Treasury management (or treasury operations) includes management of an enterprise's holdings, with the ultimate goal of managing the firm's liquidity and mitigating its operational, financial and reputational risk. Treasury Management includes a firm's collections, disbursements, concentration, investment and funding activities. In larger firms, it may also include trading in bonds, currencies, financial derivatives and the associated financial risk management.
Management is the administration of an organization, whether it is a business, a not-for-profit organization, or government body. Management includes the activities of setting the strategy of an organization and coordinating the efforts of its employees to accomplish its objectives through the application of available resources, such as financial, natural, technological, and human resources. The term "management" may also refer to those people who manage an organization.
A trader is person or entity, in finance, who buys and sells financial instruments such as stocks, bonds, commodities, derivatives, and mutual funds in the capacity of agent, hedger, arbitrageur, or speculator.
Financial risk management is the practice of economic value in a firm by using financial instruments to manage exposure to risk: operational risk, credit risk and market risk, foreign exchange risk, shape risk, volatility risk, liquidity risk, inflation risk, business risk, legal risk, reputational risk, sector risk etc. Similar to general risk management, financial risk management requires identifying its sources, measuring it, and plans to address them.
Most banks have whole departments devoted to treasury management and supporting their clients' needs in this area. Smaller banks are increasingly launching and/or expanding their treasury management functions and offerings, because of the market opportunity afforded by the recent economic environment (with banks of all sizes focusing on the clients they serve best), availability of highly seasoned treasury management professionals, access to industry standard, third-party technology providers' products and services tiered according to the needs of smaller clients, and investment in education and other best practices. A number of independent treasury management systems (TMS) are available, allowing enterprises to conduct treasury management internally.
A bank is a financial institution that accepts deposits from the public and creates credit. Lending activities can be performed either directly or indirectly through capital markets. Due to their importance in the financial stability of a country, banks are highly regulated in most countries. Most nations have institutionalized a system known as fractional reserve banking under which banks hold liquid assets equal to only a portion of their current liabilities. In addition to other regulations intended to ensure liquidity, banks are generally subject to minimum capital requirements based on an international set of capital standards, known as the Basel Accords.
Departmentalization refers to the process of grouping activities into departments. Division of labour creates specialists who need coordination. This coordination is facilitated by grouping specialists together in departments.
For non-banking entities, the terms Treasury Management and Cash Management are sometimes used interchangeably, while, in fact, the scope of treasury management is larger (and includes funding and investment activities mentioned above). In general, a company's treasury operations comes under the control of the CFO, Vice-President / Director of Finance or Treasurer, and is handled on a day-to-day basis by the organization's treasury staff, controller, or comptroller.
Bank Treasuries may have the following departments:
As money became a commodity, the money market became a component of the financial market for assets involved in short-term borrowing, lending, buying and selling with original maturities of one year or less. Trading in money markets is done over the counter and is wholesale.
The foreign exchange market is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines the foreign exchange rate. It includes all aspects of buying, selling and exchanging currencies at current or determined prices. In terms of trading volume, it is by far the largest market in the world, followed by the Credit market.
In addition the Treasury function may also have an Asset liability management (ALM) desk that manages the risk of interest rate mismatch and liquidity; and a Transfer pricing or Pooling function that prices liquidity for business lines ( asset sales teams) within the bank.
In taxation and accounting, transfer pricing refers to the rules and methods for pricing transactions within and between enterprises under common ownership or control. Because of the potential for cross-border controlled transactions to distort taxable income, tax authorities in many countries can adjust intragroup transfer prices that differ from what would have been charged by unrelated enterprises dealing at arm’s length. The OECD and World Bank recommend intragroup pricing rules based on the arm’s-length principle, and 19 of the 20 members of the G20 have adopted similar measures through bilateral treaties and domestic legislation, regulations, or administrative practice. Countries with transfer pricing legislation generally follow the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations in most respects, although their rules can differ on some important details.
A risk pool is one of the forms of risk management mostly practiced by insurance companies. Under this system, insurance companies come together to form a pool, which can provide protection to insurance companies against catastrophic risks such as floods or earthquakes. The term is also used to describe the pooling of similar risks that underlies the concept of insurance. While risk pooling is necessary for insurance to work, not all risks can be effectively pooled. In particular, it is difficult to pool dissimilar risks in a voluntary insurance bracket, unless there is a subsidy available to encourage participation.
Banks may or may not disclose the prices they charge for Treasury Management products.
The significant core functions of a corporate treasury department include:
Cash and liquidity management is often described as treasury's 'primary duty.' Essentially, a company needs to be able to meet its financial obligations as they fall due, i.e. to pay employees, suppliers, lenders and shareholders. This can also be described as the need to maintain liquidity, or solvency of the company: a company needs to have the funds available that will enable it to stay in business.In addition to dealing with payment transactions; cash management also includes planning, account organisation, cash flow monitoring, managing bank accounts, electronic banking, pooling and netting as well as the functions of in-house banks.
Risk management is the discipline of managing financial risks to allow the company to meet its financial obligations and ensure predictable business performance. The aim of Risk Management is to identify, measure, and manage risks that could have a significant impact on the business. It is important to note that the objective is not to eliminate all risk. Taking risk is a critical part of any business – no risk no gain. It is important, however, to take risks only in areas that the business has competitive advantage. For example, an automotive company will want to take risks in design and engineering but will want to avoid risks in currencies and interest rates. On the other hand, a bank will be in a position to take risks in currencies and interest rates but will avoid operational and regulatory risks.
Treasurers are typically responsible for managing:
Looking after contacts with banks and rating agencies, as well as discussions with credit insurers and, if applicable, suppliers concerning periods allowed for payment, in conjunction with the procurement of finance, also form part of the treasurer’s core business.
Concerns about systemic risks in Over The Counter (OTC) derivatives markets, led to G20 leaders agreeing to new reforms being rolled out in 2015. This new regulation, states that largely standardized OTC derivative contracts should be traded on electronic exchanges, and cleared centrally by Central Counterparty/Clearing House trades. Trades and their daily valuation should also be reported to authorized Trade Repositories and variation margins should be collected and maintained .
In finance, a derivative is a contract that derives its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate, and is often simply called the "underlying." Derivatives can be used for a number of purposes, including insuring against price movements (hedging), increasing exposure to price movements for speculation or getting access to otherwise hard-to-trade assets or markets. Some of the more common derivatives include forwards, futures, options, swaps, and variations of these such as synthetic collateralized debt obligations and credit default swaps. Most derivatives are traded over-the-counter (off-exchange) or on an exchange such as the New York Stock Exchange, while most insurance contracts have developed into a separate industry. In the United States, after the financial crisis of 2007–2009, there has been increased pressure to move derivatives to trade on exchanges. Derivatives are one of the three main categories of financial instruments, the other two being stocks and debt. The oldest example of a derivative in history, attested to by Aristotle, is thought to be a contract transaction of olives, entered into by ancient Greek philosopher Thales, who made a profit in the exchange. Bucket shops, outlawed a century ago, are a more recent historical example.
Finance is a field that is concerned with the allocation (investment) of assets and liabilities over space and time, often under conditions of risk or uncertainty. Finance can also be defined as the art of money management. Participants in the market aim to price assets based on their risk level, fundamental value, and their expected rate of return. Finance can be split into three sub-categories: public finance, corporate finance and personal finance.
A financial market is a market in which people trade financial securities and derivatives such as futures and options at low transaction costs. Securities include stocks and bonds, and precious metals.
In finance, an interest rate swap (IRS) is an interest rate derivative (IRD). It involves exchange of interest rates between two parties. In particular it is a linear IRD and one of the most liquid, benchmark products. It has associations with forward rate agreements (FRAs), and with zero coupon swaps (ZCSs).
A hedge is an investment position intended to offset potential losses or gains that may be incurred by a companion investment. A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, gambles, many types of over-the-counter and derivative products, and futures contracts.
A swap is a derivative in which two counterparties exchange cash flows of one party's financial instrument for those of the other party's financial instrument. The benefits in question depend on the type of financial instruments involved. For example, in the case of a swap involving two bonds, the benefits in question can be the periodic interest (coupon) payments associated with such bonds. Specifically, two counterparties agree to exchange one stream of cash flows against another stream. These streams are called the legs of the swap. The swap agreement defines the dates when the cash flows are to be paid and the way they are accrued and calculated. Usually at the time when the contract is initiated, at least one of these series of cash flows is determined by an uncertain variable such as a floating interest rate, foreign exchange rate, equity price, or commodity price.
Fixed income refers to any type of investment under which the borrower or issuer is obliged to make payments of a fixed amount on a fixed schedule. For example, the borrower may have to pay interest at a fixed rate once a year, and to repay the principal amount on maturity. Fixed-income securities can be contrasted with equity securities – often referred to as stocks and shares – that create no obligation to pay dividends or any other form of income.
Treasury services is a function of an investment bank which provides transaction, investment, and information services for chief financial officers or treasurers. Treasury services concentrates and invests client money, and provides trade finance and logistics solutions as well as safeguards, values, clears and services securities and portfolios for investors and broker-dealers. Treasury Services is a transaction intensive and system intensive business. This is a source of risk free fees income for the banks.
Proprietary trading occurs when a trader trades stocks, bonds, currencies, commodities, their derivatives, or other financial instruments with the firm's own money, aka the nostro account, contrary to depositors' money, in order to make a profit for itself. Proprietary traders may use a variety of strategies such as index arbitrage, statistical arbitrage, merger arbitrage, fundamental analysis, volatility arbitrage or global macro trading, much like a hedge fund. Many reporters and analysts believe that large banks purposely leave ambiguous the proportion of proprietary versus non-proprietary trading, because it is felt that proprietary trading is riskier and results in more volatile profits.
In structured finance, a structured product, also known as a market-linked investment, is a pre-packaged investment strategy based on a single security, a basket of securities, options, indices, commodities, debt issuance or foreign currencies, and to a lesser extent, derivatives. The variety of products just described is demonstrative of the fact that there is no single, uniform definition of a structured product. A feature of some structured products is a "principal guarantee" function, which offers protection of principal if held to maturity. For example, an investor invests $100, the issuer simply invests in a risk-free bond that has sufficient interest to grow to $100 after the five-year period. This bond might cost $80 today and after five years it will grow to $100. With the leftover funds the issuer purchases the options and swaps needed to perform whatever the investment strategy calls for. Theoretically an investor can just do this themselves, but the cost and transaction volume requirements of many options and swaps are beyond many individual investors.
In finance, a currency swap is an interest rate derivative (IRD). In particular it is a linear IRD and one of the most liquid, benchmark products spanning multiple currencies simultaneously. It has pricing associations with interest rate swaps (IRSs), foreign exchange (FX) rates, and FX swaps (FXSs).
Basis risk in finance is the risk associated with imperfect hedging. It arises because of the difference between the price of the asset to be hedged and the price of the asset serving as the hedge, or because of a mismatch between the expiration date of the hedge asset and the actual selling date of the asset, or—as in energy—due to the difference in the location of the asset to be hedged and the asset serving as the hedge.
Initially pioneered by financial institutions during the 1970s as interest rates became increasingly volatile, asset and liability management is the practice of managing risks that arise due to mismatches between the assets and liabilities.
In financial economics, a liquidity crisis refers to an acute shortage of liquidity. Liquidity may refer to market liquidity, funding liquidity, or accounting liquidity. Additionally, some economists define a market to be liquid if it can absorb "liquidity trades" without large changes in price. This shortage of liquidity could reflect a fall in asset prices below their long run fundamental price, deterioration in external financing conditions, reduction in the number of market participants, or simply difficulty in trading assets.
The CELS ratings or Camels rating is a supervisory rating system originally developed in the U.S. to classify a bank's overall condition. It is applied to every bank and credit union in the U.S. and is also implemented outside the U.S. by various banking supervisory regulators.
Collateral has been used for hundreds of years to provide security against the possibility of payment default by the opposing party in a trade. Collateral management began in the 1980s, with Bankers Trust and Salomon Brothers taking collateral against credit exposure. There were no legal standards, and most calculations were performed manually on spreadsheets. Collateralisation of derivatives exposures became widespread in the early 1990s. Standardisation began in 1994 via the first ISDA documentation.
A foreign exchange derivative is a financial derivative whose payoff depends on the foreign exchange rate(s) of two currencies. These instruments are commonly used for currency speculation and arbitrage or for hedging foreign exchange risk.
An X-Value Adjustment is a generic term referring collectively to a number of different “Valuation Adjustments” in relation to derivative instruments held by banks. The purpose of these is twofold: primarily to hedge for possible losses due to counterparty default; but also, to determine the amount of capital required under Basel III. For a discussion as to the impact of xVA on the bank's overall balance sheet, return on equity, and dividend policy, see: XVA has, in many institutions, led to the creation of specialized desks. Note that the various XVA require careful and correct aggregation without double counting.