Risk Management

policies covering compliance of foreign central banks like Fed,

SEC, FSA

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STRATEGIC FUNCTIONS OF TREASURY MANAGEMENT

The following are the strategic functions of Treasury Management are as follows:-

Treasury Management

FunctionsForeign Exchange

ManagementCash or Liquidity

ManagementFinancial Controls &

Reporting

Onshore & Offshore Foreign Exchange Risk Management , Hedging and

Trading

Onshore and Offshore Liquidity management like

Cash Pooling , Notional pooling and

cross currency conversions and day

end investments

Management Reporting , Board

of Directors , Board Deck and Internal

Audit

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THE ROLE OF TREASURER & SCOPE

The Treasurer

Funding Management

Cash Management Investments Management

Foreign Exchange Risk Management

Risk ManagementSingle & Multiple Banking

Relationships

M&A

Corporate relationshipsInvestor Relations

Taxation on Derivatives

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MODULE 1 (PART C) - GLOBAL TREASURY MARKETS & MODELS- PART I

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GLOBAL TREASURY MARKETS & MODELS – PART II

Limited Roles to Centralized Treasuries

Decentralized Treasuries

Across the Globe Treasury - Centralized

Across the Globe Treasury – De Centralized

Best Global Treasury

Model

2nd Best Global

Treasury Model

Worst Treasury Model

Manageable Treasury

Model

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GLOBAL TREASURY MARKETS & MODELS – PART II

Full Service Global :-Full service refers to Global Treasury that operates as one Treasury for all the markets across the Globe. This models suites to Global Organizations like Microsoft, Yahoo, Apple, HP, Facebook and Google. Centralized Treasury covers entire functions like Foreign Exchange Risk Management , Cross Currency Risk Management, Global Compliances and Reporting's , Cash & Cash equivalents and respective netting and pooling.

Limited Service Global :-Here, each Treasury is a self contained local unit dictated purely by the needs of the local business. Thus the Treasury management function is by and large decentralized.

======================================================================= Limited Service Global :-This model is different from Fill Service Global model in that the

range of services offered is limited. This could largely be due to the fact that certain activities are kept outside the purview of Treasuries and handled directly by business units, if only because of scale of these activities is not large enough to warrant the attention of Central Treasuries.

Limited Service Local :-This model is akin to having virtually little or no Treasury activities , beyond Cash & Liquidity management. These are various small decentralized Treasuries where the concerned managers may also have other responsibilities in the finance function.

=======================================================================

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ONSHORE TREASURY MARKETS – LOCATIONS & INSTRUMENTS

The following are the available offshore Treasury markets & respective Treasury Derivatives they are offering to Corporate Treasurers

Offshore Treasury Markets

Singapore / Tokyo London NY

Singapore is termed as amongst

best Offshore markets for NDF & DF deals covering

Fwds, Swaps & Options.

London is termed as amongst best Offshore markets

for NDF & DF deals covering Fwds,

Swaps & Options.

NY is amongst best Offshore markets

for NDF & DF deals covering Fwds,

Swaps & Options.

Plain vanilla fwds, Swaps ,

Options , Libor , Buyers Credit

hedging

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MODULE 1 (PART D) – TREASURY THEORIES

Theories of Treasury Management & Dynamics

Liquidity Management Theory

Trapped Cash Theory

Theory of Rolling FX Hedging Program

Liquidity Management Theory ( Example )

Rolling FX Hedging Program (Example)

Trapped Cash Theory ( Example )

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THEORIES OF TREASURY MANAGEMENT – LIQUIDITY MANAGEMENT THEORY – PART I

Liquidity Management Theory: Liquidity management theory suggest you how to manage the liquidity in an organization. This theory would taught you to manage your cash at Global level considering funding of various International subsidiaries and respective requirements at the end or beginning of the month.

Liquidity management theory works well in case of various International subsidiaries across the world and managing the cash requirement covering adhoc or regular requirements which cover all three types of cash flows - Operating, Investing & Financing expenses.

Liquidity management requires centralized Treasury in any part of the world specially in Singapore, Australia or London.

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THEORIES OF TREASURY MANAGEMENT – LIQUIDITY MANAGEMENT THEORY – PART II

Full Service Global Treasury Function

Inter Company Funding Requirements

Parent Company

Subsidiary A

Subsidiary B

Subsidiary C

Subsidiary D

Subsidiary E

Subsidiary G

Subsidiary F

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THEORIES OF TREASURY MANAGEMENT – TRAPPED CASH LIQUIDITY THEORY – PART II

Trapped Cash Liquidity Theory: This theory would apply to those organizations where in cost is in INR or PHP or any other Asian currency however the final realization is in USD terms. This theory would apply to all ITES or BPO companies in India where in cost is in local Asian currency however the final billing is in USD.

Under this theory only the cost part would get reimburse at the end of the month to meet regular Operating , Investing & Financing expenses and rest part would kept at US level which is nothing but the Gross Margin for the company.

Trapped cash would happen when any legal entity would get continuous cash and over the period of time accumulated a huge amount of cash which they won’t be able to return to their parent in case of any strategic M&A to be happen at Foreign entity level.

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THEORIES OF TREASURY MANAGEMENT – TRAPPED CASH LIQUIDITY THEORY – PART II

Infosys ( Parent Company

)

Funding to Infosys India Limited via Inter Company Billing

Sudden Depreciation of USD/INR Sudden Appreciation of USD/INR

INR Cost would decrease due to Translation and lead to Trapped

Cash in Indian entities

INR Cost would increase due to Translation and not lead to

Trapped Cash in Indian entities

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THEORIES OF TREASURY MANAGEMENT – ROLLING FOREIGN EXCHANGE HEDGING PROGRAM – PART III

Rolling Foreign Exchange Hedging Program:- This theory applies to those who are having Foreign Currency exposures e.g. where in both cost and revenue are in different currencies.

Under this theory organizations have to decide the hedging structure of their receivables and payables. There are various hedging structures available in the market and prominently they are divided into two parts – Static & Dynamic Hedging

Majority of the organizations considering Dynamic hedging considering the current volatility in the exchange rates covering all Asian , G7 and SDR pairs.

Dynamic hedging strategy is required considering current volatility and effects of revaluations in your books. The same is required for both Cash Flow , Fair value & Net Investments Hedges.

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THEORIES OF TREASURY MANAGEMENT – ROLLING FOREIGN EXCHANGE HEDGING PROGRAM – PART III

Rolling Foreign Exchange Hedging Program:- This theory applies to those who are having Foreign Currency exposures e.g. where in both cost and revenue are in different currencies.

Rolling Foreign Exchange Hedging Program

Monthly Rolling Hedging Program

Yearly Rolling or Semi Yearly Hedging

ProgramQuarterly Rolling Hedging Program

Infosys ( 6 Months Rolling Monthly Hedging

Program)

TCS/Wipro/HCL ( Yearly Rolling Hedging

Program)

Cognizant , Capgemini , Genpact & Accenture

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MODULE 1 (PART E) – FORCES DRIVE TREASURY & CASH MANAGEMENT

Forces that drive Treasury

Cash Management & Notional Pooling

Multi Bank Cash Balancing

Notional PoolingOptimization – Multi Currency Notional

Pooling

Globalization

Risk & Control Focus

Technology

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FORCES DRIVING TREASURY CHANGES

Forces Trends Outcome

■ Rationalisation of bank relationships and account structures■ Migration of treasury / financial functions into global treasury centres,

in-house banks, shared service centres, and payment factories■ Focus on integrating transaction management, optimising cash / credit

utilisation globally

■ Centralisation of head office control, standardised processes / procedures

■ Centralised audit, regulatory, reporting and internal benchmarking through transactional visibility (SOX, IAS39, FAS133, IFRS)

■ Focus on gaining visibility and control

■ Process / workflow automation to free resource time■ Leveraging a single ERP platform to apply best practices for automation

of payables and receivables management in SSC or Payment Factory structure with a single bank integration point

■ Format standardisation to increase STP and reduce errors / fraud■ Trading partner integration for better working capital management■ Real-time actionable information delivery for better decisions

Strategic Treasury

Holistic approaches across

enterprise

Globalization

Risk &

C

ontrol Focus

Technology

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Automated Target Balancing tools will enable efficient concentration of cash and funding of deficits Same day value via cross border/cross regional Target

Balancing Intra day or next day via Multi Bank Target Balancing

Statement Files/Message Based Information downloaded to SAP for daily accounting of funds movement

Domestic Bank(s)

MT920 Request for Statement (MT942)

Customer

Define TBA Rules – Source A/C & Target A/C relationship

Intraday TBAProcessor

MT940 / MT950 End of Day Reporting

MT942 Ad hoc Intraday Report

Communication Methods-Web-based reports-Files-XML Messages

MT101 Request for Transfer

MT103 – Funds Transfer (Concentrating to Target Account)Target Account

MT101 Request for Transfer

MT103 – Funds Transfer (Funding Source Account)

MULTI-BANK TARGET BALANCING

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NOTIONAL POOLING

With notional pooling, the autonomy of the accounts is maintained, while debit and credit balances are offset for interest purposes.

BankAccount 1+USD 1000


BankAccount 2-USD 2100



Without Notional Pooling

With Notional Pooling

Interest = + 40 - 126 + 60 - 30 + 16 = - USD 40

Bank RatesCredit Interest = 4%, Debit Interest = 6%

Bank Account 1+USD 1000


Bank RatesCredit Interest = 4%, Debit Interest = 6%

BankNet Position+USD 300

Interest earned by pooling accounts = USD 300 x 4% = USD 12Advantage to customer = USD 12 - (- USD 40) = USD 52




Single Currency Notional Pooling – Example.

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OPTIMIZATION – MULTI CURRENCY NOTIONAL POOLING

Optimizes short term (overnight) cash positions, by notionally pooling balances with London bank , across eligible currencies

Fully automated process applies to full closing balances, so treasury can focus on managing strategic hedging and structural positions

Flexibility to transact in any pooled currency, without FX conversion

Integrate with target balancing to maximize cash up streamed into pool

- EUR 40mn eqv.

+ EUR 20mn eqv.

+ EUR 60mn eqv.

Available Balance = EUR 40mn equivalent, in any pool CCY

London

xGroup EUR

Sub D EUR

Sub CEUR

London

x Group LCY

Sub B LCY

Sub ALCY

London

Individual Currency Pools or TBAs in London

Net Multi Currency Pool Balances(EUR Equiv)

Net Customer Position(EUR Equiv)Cross Currency Balance Sheet Set-

Off

xGroup GBP

Sub FGBP

Sub EGBP

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MODULE 1 (PART F) – CASH FLOW FORECASTING

Cash Flow Forecasting

Cash Flow Forecasting – Cash Management

Cash Flow Forecasting – Kinds & Schema

Cash Flow Forecasting – P&L flow

Cash Flow – IT & ITES Companies Scenario

Cash Flow Forecasting – Information flow

Cash Flow Forecasting – Excel template

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LIQUIDITY MANAGEMENT IN TREASURIES – CASH FLOW FORECASTING

Cash Flow Forecasting: Cash flow forecasting is amongst those techniques where in organization would forecast the cash available at a future course of time. Cash flow forecasting would happen at three levels :-

Cash flow from Operations Cash flow from Investing Cash flow from financing

Cash flow forecasting would cover all three forms of cash & cash equivalents and subsequent forecasting.

The biggest objective of Cash flow forecasting is to mitigate the effects of trapped cash and also create a financial model which would be able to cover cash & cash equivalents till next 30-90 days.

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CASH MANAGEMENT OBJECTIVES

Centralized Administrative, Treasury and Accounting Functions for :-

distribution invoicing receivables payables - domestic and foreign credit and collections FX dealing and Investments information processing analysis and reporting

Maintain optimum number of bank accounts reduce number of banking relationships to optimum level improve bargaining position and therefore pricing reduce costs

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CASH FLOW FORECASTING : KINDS & SCHEMA Cash Flow Forecasting : A cash flow forecast aims to predict a company’s future financial liquidity over a specific period of time, using tried and tested financial models. While cash normally refers to the liquid assets in a company’s bank account, the forecast which is cash plus short-term investments minus short-term debt. The cash flow itself refers to the change in the cash or treasury position from one period to the next.Kinds of Cash Flow :

Cash Flow From Operations ( Operating Cash Flow ): The cash generated from the operations of a company, generally defined as revenues less all operating expenses, but calculated through a series of adjustments to net income. The OCF can be found on the statement of cash flows.Cash Flow From Investing : An item on the cash flow statement that reports the aggregate change in a company's cash position resulting from any gains (or losses) from investments in the financial markets and operating subsidiaries, and changes resulting from amounts spent on investments in capital assets such as plant and equipment. Cash Flow From Financing : A category in the cash flow statement that accounts for external activities such as issuing cash dividends, adding or changing loans, or issuing and selling more stock

Opening Cash : Add : Net Cash Flow from Operations ( Net Operating Cash Flow )Add : Net Cash Flow from Investments ( Investments & Redemptions of Cash Flow / Capex )Add : Net Cash Flow from Financing ( Financing Cash Flow like Loans / Payments & Others )Closing Cash

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CASH FLOW FORECASTING : P&L FLOW

Sales

Costs

Trading Profits

Interest Earned / Paid

Taxation

Dividends

Profits Retailed

Less

Equals

Add / Less

Less

Less

Equals

Operating / Investing & Financing

Cost

Cash Flow from

Operations

Cash Flow from

Investing

Cash Flow from

Financing

Credit & Cash sales

Gross Profits

Vs

Net Profits

Credit & Cash sales

Interest Earned / Paid

to Banks / Corporate

Owners Interest and

Corporate Earnings

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CASH FLOW FORECASTING : IT & ITES COMPANIES SCENARIO Opening Cash & Cash Equivalents ( A )Cash Flow from Operations or Operating Cash is Cash flow from Outsourcing & Transformation business. ( B )

Revenue earned from Outsourcing & Transformation business. Non cash items like Depreciation & Amortization. Accumulated Other Comprehensive Income ( Forex Gain/(Loss)) Change in Current Assets and Current Liabilities Cash flow Hedging / Balance Sheet Hedging

Cash Flow from Investments is Cash earned on investments as well as cash spent on Capex. ( C )

Business Acquisions Purchase of Fixed Assets Purchase of Short Term Investments

Cash flow from Financing is the Cash earned on Financing like Debt etc. ( D) Payment of Capital Lease Payment of Interest Payments

Closing Cash & Cash Equivalents ( A + B + C + D)

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CASH FLOW FORECASTING : KINDS & SCHEMA - II Current Availability of Information:

Revenue forecasting by FP&A ( Cash Flow from Operations(CFO)) Capex Information from FP&A ( Cash Flow from Investing(CFI)) AP Expenses by AP Team ( CFO) Tax payments from Tax Team (CFO) Cash Flow Hedging / Balance Sheet Hedging / Accrued Gain / ( Loss ) from

Treasury ( CFO)Desired Process: Desired process on Cash Flow Forecasting is to have information from all stake holders like

Treasury / AP / AR / Capex / Taxation/ M&A for Hedging / Vendor & other payments / Capital expenditures / Tax payments & M&A cash outflows .

Non cash items like Depreciation & Amortization from Accounting team. DSO from AR Team as to understand and take the effect of the cash inflow like

Collections in various currencies.

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CASH FLOW FORECASTING : INFORMATION FLOW

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JUST DO IT

Like exercising, getting started is the hardest part of cash flow forecasting.

Like most of us, the hardest part of exercising is not using the equipment, it is getting to the room to use the equipment.

Once we get to our exercise room, using the equipment is not that bad.

The same holds true for cash flow forecasting.

Profit is an illusion, cashflow is fact

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MODULE 1 (PART G) – TREASURY RISK MANAGEMENT

Treasury Banking Relationships



Risk Management What IS ??

Basic Principles of Risk Management

Risk Management Essentials & Credit Risk

Types of Risks – Funding Risk

Types of Risks – Interest Rate Risk

Types of Risks – Funding Risk

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TREASURY BANKING RELATIONSHIPSTreasury Banking Relationships : Treasury Banking relationships refers to number of bank accounts any Treasury maintains within or outside an organizations. Today majority of the organizations are Global in nature and considering this fact they are having many Global subsidiaries as well hence forth in that circumstances Treasuries are forced to keep number of bank accounts in respective legal entities.Types of Bank Accounts:-

Exchange Earner Foreign Currency Account (EEFC A/c ) : - These are the accounts where in organizations are keeping Foreign Currency balances which are not only subject to revaluation but also subject to foreign currency risk.

Local Currency Accounts : These are the accounts which are carrying local currency balances like Indian Rupee, Philippines Peso, Chinese Yuan, Romanian RON, Czech Republic Koruna (CZK) and lots others

Note: The concept of netting and pooling would come when Organizations are having many legal entities and to manage these entities Organization would like to have numerous bank account relationships.

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TREASURY RISK MANAGEMENT

Risk exposure arising from business activities Need to effectively manage because of

Potential business losses Ensure business continuity

Wider and/or complex risk requires more prudent management

Risk appetite determines risk exposure

Treasury risk can be divided into several parts:- Commodity Risk Counterparty Risk Credit / Liquidity Risk Foreign Exchange Risk Interest Rate Risk Sovereign Risk Reputational risk & respective others

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RISK MANAGEMENT – “WHAT IS?”

Optimize risk-reward trade-off rather than minimize/eliminate risk.

Risk taking is inherent activity but neither engage in business with unnecessary risk

nor absorb risk that can be transferred Regulatory Case vs. Business Case

Optimize risk-reward trade-off rather than minimize/eliminate risk.

Risk taking is inherent activity but neither engage in business with unnecessary risk

nor absorb risk that can be transferred Regulatory Case vs. Business Case

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BASIC PRINCIPLES FOR RISK MANAGEMENT – PART I

Board and senior Management oversight“The overall responsibility of risk management vests

in the Board of Directors, which shall formulate policies in various areas of operations of the bank. The senior management is, interalia, responsible for devising risk management strategy and well-defined policies and procedures for mitigating/controlling risks, which should be duly approved by the Board. The senior management is also responsible for the dissemination, implementation, and compliance of approved policies and procedures.”

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BASIC PRINCIPLES FOR RISK MANAGEMENT – PART II

Integration of Risk Management“At operational level, risk assessment may be made on portfolio or business line

basis, however, at the top level the management need to adopt a holistic

approach in assessing and managing risk profile of the bank.” Business Line Accountability

“Irrespective of a separate risk review or management function individuals heading various business lines or units are also accountable for the risk they are taking.”

Integration of Risk Management

American Geography Asian Geography European Geography

Integration of Risk Management combining all Geographies across the

world

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BASIC PRINCIPLES FOR RISK MANAGEMENT – PART III

Risk Evaluation/Measurement“Wherever possible risks should be quantitatively measured,

reported, and mitigated.” Independent review

“The risk review function should be independent of those who approve and take risk. The review should include, interalia, stress tests exposing the portfolio to unanticipated movements in key variables or major systemic shocks.”

Contingency planning“Banks should have contingency plans for any unexpected or

worst case scenarios.”

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RISK MANAGEMENT ESSENTIALS & CREDIT RISK

• The individuals who take or manage risks clearly understand it.• The organization’s Risk exposure is within the limits established by

Board of Directors.• Risk taking Decisions are in line with the business strategy and

objectives set by BOD.• The expected payoffs compensate for the risks taken• Risk taking decisions are explicit and clear.• Sufficient capital as a buffer is available to take risk.

Board and Senior Management Oversight BOD to approve credit risk strategy and other significant policies SM to develop and establish credit risk policies & credit administration

procedures and guide staff Setting up appropriate organization structure and specify

duties/responsibilities Credit management discipline

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BENEFITS OF A ROBUST RISK MANAGEMENT FRAMEWORK

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RISK MANAGEMENT PROCESS

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MODULE 1 (PART H) –TREASURY MANAGEMENT SYSTEMS

Treasury Management Systems – Oracle Treasury

Treasury Management Systems – Business

Key Risks Associated – TMS vs. Manual Treasury

Key Features of Oracle Treasury Module

Risks vs. Mitigation Process - OTM

TREASURY MANAGEMENT SYSTEMS (TMS)

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Currency risk has been recognized as one of the major business risk as high volatility of exchange rates has proved to impact the business profit and share holder’s equity in big way.

Increase in Hedge

Program

Monitoring

& Control

Automation

& Efficiency

TREASURY MANAGEMENT SYSTEMS - BUSINESS NEEDS

49

Increase in Size of Hedge Program

Multiple Revenue - for computation of

exposure

Multiple Currency Exposure

Increase in Complexity of Exposure

Complexity in Hedges Exposure

Treasury Management Systems (TMS)

KEY RISKS ASSOCIATED – TMS VS. MANUAL TREASURY FUNCTION

Manual / Excel based Computation of Exposure

Manual/ / Excel based Computation of Gain /Loss

Accounting & Hedge Effectiveness testing

Manual process for multiple approvals on chain mails

Manual Accrual of Interest / Other Income / Recording MTM Gain Loss

Incorrect qualifying exposure for hedging. No audit trail for transactions

Incorrect recording of gain/loss on matured hedges, incorrect projected income/loss for forecast / guidance to street

Manual process for hedge effectiveness testing and Incorrect US GAAP Accounting

No permanent repository for transactions entered or approved. No audit trail for transactions

Incorrect MTM recording of gain /loss / Other Comprehensive Income, Incorrect Income recording.

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Manual Treasury Function Risks with Manual Treasury Function

KEY FEATURES OF ORACLE TREASURY MODULE… - PART I

51

Compatibility with Existing System (ERP)

Leverage existing Oracle 11i Implementation for faster Treasury Implementation

Standard Oracle Interface and Integration and availability of various Financial Transactions ( Revenue Forecast, Foreign currency balances etc.) into Treasury module.

Centralized access of Treasury related data across geographies and entities.

Automation @ Treasury FX

Automation of computation of exposure for cash flow and balance sheet hedging.

Rule based Parameters for defining exposure, report on foreign currency balances (eligible for hedge) from multiple set of books of accounts.

Foreign Exchange deals recorded in ERP and availability of hedge book in ERP.

Automation of computation of Gain/Loss on matured and outstanding hedges and generating accounting entries.

System based hedge recording with implementation of Maker Checker rule

KEY FEATURES OF ORACLE TREASURY MODULE…- PART II

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Accounting @ FAS 133 / FAS 157 / FAS 95

Rule based hedge effectiveness testing in ERP and recording of gain / loss.

Accounting for outstanding hedges as USGAAP -FAS 133 in ERP .

Fair Valuation as per FAS 157 .

Cash Flow Statement as per FAS 95 .

Improvements @ Cash Management & FX

Consolidated cash and cash equivalent report including details of investment, restricted cash and accrued interest.

Cash Management and forecasting for multiple subsidiaries.

Automation of Computation and recording of accrued interest on Investments

Digital Repository of Forex Transactions including Fwd Contracts & Money Mkts Deals.

RISKS ASSOCIATED WITH CURRENT PROCESS & IMPLICATION – HEDGING PROCESS

Manual / Excel based computation of exposure

Manual / Excel based computation of Gain / Loss

Accounting & Hedge Effectiveness Testing

Manual process for multiple approvals on chain mails

Manual accrued Interest / Other Comprehensive Income / Reporting of M2M

Oracle Treasury Module will make the process of Projected Revenue to Exposure online and besides the same this module is can run simulations as well.

Oracle Treasury Module will automatically compute the gain / Loss on Off Balance Sheet Exposure along with facility of tenor filtering.

Oracle Treasury Module will incorporate all features of FAS 133 and respective Hedge Effectivity testing and fair valuation as per FAS 157.

Authorization of hedges in oracle.

Periodic Computation of AI on Term Deposits /Money Mkts Investments / MF Income.

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Risks Mitigants with Oracle Treasury Module

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MODULE 1 (PART I) –TREASURY BIGGEST RISKS

Treasury Biggest Risks

Liquidity Risk

Funding Risk

Interest Rate Risk

Foreign Exchange Risk

Commodity Price Risk

Credit Risk

Business & Operating Risk

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TREASURY BIGGEST RISKS – LIQUIDITY & FUNDING RISK

Liquidity Risk:-Liquidity risk is the risk that the entity will not have sufficient funds available to pay creditors and other debts. This includes the risk that loans may not be available when the organization requires them or they will not be available for the required term or at an acceptable cost. There is also a risk that bank credit lines may be terminated if borrowers breach loan covenants. The organization may have to keep unused funding sources in reserve for potential outlays such as future debt repayments, capital expenditure, seasonal fluctuations, acquisitions and contingencies. Funding sources may include equity issues (in all forms), debt, supplier finance and leasing.

=======================================================================Biggest Question :- New funding needs to be included in the cash flow, is it committed or uncommitted, and have the banks or other sources of funding been consulted and do they have enough information to give at least approval in principle?======================================================================= Funding Risk:- Funding risk is most often faced by highly rated large-volume borrowers who issue

debt securities. These borrowers rely on liquidity of their securities (the degree to which they are readily bought and sold in financial markets) to maintain prices, smooth out price volatility and facilitate future issues. The risk is that for some reason investors may judge the securities to be insufficiently attractive, with the result that prices may fall and access to the market may become difficult.

=======================================================================Biggest Question :- To what extent can or must the organization rely on its bankers and shareholders to meet funding requirements instead?=======================================================================

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TREASURY BIGGEST RISKS – INTEREST RATE RISK & FOREIGN EXCHANGE RISK

Interest Rate Risk:-Interest rate risk is the risk that movements in variable interest rates will affect financial performance by increasing interest expenses or reducing interest income. Changes in market rates of interest may also affect fixed-rate securities where they are marked to market, in which case the capital value of the securities will change. Management needs to use sensitivity analysis to predict the impact on profit and loss of a given change in interest rates.

=======================================================================Biggest Question :- Does the organization have any form of borrowing or similar commitments or obligations that may be subject to a change in interest rates? (Include conventional borrowing, overdrafts, debtor or creditor terms and discounts, other contracts, etc.)======================================================================= Foreign Exchange Risk:- Foreign exchange risk describes the risk of variation in the rate

of exchange used to convert foreign currency revenues and expenses and assets or liabilities to Australian dollars

=================================================================================Biggest Questions :- transaction exposures resulting from normal operational business activities (trade purchases and sales, short-term borrowing, etc.)=================================================================================Biggest Questions:- Translation exposures resulting from conversion of long-term foreign currency assets and liabilities into Australian currency (equity investments, capital items, etc.)=================================================================================Biggest Questions:- Competitive exposures that may result (profitably or otherwise) from adopting a different approach to managing foreign exchange exposures from that taken by the organization's competitors=================================================================================

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TREASURY BIGGEST RISKS – COMMODITY PRICE RISK & CREDIT RISK

Commodity Price Risk:-Commodity price risk is the risk that a change in the price of a commodity that is a key input or output of a business will adversely affect financial performance. It should be noted that many commodities have a foreign exchange component in their $A price – for example, oil, gold and sugar.

===================================================================================Biggest Question :- Does the organization rely significantly on specific commodities for inputs or outputs whose prices are determined by the market?Biggest Question :- Will price movements significantly affect profitability by increasing manufacturing costs or reducing sales proceeds?=================================================================================== Credit Risk:- Credit risk is the risk that another party in a transaction will not be able to

meet its financial obligations. The general term ‘credit risk’ may include: Counterparty risk, which is the risk that the other party to a transaction will not meet its

obligations as to timing or amount of settlement Country/political/sovereign risk associated with government directives and policies that may

affect the contractual performance of either party to the transaction, and that are generally beyond the direct control of the counterparty

Settlement or delivery risk that may exist if there is a default in a single settlement or delivery, in which case all other exposures or positions with that counterparty will be closed out, thus establishing claims for transaction costs

===================================================================================Biggest Question :- Has the organization entered into any significant financial transactions which, in aggregate, amount to a material exposure to any one counterparty, especially in one currency or one country?===================================================================================

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RISK MANAGEMENT PROCESS

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TREASURY SERVICES – TYPES & MARKETSTreasury Services – Bank/ Government Treasury :-

Maintenance of daily cash flow movement Effective hedging of net FX exposures ( NCOP limits) Pledging or taking G Sec securities considering repo and reverse with RBI Appropriate watch on “ Interest Rate “ movement and SLR ratio Liquidity management for bank central funding pool

Treasury Services – Corporate Treasury :- Maintenance of daily cash flow movement Effective hedging of net FX exposures ( Group entity wise) “ Interest rate forecast “ desk to control investments in money market Foreign exchange hedging – Onshore or Offshore Treasury markets

Onshore Treasury markets:- Onshore Treasury markets are local Treasury markets like all corporates who are sitting in India would have India as Onshore Treasury markets. They have to tap or refer when it comes to their FX , Investments or Money market investments and they are also subject to RBI guidelines.

Offshore Treasury markets:- Offshore Treasury markets are foreign Treasury markets like all corporates who are sitting in India would have Singapore, London , NY , Australia as Offshore Treasury markets. They have to tap or refer when it comes to their FX , Investments or Money market investments and they are also subject to respective guidelines.

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MODULE 1 (PART J) – TREASURY CORPORATE GOVERNANCE

Treasury Corporate Governance

Corporate Governance – Treasury Functions

Treasury Corporate Governance & Maturity

Risk Management framework & Governance

Preventive & Pre emptive Strategy - FRM

Treasury Payment SystemsScope of Internal Audit – Treasury

FunctionTreasury Risk Management Policy

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TREASURY POLICY MANUALTreasury Policy Manual :- Treasury Policy manual is nothing but the stipulated guidelines by an organization which would cover the following:-

Maintenance of daily cash flow movement Effective hedging of net FX exposures ( Group entity wise) “ Interest rate forecast “ desk to control investments in money market Foreign exchange hedging – Onshore or Offshore Treasury markets

This would also cover SOX compliance , Internal Audit , International or Cross border compliance like Dodd Frank Act , Volker's Act , Basel III for liquidity management , Bank a/c management – Single or multiple banking relationship and respective others.

Treasury Policy Manual would also cover the following :-

Corporate Governance – Treasury Function & Models Treasury Corporate Governance & Maturity Risk management framework and Governance Preventive and Preemptive Strategy – Financial Risk Management Treasury Payment Systems Internal Audit Scope of Treasury Function FX & Other Treasury Risk Management Policy H2H Implementations & CMS

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CORPORATE GOVERNANCE – TREASURY FUNCTION & MODELS

An appropriate balance between information overload and the dearth of information is maintained.

Risk Approach

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Key factors Basics Developing Established Leading Class

Policies & Procedures

Informal policies and procedures notdocumented.

High level policy statements setting out centraltreasury activities. Limited documentedguidance on local treasury activities andincomplete procedure documentation.

Well documented group treasury policy andprocedures. Limited policies and procedureson treasury activities in local business units.

Comprehensive policy document for grouptreasury and the business units.

Governance Treasurer or group FD responsible for allaspects of treasury. No compliance monitoringor internal audits.

Regular reporting to the board on treasuryactivities. Internal audits not performed bytreasury experts. Minimal compliancereporting.

Treasury compliance regularly monitored andreported to the board and/or the relevanttreasury/finance committees. Regular internalaudits using external treasury sprecialists.

Treasury activities monitored by and treasurystrategy approved by Board or boardsubcommittee. Regular internal audits bytreasury experts with treasury selfassessments.

Structure Decentralized treasury structure with localbusinesses responsible for managing their owntreasury activities. Little/no interactionbetween Group Treasury and Groupcompanies.

Centrally managed funding with businessesresponsible for managing local treasuryactivities. Some interaction between GroupTreasury and Group companies.

Centralized treasury with clear guidelinesgoverning any local treasury operations.Communication between group treasury andgroup companies on an informal basis.

Centralized treasury with all treasury activitymanaged by group treasury (as far aspossible). Regular dialogue between grouptreasury and business units.

TREASURY CORPORATE GOVERNANCE & MATURITY

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ROBUST CONTROLS –RISK MANAGEMENT FRAMEWORK AND GOVERNANCETypical controls Controls for a treasury VS Controls for

spreadsheets and systems environment manual systems environment

The risk management objectives must match the organizational culture and the board’s objectives.

Statement of treasury objectives in policy document and riskappetite.

The board should adequately communicate the organization's culture and objectives to the staff.

Policy document available to staff.

The board must clearly understand the risk management issues faced by the organization.

The board has been involved through discussions in accepting policy.

The board is responsible for the execution of, and compliance with, the internal controls. This may be delegated to an audit or risk committee.

The board receives reports on treasury activities, includingcompliance with policy. People with specialist skills may be required to sit on this committee.

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PREVENTIVE AND PRE-EMPTIVE STRATEGY – FINANCIAL RISK MANAGEMENT Financial Risk Management:-Strong market volatility, constant evolution of the international accounting standards and increasing importance of financial reporting prompt companies to improve regularly their financial risk knowledge and to optimize its management. In this environment identification of risk drivers and exposures, definition of risk management policy and implementation of appropriate management tools, communication lines and reporting are the key means to enable effective financial risk management. Pre emptive Strategy :- When it comes to Pre emptive Strategy in Financial Risk

Management than it is to align your risk management policy with International accounting standards. Treasuries should align their risk management policies with International accounting standards and then realign their derivatives accounting with both US GaaP and IFRS.

Preventive Strategy :- When it comes to Preventive strategy in Financial Risk Management than it is to realign their derivatives valuation with International accounting standards. Treasuries should align derivatives valuation and respective discounting of the derivatives using either Libor or OIS.

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TO SET CLEAR DEFINED AND TRANSPARENT POLICIES AND GOVERNANCE

Corporate Governance & Disclosures:- Yet, most academic discussions about transparency have nothing to do with corporate governance. The most commonly discussed benefit of transparency is that it reduces asymmetric information, and hence lowers the cost of trading the firm’s securities and the firm’s cost of capital. To offset this benefit, commentators typically focus on the direct costs of disclosure, as well as the competitive costs arising because the disclosure provides potentially useful information to product-market rivals. While both of these factors are undoubtedly important considerations in firms’ disclosure decisions, they are not particularly related to corporate governance

Corporates should have transparent policies when it comes to Insider trading of firm securities across the world in case they are listed at various platforms.

Corporates should have transparent policies when it comes to description of short term debt in books of various subsidiaries. Risk managers should be void in using Repo 105 as to shift their short term debt as cash during release of financials and then reconvert of cash into short term debt.

Corporates should have transparent policies in terms of capital usage like usage of Foreign Currency loans , ECB, FCCB and conversion of debt into equity shares.

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TREASURY PAYMENT SYSTEMS

Treasury Payment Systems :- A payment system is a set of processes and technologies that transfer monetary value from one entity or person to another. Payments are typically made in exchange for the provision of goods, services, or to satisfy a legal obligation. They can be made using a variety of methods such as cash, checks, electronic payments and cards in a variety of currencies.

Most US banks are members of payment systems such as NYCE (New York Cash Exchange), CHIPS (Clearing House Interbank Payment Systems) and Fed wire.

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SCOPE OF INTERNAL AUDIT - TREASURY FUNCTION

Treasury Internal Audit: Treasury Internal audit should cover all three functions of Treasury from Front office till Back office. Treasury Internal audit should also cover any TMS and linking of TMS with all three functions of Treasury.

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FX AND OTHER TREASURY RISK MANAGEMENT POLICY

Treasury Front Office should take FX hedges w.r.t to defined corporate policy. The corporate policy should be dynamic in nature which should be align with the recent developments in the FX markets across the world.

If Treasury front Office is taking FX hedges then all three types of risk should be covered – FX Risk , Credit Risk and Market Risk. If hedges are taken in the form of Options then all the five options Greeks should be clearly defined in risk management policy.

Delta limit, Gamma limit, Vega limit, Theta limit, Rho limit. These Options Greeks limits is applying to all those who are taking FX hedges in Options.

Treasury Middle Office should realign corporate risk management policy with respect to dynamic markets so that Treasury would be able to cover all the three types of risks with all organizations.

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HOST TO HOST IMPLEMENTATION– MT940 & CMS

Treasury Bank balances : With the backdrop of multiple subsidiaries across the world and having 100’s of accounts Treasury should manage their day end cash & cash equivalents using to ways

MT940

Under this all balances and

payments will route from one accounts

and at the end of the day generation of MT

940 reports confirming all

balances

Treasury CMS

Under this all payments

processes will run from defined chain

along with respective approval

mechanism in the system.

Treasury MT940 and

CMS are linked with each other

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MODULE 1 (PART K) – CITI BANK FX SURVEY & GLOBAL TREASURY MARKETS

Citi Bank (India) FX Survey

Holistic Risk Management Framework

Treasury Risk Management Objective

Types of Hedging Strategies – Part I & II

Risk Reporting Methods

Balanced Approach to Hedging – Part I & II

Treasury Structure & Currency Evaluation

Overhaul of Hedge Accounting Standards

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HOLISTIC RISK MANAGEMENT FRAMEWORK – CITI BANK

Source: Citi Bank FX Risk Management Survey

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TREASURY RISK MANAGEMENT OBJECTIVES– CITI BANK


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TYPES OF HEDGING STRATEGIES – CITI BANK – PART I


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TYPES OF HEDGING INSTRUMENTS – CITI BANK – PART II


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RISK REPORTING METHODS– CITI BANK


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BALANCED APPROACH TO HEDGING– CITI BANK – PART I


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BALANCED APPROACH TO HEDGING– CITI BANK – PART II


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TREASURY STRUCTURE & CURRENCY EVALUATION


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OVERHAUL OF HEDGE ACCOUNTING STANDARDS


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MODULE 1 ( PART L) - GLOSSARY

Treasury Front Office :-Treasury Front Office is the Office which deals with Banks , Financial Institutions, Credit Ratings Agencies and respective others on behalf of Organization.

Treasury Middle Office :-Treasury Middle Office is the Office which makes Risk Management Policies covering Foreign Exchange Risk Managements till Investments.

Foreign Exchange Risk Management :- Foreign Exchange Risk Management refers to risks associated with fluctuations in pricing of Foreign Exchange as Organization exports earnings is in Foreign Currency while cost is in local currency.

Corporate Investments Management :- Corporate Investments Management refers to Investment Policy which allow Treasury Front Office to Invest surplus cash in approved instruments.

ISDA Master Agreement :- The ISDA master agreement is the most commonly used master service agreement for OTC derivative transactions internationally. It is part of a framework of documents, designed to enable OTC derivatives to be documented fully and flexibly. The framework consists of a master agreement, a schedule, confirmations, definition booklets, and a credit support annex. The ISDA master agreement is published by the International Swaps and Derivatives Association.

ISDA CSA/CSX Agreement :- ISDA CSA/CSX agreement refers to supporting agreement which covers collateralized based hedging covering LTFX period.

http://en.wikipedia.org/wiki/Master_service_agreements

http://en.wikipedia.org/wiki/Over-the-counter_(finance)

http://en.wikipedia.org/wiki/Derivative

http://en.wikipedia.org/wiki/Financial_transaction

http://en.wikipedia.org/wiki/International_Swaps_and_Derivatives_Association

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Certificate of Deposits (CD):-It is an Money market discounted instruments which can be issued till 270 days in Indian market.

Fixed Maturity Plans (FMP) :-It is a form of Mutual Fund Investments under which there is no disclosure of portfolio however there is an agreed rate of Interest between AMC and investor however unwritten.

Onshore Enterprise Risk Management (ON-ERP) :- Onshore Risk Management refers to all Risk Management techniques in local markets. All corporations in India would have India as Onshore Treasury Market and Singapore as Offshore Treasury Market.

Offshore Enterprise Risk Management (OFF-ERP):- Offshore Risk Management refers to all Risk Management techniques covering Foreign markets. All corporations in India would have India as Onshore Treasury Market and Singapore as Offshore Treasury Market.

Treasury Models :- Treasury models refers to various structures though which Organizations would like to run their Treasury Function. Predominantly Treasury Function can be Centralized or Decentralized.

Trapped Cash :- Trapped Cash refers to cash which left in Indian or Offshore subsidiaries post Inter Company funding. This cash may move to parent entity however subject to Dividend Taxation. Dividend taxation varies from country to country.

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Foreign Exchange Risk Management :-Foreign Exchange Risk Management refers to set of techniques through which organization try and hedge their Foreign Currency exposures via Onshore and Offshore Treasury Markets.

Cash Management & Pooling :-Cash Management refers to techniques to manage excess liquidity in the system and this is done via pooling of free or surplus cash lying in non Interest rate bearing accounts at end of the day.

Cash Flow Forecasting :- Cash Flow Forecasting refers to techniques through which Organization try to forecast Cash for shorter period of time say 90 days. The same can be done under Indian GaaP , US GaaP or IFRS. Cash Flow Forecasting is done via Direct or Indirect method.

Cash Flow from Operations :- The cash generated from the operations of a company, generally defined as revenues less all operating expenses, but calculated through a series of adjustments to net income.

Cash Flow from Investing :- An item on the cash flow statement that reports the aggregate change in a company's cash position resulting from any gains (or losses) from investments in the financial markets and operating subsidiaries.

Cash Flow from Financing :- A category in the cash flow statement that accounts for external activities such as issuing cash dividends, adding or changing loans, or issuing and selling more stock.

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Treasury Transaction Risks:-Treasury Transaction Risks refers to change in the pricing of cash flows due to variability in Foreign Exchange.

Treasury Translation Risks:-Treasury Translation Risks refers to conversion of local currency into foreign currency. In Indian context Translation refers to conversion of Indian Rupee into USD dollar.

Treasury Revaluation Risks:- Treasury Revaluation Risks refers to conversion of Foreign Currency into Local currency. In Indian context Revaluation refers to conversion of USD or Foreign Currency balances into Indian Rupee.

Treasury Onshore Debt Capital Markets:- Treasury Onshore Debt Capital Markets refers to Onshore Debt Capital Markets. In Indian context Onshore Debt Capital Markets refers to Indian markets and companies are allowed to invest in G Sec, Treasury Notes, Treasury bonds , Certificate of Deposits , Commercial Papers and FMP.

Treasury Offshore Debt Capital Markets:- Treasury Offshore Debt Capital Markets refers to Offshore Debt Capital Markets. In Indian context Offshore Debt Capital Markets refers to Singapore, London, Australia and NY markets and companies are allowed to invest in G Sec, Treasury Notes, Treasury bonds , Certificate of Deposits , Commercial Papers and FMP and structured products.

implication of coso in treasury function

Documents