INTRODUCTION

Treasury Operations or management includes management of a company’s investments with the objective of managing the firm’s resources so that the firm’s liquidity needs is fully met and also income owing to the investment is also optimized. The function of Treasury Management involves raising of resources both at home and overseas, investment in bonds and also trading activities in bonds and currencies. Treasury Management is more prominent in commercial and investment banks, wherein investment activities are managed as part of its statutory requirement and also for trading activities either for its own proprietary needs and merchant transactions i.e., transactions for its customer behalf. 

The Corporate Sector Treasury Management is done mainly from the point of view of arranging resources for business need and its cash management, management for firms’ receivable and payable in different currencies and also hedging of balance sheet financial items. 

The Treasury Management function is more intensive in banking context as the function is undertaken for itself and also on behalf of its customer’s requirement. Broadly, the Treasury Management function involves operating in the Financial Markets such as Wholesale Debt Market, Stock Exchanges and also Currencies Markets, which are financial markets with large numbers of market participants. The volumes of transactions in these domestic markets are in multiple of INR in Billions and also multiple of billions in USD for FX market. Hence, these markets are actively

managed and monitored through regulators/regulatory mechanism. 

Thus, the Treasury functions mostly comprise functioning in following markets: 

· Fixed Income or Money Market: The fixed income or money market involves buying and selling interest/coupon bearing securities for investment functions or trading intention. The fixed income or money market consists of instruments such as Treasury Bills, Government Securities, Bonds issued by PSU companies and Debenture issued by private corporate. The market involves both primary or new issue market and also secondary market, where active trading of securities take place. 

· Mutual Fund Market: Now a days Mutual Fund has also become one of the important source for deployment of fund. Since there are variety of schemes are available for investment, treasury managers can invest in these funds as per their requirements and risk profile. 

· Foreign Exchange Market: "FX" Market that buys and sells currencies. The currency pairs, that are traded in Indian Forex Markets are USD/INR, EUR/USD, USD/JPY, EUR/SWF, JPY/INR, GBP/INR etc. 

· Capital Markets or Equities market: It is the place where equity shares are listed and traded in the stock exchanges. 

1.2 Organization of Treasury 

The organizational structure of Treasury Operation is based on the function and role of each of the offices within Treasury Division/verticals of any organization. The normal structure of Treasury Operation involves: 

1. Front Office 

2. Back Office 

3. Mid Office 

The typical layout of an organizational structure of a Treasury is as below:

Front Office

The scope of Front Office involves buying, selling and trading of money market instruments, securities, Forex, equity, derivatives and precious metals. The front office set-up involves dealers/traders, chief dealer, In-charge of Front Office to execute trade on behalf of the banks/corporate. As trade transactions in a front office involve huge transactions of very high value, the conduct of front office traders is highly regulated as excessive position may lead to substantial loss to the organization.

1.2.1.1 Dealing Room

The transactions of Front Office are done in a place called the dealing room. The dealing room acts as the interface of the bank/corporate to the domestic and international financial markets, having the set up for dealers, financial information software, dealing terminals, high quality communication channels, Treasury application softwares , all integrated through IT platforms.

Thus, the critical components of any dealing room are human resources, i.e. dealers and traders and considering the risk involved in the trading or dealing activities, the dealers need to follow sound internal control and good conduct. These are generally,

(a) Code of Conduct: In India dealers are asked to follow the code of conduct as approved in the organisation and firm. The RBI (for bank traders), FEDAI (for Foreign Exchange Dealers) and FIMMDA (for Money Market Dealers) have defined the code for traders in the trading room.

(b) Adherence to Internal Limits: Each organisation having a dealing room set has an investment policy, which defines the internal limits on exposure, position taking and many other limits. Dealers are required to adhere the powers and limits as per these guidelines.

(c) Dealing Hours: Dealers should operate within the trading hours as defined by different markets.

(d) Secrecy and Confidentiality: Keys to the conduct of the dealers.

The person-in-charge of Front Office is generally a senior official of any organizational hierarchy who reports to In-Charge of Treasury. A typical structure of a front office is as below:

The dealing room structure of a typical bank is as above. Depending upon the size of the portfolio, the number of dealers can be one or more. Similarly, depending upon the size of a portfolio, a dealer can also manage multiple portfolios. The segregation of structure is more from the point of view of portfolio of type.

Back Office

The back office is responsible for the delivery and settlement of all transactions concluded by the back office. The role of back office includes:

(a) Delivery and settlement and consequent accounting entries for all those transactions.

(b) Internal Control and checking over treasury dealings, confirmation and settlement activities and accounting thereof.

(c) Auxiliary functions of Treasury

The key controls over market risk activities, and particularly over dealing room activities and function, exist in back office. It is critical that clear segregation of duties and reporting lines are maintained between dealing room staff and back- office staff.

Mid-Office

Mid-Office function as an independent risk assessment of the treasury function of any bank ororganization having Treasury Operation. The middle office is responsible for the critical functions of independent market risk monitoring, measurement, analysis and reporting for the management. An effective Middle office provides independent risk assessment which is critical to the firms’ key function of controlling and managing the market risks in accordance with the mandate established by the Board of the organization. It is a highly-specialized function and must include trained and competent staffs. The methodology of analysis and reporting will vary from organization to organization depending upon degree of sophistication and exposure to market risk. 

Function of Integrated Treasury 

The treasury management has been categorized from the point of Treasury functions of banks and that of corporate. 

The Bank’s treasury function mainly involves 

1. Reserve Management: The reserve management involves maintenance of Cash Reserve Ratio and Statutory Liquidity Ratio. 

2. Funds Management and Liquidity Management: Funds are key to banking operation. The banking function involves large scale receipt and payment of cash. The funds management and liquidity management at Treasury involves not only arranging and managing aggregation of cash function at the branches of the bank, but also managing the CRR of the bank, thus would involve lending of money to interbank market participants/RBI and also borrowing of money from interbank participants/RBI. 

3. Investment and optimizing return on bank funds: The treasury function involves investment of bank’s fund not only the investment requirement in Government securities due to SLR requirement, but also investments over and above the SLR requirement in Government Securities, Non-SLR bonds and debentures, investment in equity shares, venture funds, mutual funds etc. 

4. Trading of investment products for trading profit: Trading function is key to any Treasury functions. Banks are the most active trader in the markets with an eye on trading profit, which involves same day trading or holding the investment for a longer term and then off-loading the same in market with trading profit. 

5. FX Treasury Operation: The banks’ treasury function also involves trading in Foreign Exchange markets both in the capacity of proprietary trading (trading on its own behalf) or on behalf of the corporate as part of merchant activities for a margin. 

6. Derivative Transactions: The treasury function also involves derivative transactions to hedge its own book or on behalf of its clients or corporate. 

Corporate Treasury Management functions1. Cash management: Cash management clearly forms part of the treasury’s core functions. 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 function of in-house bank. 

2. Liquidity planning and control: Liquidity planning and control are closely linked to cash management. 

3. Management of interest, currency and commodity risks: Although, large companies (especially banks and financial institutions) have a separate Risk Management department which are responsible overall governance of the all types of risk in the organisation. However, functions of Treasury revolves around management of interest and currency risks, commodity risks etc.. This involves control of these risks, as well as the documentation of hedging transactions. Thus, while Risk Management department may be dealing with Market Risk, Treasury Department may be least concerned with the same. 

4. Procurement of finance and financial Investments: The core duties of the treasury also comprise the procurement of finance and financial investments, and dealing with products such as term loan, working capital finance and factoring. 

5. Corporate finance functions: It comprise medium- and long- term financing, particularly capital market instruments, group financing, credit, leasing, and negotiating with banks and financers for terms and condition of lending, hedging etc. Corporate finance is thus dealt in Treasury, which deals in finance of the firm with the sources of funding and the capital structure of the firm and the actions that managers take to increase the value of the firm to the shareholders, as well as the tools and analysis used to allocate financial resources. 

6. Contacts with banks and rating agencies: The corporate treasury function also involves intensive contacts with banks and institution and rating agencies for corporate rating.