presentation_fx_risk_management_10_04_11
TRANSCRIPT
PRESENTATION ON
FOREIGN EXCHANGE RISKS AND MITIGATION IN BANK
Presented by
FAHIM AHMED
Senior Manager, Treasury Operations
Banking Services
April 10, 2011
CONTENTS OF THE PRESENTATIONS
• RISK OVERVIEW IN BANK
• BANGLADESH BANK FX RISK MANGEMENT POLICY
• TREASURY RISK MANGEMENT POLICY OF BBL
• KEY RISKS OF TREASURY AND SOME DEFINATIONS
• TREASURY OVERVIEW AND FX RELATED FUNCTIONS
• TRESURY OPERATIONS OVERVIEW AND FUNCTIONS
RISK OVERVIEW IN BANK • “IF YOU WAIT FOR THE
WAVES TO SUBSIDE YOU MAY NEVER GO OUT TO THE SEA….
• BUT MAKE SURE YOU KNOW HOW TO SWIM”
If we want to see the correct Operation system of the Bank for managing its potential RISK, we have to ensure following three ‘P’s are in placed the Bank
Policy: Guidelines that govern the management of risk People: Organization Structure that supports the policy Process: Its ensures controls/checks are in place to mange the risk and ensure accountability
What are the Risks in
Banking?
Core Risks: - Credit
- Asset and Liability or Balance Sheet
- Foreign Exchange
- Internal Control and Compliance (with Regulatory Guidelines/Laws/Policies)
- Money Laundering
Support Function Risks:
- Human Resource
- Capital and Revenue Expenditure
- Accounting Standards
- Security
- Information Technology
- Corporate Affairs –(Brand, Internal/External Communications)
FOREIGN EXCHANGE RISK MANAGEMENT
Policy Guidelines:
Dealing Limits
Mandatory Leave
Position Reconciliation
Nostro Reconciliation
After Hours/Off Premises Dealing
Stop Loss Limits
Mark to Market Valuation
Internal Audit
Organization Structure:
Centralized Money Market
Separate Trading and Risk Management Units
Back-Office/Front Office Separation
Process Guidelines
Dealing Room
Deal Recording/Taping/Delay
Counter party Limits
Rate/Deal Appropriateness
Stop Loss Orders
Deals Outstanding/Treasury Risk Report
Code of Conduct
TREASURY RISK MANAGEMENT POLICY OF BBL
Separate reporting line for Treasury and Treasury Operations.
Documented Job Descriptions of Each Function.
Centralized Money Market and Foreign Exchange
Activities in Treasury.
Dedicated module for Treasury product processing, daily reconciliation.
Dealing Limits, Stop loss limits, Over night limits, Intra day Limits, Off premises limit, After hours limit, Counterparty limit maintenance.
Daily reporting to MANCOM members for effective Compliance and Monitoring.
KEY RISKS OF TREASURY
Credit Risk
Pre-Settelement/Settlement Risk
Forward Risk
Market Risk Interest Rate Risk
Liquidity Risk
Price Risk
Operational Risk
Compliance Risk
Strategic Risk
Reputation Risk
DEFINITIONS OF FX SOME KEY RISKS
MARKET RISK: The uncertain impact on a bank’s earning resulting from changes in market conditions. It may happened due to following reasons:
• Price volatility
• Interest rate fluctuations
• Foreign exchange fluctuations
• Market liquidity
LIQUIDITY RISK: The current or prospective risk to earnings and capital, arising from a banks inability to meet its liabilities when they become due, without incurring unacceptable losses due to over-liquidity relative to its liabilities
INTEREST RATE RISK (IRR): is the risk that bank’s earnings and/or net worth will be influenced adversely by unanticipated changes in interest rate structure
FEED BACK TIME
LETS HAVE A RECAP …..
TREASURY BUSINESS ACTIVITY • MONEY MARKET :
• Facilitates in lending & borrowing of money for Call and short term
• The transactions cover overnight deals to deals that mature in twelve months time
• To meet up CRR & SLR requirement and banks inflow and outflow
• FOREIGN EXCHANGE MARKET:
• Buying & Selling of Foreign Currencies on value date
• Buy low and sell high of Foreign currency to counterparty
• Exchange gain by compiling regulator’s, internal and external guideline
• CAPITAL MARKET:
• To maximize the Shareholder’s value in the long run
• Ensure sound return on investment
• Trading shares and securities in Stock Exchange Market.
Price
OVERSOLD FX Loss FX Profit
OVERBOUGHT FX Profit FX Loss
n Net FX position to take advantage of price changes
to generate trading income
n Exposed to adverse FX price movements
FX Gapping
TREASURY BUSINESS ACTIVITY -FOREX
TREASURY BUSINESS ACTIVITY- FOREX 1. Circulation of Exchange rate & Interest rate on Fx. deposits i. Rates are generated based on: a. Inter Bank exchange rate, Reuters, Bloomberg b. Rates offered by other banks
2. Maintenance of Exchange Position within the limit: i. If position gets flooded/shortage, it is required to sale or buy of Fx.
Stock ii. If foreign exchange holding in Bangladesh Bank gets lower than
the half of Bank’s open position then, it is required to buy foreign currency.
Key Foreign Exchange products for Treasury: • SPOT Corporate • FORWARDS Merchant Cover • SWAPS OBU
TREASURY BUSINESS ACTIVITY -FOREX 3. NOSTRO funding / BB FC clearing A/C. I. Monitors fund position, if it does not meet branch requirement
for LC payment, outward remittance etc. then check for inward remittance to match the necessity. If there is not sufficient inward remittance to meet all the demand then it is required to buy foreign exchange and route the fund to its required NOSTRO account
4. Meeting Trade/Customer requirements: I. If there is any payment requirement against LC issued by the
Branches/Corporate/SME fund has to be arranged in the required position
ii. In the case of outward remittance sufficient fund has to be
arranged in specified NOSTRO account by buying or receiving inward remittance.
TREASURY OPERATIONS OVERVIEW Mid Office – Monitoring Risk of Treasury’s activity
Regulatory Limits-
50% holding of FC balance with BB against Bank’s total FC assets
5.5% Daily and 6% bi-weekly (15 days) CRR maintenance
19% SLR maintenance
30% paid up capital of investee or investors bank’s reserve
Overnight FC open position maintenance and squaring of deals
Daily Nostro reconciliation and route unmatched items
Internal Limits-
Counter party Credit Limit
Dealer’s Limit and delegation of authority by Head of Treasury
Nostro Fund movement from FC to FC and FC to Counter party’s FC
Stop loss and setting Trigger limit, Management reporting
WAR and VAR calculation
TREASURY OPERATIONS OVERVIEW
Back Office – Processing
MM & CM Deals:
Call Money deals with Banks/ NBFI and exchanging CMR
Term deals with Banks/ NBFI and Term instruments
Processing and submitting bid forms of T-Bills/ Bonds, Repo & Reverse Repo
Booking Bonds, Shares and Debentures receivable and payable
Processing all transactions
FX Deals:
Inter-Bank FX deals slip processing
Regulatory report preparations
SWIFT Payment execution and confirming payments
Record keeping of cancelled deal slips and proper documentations
TREASURY OPERATIONS OVERVIEW Treasury Back Office Support – Processing
MM Deals:
Issue BB Cheque as per order from Back Office
Collect and deliver BB cheque, FDD and other settlement through BB A/cs
Collect BB A/c statement and Ensure Opening/Closing balance
Ensure interdepartmental relationship with BB Officials.
Ensure timely delivery of confirmation of FX and Money Market related activity.
Corporate Challan settlement
BB related news and circular collections