Treasury management

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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 Coordinating the efforts of people

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.

Trader (finance) person who buys and sells financial instruments

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.

Contents

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.

Bank financial institution

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:

Money market type of financial market

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.

Functions

The significant core functions of a corporate treasury department include:

Cash and Liquidity Management

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. [1] 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. [2]

Risk Management

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. [3]

Treasurers are typically responsible for managing:

Corporate Finance

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. [2]

Regulation

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 .

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