KNUST - IDL

KUMASI & ACCRA CENTERS

Compiled by: Patrick Tutu, ACIB

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KNUST - IDL

INTRODUCTION TO TREASURY
The role of the Treasury department in Ghanaian banks

traditionally was limited to ensuring the maintenance

of the Bank of Ghana (BOG) stipulated norms for:
Cash Reserve Ratio (CRR) - which mandates that a minimum

proportion of defined liabilities be kept as deposit with the

central bank; and
Statutory Liquidity Ratio (SLR) - which obliges banks to invest a
specified percentage of their liabilities in notified securities
issued by the Government of Ghana.

Activity in foreign exchange was limited to meeting

merchants' and customers' requirements for imports,

exports, remittances and deposits.
Furthermore, Ghana Money Market was characterized
by the imperfections arising from administered interest
rates.
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INTRODUCTION TO TREASURY
The Ghana Money Market was characterized by the
(cont)
imperfections arising from administered interest rates.
The Money Market, therefore, hardly reflected the position of

true liquidity in the system.

BOG had initiated various measures to reform the money
market and to develop the necessary institutional
infrastructure and instruments needed to widen and deepen
the money market.
To start with, institution was set up to provide to the market
participants an institutional mechanism (in the form of a
market maker) to meet their liquidity requirements by
dealing in short term money market instruments like
treasury bills, bills rediscounting, etc.
Further, steps such as increasing the number of instruments
by introducing commercial paper and certificate of deposits
greatly contributed to the development of money market.
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INTRODUCTION TO TREASURY
To enable price discovery, cap on call money interest rate was
(cont)
removed in stages, and completely withdrawn.
Non-banking institutions such as Life Insurance Corporation, All

Ghana Financia1 Institutions, Mutual Funds, etc, were, over a

period, allowed to enter the call money market for lending only.
While the reported misuse of Ready-Forward (Repos)
transactions by some of the market participants had resulted in
its partial ban for some time, the instrument was subsequently
reintroduced with necessary safeguards to prevent its misuse.
The introduction of Delivery Versus Payment (DVP) system for
securities settlement at Public Debt Offices substantially
reduced the counter party risk in security transfers and this
also infused confidence in' the introduction of repos and
expansion of the list of repoab1e securities.
'Repos' is presently an important instrument in the money
market.
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KNUST - IDL

INTRODUCTION TO TREASURY
The deregulation of financial market began with:
(cont)
the shift to market determined exchange rates; and
moved ahead with the freeing of bank deposit and

lending rates.
The BOG began using monetary intervention tools such as:
open market operations (OMOs) to manage liquidity in
the financial system; and
make the determination of interest rates on government
securities more transparent and competitive by holding
auctions.
Post-liberalization, deregulation and financial market
reforms, a vibrant bond market has evolved in the country.
This has enhanced the relative importance of investments
and the investment portfolio in the balance sheets of banks.
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INTRODUCTION TO TREASURY
Investments are now viewed as an alternative to credit, the
(cont)
historical source of profits for banks.
Further, being tradeable assets, they offer both interest

spread as well as capital appreciation.

Just like equity prices and foreign exchange markets,
interest rates (yields) on debt instruments are determined
through the interplay of various economic, financial
(liquidity, inflation, government's/BOG's policies, growth,
forex demand and supply, domestic interest rates vis--vis
global, etc.) and political (local and international) factors
and events.
Given this, as in the case of equities and forex rates, bond
yields can (and do) vary moment to moment. The reflection
of these changes in spot interest rates has seen the
fluctuations in gilt prices - as indeed those of all bonds,
whether Government or non-government.
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INTRODUCTION TO TREASURY
The volatility in interest rates (yields) is at the heart of
(cont)
the transformation of bank treasuries from mere CRR
and SLR keepers to a profit centre.
Downward and upward movements in gilt yields offer
excellent scope and opportunities for the bank to
trade in the underlying securities and earn profits such
that trading in forex to take advantage of currency
variations.
An active treasury can arbitrage (earns profits without
risk) by borrowing cheap (money market/forex market)
and investing high in money, Forex and bond markets.
Bank treasuries deal with the customers enabling
them to execute their transactions in financial
markets.
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KNUST - IDL

INTRODUCTION TO TREASURY
Apart from trade execution, in such situations, the
(cont)
bank is, in effect, 'lending' its balance sheet so that
counterparty risk for both the customer and the
deal counterparty is overcome.
Another key (modern) function of the treasury is
asset-liability management and hedging (i.e.
insulating) the bank's balance sheet from interest
and exchange rate fluctuations.
This involves reordering the maturity and interest
rate patterns of assets and liabilities, either through
direct portfolio actions or derivatives (e.g. swaps
and futures) to minimize or eliminate the risks
arising from mismatches between the two sides of
the balance sheet.
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KNUST - IDL

Sources
of
Treasury
Profits

Investments, where the bank earns a higher yield than its cost
of funds.
Spreads between yields on money market assets and money
market funding.
Arbitrage is the simultaneous buying and selling of securities,
currency, or commodities in different markets or in derivative
forms in order to take advantage of differing prices for the same
asset.This generates a risk-free profit ("arbitrage"), if LIBOR plus
the forward premium on dollar / local currency is more than the
domestic interest rate.
Relative Value. This is a form of arbitrage in which the bank
exploits anomalies in market prices. The bank may have an
'AAA' bond, which yields only 6%, compared to another with the
same rating and maturity, but of a different issuer, which offers
6.5%. It is worthwhile to sell the first bond and invest in the
second and improve the yield by 50 bps without any
incremental risk, as both bonds have the same credit quality.
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KNUST - IDL

Sources
of
Treasury
Profits
Proprietary Trading. In this, the focus is entirely on short term,
as opposed to investment which is long term. The aim is to
(cont)
earn trading profits from movements in security and forex
prices during a day or a few days of trading. These are mostly
directional trades.
Customer Services. Bank treasuries offer their products and
services to customers / non-banking customers. The income of
banks from these activities comprises fees for and/or margins
on trade execution. Profits would be higher on structured (i.e.
non-standard) transactions compared to plain vanilla (e.g. a
straightforward buy sell USD/INR) deals.
Treasuries are also involved in investment banking where their
responsibility covers trade execution on behalf of the banks
clients in the cash or derivatives markets. These may generate
good margins, depending on the complexity and skills required
to design and put through customized structures in the market.
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KNUST - IDL

List of Banks Treasury Products

A. Domestic Treasury
ASSET PRODUCTS / INSTRUMENTS
Call / Notice Money Lending
Term Money Lending / Inter-bank deposits
Investment in Certificates of Deposit (CDs)
Investment in Commercial Paper CPs)
Inter-bank Participation certificates
Derivative Usance Promissory Notes / Bankers or

Corporate
Acceptances
Reverse Repos / CBLO backed Lending through
CCIL
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List of Banks Treasury Products

ASSET PRODUCTS / INSTRUMENTS
(cont)
SLR bonds

Issued by the Government of Ghana as securities and Tbills, Issued by State Governments, Guaranteed by
Government of India, Guaranteed by State Governments
Non- SLR bonds ( issued by )
Financial Institutions, Banks / NBFCs ( Tier II Capital ),
Corporate, State-level Enterprises, Infrastructure Projects, etc.
Asset- backed Securities
Private Placements
Floating Rate bonds
Tax-free bonds
Preference Shares
Listed / Unlisted Equity
Mutual Funds

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List of Banks Treasury Products

LIABILITY PRODUCTS / INSTRUMENTS
(cont)
Call / Notice Money Borrowing
Term Money Borrowing
CD Issues
Inter- bank Participation Certificates
Repos / CBLO-backed Borrowing through CCIL
Refinance ( BOG, SIDBI, NABARD, Exim Bank,

NHB )
Tier II bonds (issued by bank )

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KNUST - IDL

List of Banks Treasury Products

B. Foreign Exchange
(cont)
INTERBANK
Spot Currencies
Cash Tom
Forward and Forward- Forward ( simultaneous

purchase and sale of a currency for two

different forward maturities )
Foreign Currency Placements, Investments and
Borrowings.

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KNUST - IDL

List of Banks Treasury Products

MERCHANT (INITIATED IN BRANCHES, RRANGED
(cont)
BY FOREX TREASURY )
Pre shipment Foreign credit ( PCFC )
Foreign Currency Bills Purchased ( FCBP )
Foreign Currency Loans ( FCLs )
Post shipment Foreign Credit ( PSFC )
External Commercial Borrowing ( ECB )

Derivatives
Interest Rate Swaps, Forward Rate Agreements,

Interest Rate Futures, Interest Rate Options,

Currency Options
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KNUST - IDL

Objectives of Treasury

Treasury of a commercial bank undertakes various

operations in fulfilment of the following objectives:

i.
ii.

iii.

iv.
v.

To take advantage of the attractive trading and arbitrage

opportunities in the bond and forex markets.
To deploy and invest the deposit liabilities, internal
generation and cash flows from maturing assets for
maximum return on a current and forward basis
consistent with the bank's risk policies/ appetite.
To fund the balance sheet on current and forward basis as
cheaply as possible taking into account the marginal
impact of these actions.
To effectively manage the forex assets and liabilities of
the bank.
To manage and maintain the treasury risks of the bank
within the approved and prudential norms of the bank
and regulatory authorities.

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KNUST - IDL

Objectives of Treasury
To assess, advise and manage the financial risks
(cont)
associated with non treasury assets and liabilities of the
vi.

vii.
viii.

ix.
x.
xi.
xii.

bank
To, adopt the best practices in dealing, clearing,
settlement and risk management in treasury operations.
To maintain statutory reserves CRR and SLR - as
mandated by the BOG on current and forward planning
basis.
To deploy profitably and without compromising liquidity
the clearing surpluses of the bank
To identify and borrow on the best terms from the
market to meet the clearing deficits of the Bank
To offer comprehensive value-added treasury and
related services to the bank's customers
To act as a profit centre for the bank.

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KNUST - IDL

Organizational
Structure
Organizational structure of a commercial bank
treasury should facilitate the handling of all
market operations, thus:
Dealing;
Settlement;
Custody; and
Accounting; in both the domestic and forex markets.

In view of the voluminous and complex nature of

transactions handled by a treasury, various

functions are segregated as under:
front-office;
mid-office; and
back office.
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KNUST - IDL

Organizational Structure: Front

Dealers, as dealmakers, will seek to conclude transactions
Office
Products must be priced in order to generate the necessary
level of margin.
Throughout the dealing day the bank needs to optimize its
cashflows in order to maximize its returns.
These activities can be placed under the heading cash
management.
Doing the deal is classed as front-office,
The front-office and the back-office managers have to
forecast activity in order to ensure prudence is being
applied in its trading activities and that all liabilities can be
met in the course of the trading period.
The front-office will forward the deal to the back-office to be
processed alongside all the other different forms of
balance-sheet activity taking place.
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KNUST - IDL

Organizational Structure: Mid The mid-office deals with risk management and
office
management information. These activities
include:
Produces the risk management reports and

checks for compliance with internal limits.

Tends to be link with the back office. Thus manual
dealings slips are collected by the middle office
staff for onwards transmission to the back office.
Checks that dealing slips are completed
accurately and settlement instructions are proper.
Queries from the back offices on deals would be
filtered through the middle office.
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KNUST - IDL

Organizational Structure: Back

The activities of the back-office include:
Office
confirmations,
settlements,
accounting, and
reconciliation.

Once a deal has been done in the front-office, it will

need to be cleared and settled by the back-office.

Clearing covers all the activities prior to settlement
such as:
trade comparison and matching,
trade netting and settlement,
securities messages and numbering and,
if applicable, securities lending.
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KNUST - IDL

Organizational Structure: Back

Even though back-office activities are sometimes seen as less
Office
glamorous than front-office activities, this crucial area needs

robust systems and controls.

Otherwise, a bank may face the potential risk of being unable
to settle its respective outstandings, a situation that can arise
for reasons of:
fraud,
poor management,
exceptional circumstances, and
systems failure.
It is important that the above three functions are properly
segregated to ensure controls within the treasury department
of the bank.
The head of treasury who is a senior executive directs controls
and co-ordinates the activities of the treasury department.
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KNUST - IDL

Balance Sheet Management

The ongoing reforms have provided the banks freedom

to price most of their assets and liabilities by themselves

although there exist a broad band specified by the BOG.
The pricing of treasury assets and liabilities which form a
critical mass of the balance sheet, is therefore, very
crucial to the balance sheet management.
An important aspect of balance sheet management is
Liquidity Management.
Liquidity essentially means the ability to meet all
contractual obligations as and when they arise, as well
as the ability to satisfy funds requirement to meet new
business opportunities.
Effective liquidity management requires careful attention
to balance sheet structure and growth.
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KNUST - IDL

Balance Sheet Management

Funds management by the treasury involves providing a

(cont)
balanced and well diversified liability base to fund the
various assets in the balance sheet of the bank.

Customer deposits are often the most suitable source of funds for

a bank, due to actuarial and behavioural reasons.

The second are the funds obtained from the interbank money
market which are very short term in tenure and volatile as regards
rate as well as availability.

The treasury has to decide on an optimal mix of funds from

various sources to ensure that there is no excessive

dependence on any single category.
It is also advisable that the maturity profile of assets
conform broadly to that of the liabilities.
The treasury also has the responsibility for setting targets
for balance sheet size and key ratios, in consultation with
all business groups.
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KNUST - IDL

Transfer Pricing

Transfer price is the price at which divisions of a company

transact with each other.

Transfer prices are used when individual entities of a larger multientity firm are treated and measured as separately run entities.
The treasury provides the interface between the bank and the
external market, and also between the asset and liability groups
of the bank.
It helps to provide a balance between the two, so that optimum
returns can be obtained on the assets without compromising
liquidity.
The treasurer has to ensure that the funds of the bank are
deployed in the most appropriate manner without sacrificing
either yield or liquidity.
This is done very effectively through the means of a transfer
pricing mechanism administered by the treasury, which can
provide correct signal to various business groups as to their future
asset and liability strategies.

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KNUST - IDL

Reserve Management &

In the Ghana banking scenario, a large asset base of a bank consists of
investments on account of statutory reserves.
Investments
It should ideally take into account both liquidity as well as yield

considerations.
Along with this, the market risk of the portfolio in terms of its price
sensitivity to interest rate changes needs to be quantified and periodically
monitored by means of analytical tools such as duration analysis.
In addition to investment for statutory reserves, the treasury also
makes investment in various other kinds of instruments such as
Certificate of Deposits, Commercial Papers, Public sector bonds,
Corporate Debts, etc.
The Bank of Botswana considers three key investment objectives for
foreign exchange reserves management:
Safety of the reserves is considered to be the first and foremost objective.

This involves the preservation of the value of the foreign exchange

reserves.
Liquidity is also considered and ensures the timely availability of
adequate resources at a reasonable price.
Return on the reserves should be optimised though prudent investments
within a framework of acceptable risk.

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KNUST - IDL

Customer Focus

In a Competitive environment, treasury should never lose its customer

focus.
In addition to trading avenues, which are essentially volatile in nature,
treasury should also have non-volatile sources of revenue which are ref
Factors affecting customer satisfaction. They include:
ease of use educating customers on how to get the best from the
service or product and designing services that are easy to use and
access
personal relationships building a rapport with customers to make
them feel valued and that their needs are important, so that they
develop an attachment to the service
appropriate payment systems enabling customers to pay in ways
that are convenient to them and at appropriate times, such as on
satisfactory completion of service
an effective complaints process dealing with any problems or
complaints promptly and making sure customers know of the outcome
after-sales service checking that customers have had a
satisfactory experience and offering other potentially relevant services
to extend the customer relationship.
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KNUST - IDL

Questions
1. State and explain five(5) sources of

treasury profits.
2. Outline and briefly explain the stages

of treasury centralization.
3. Outline and explain five (5) role of the

treasury department.
4. The treasury function has various
objectives. State seven (7) of them.
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END
THANK YOU
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