Treasury Management

Part 1 – Functions and Operations

 THE BUSINESS OF BANKING
People with excess People in need of
funds funds

Monday, February 8, 2021 2

 THE ROLE OF TREASURY

RETAIL CORPORATE
BANKING BANKING
Fund raisers Fund users

TREASURY
✓ Liquidity
✓ Profitability
✓ Risk Management
 TREASURY FUNCTIONS
MANAGE:
1.Balance Sheet (Assets & Liabilities) - ALM
➢ Take into account Interest Rate & FX Risks*
2.Liquidity and Cash Flow Requirements
➢ Fund bank’s operational requirements (ex. deposit/withdrawal,
loan availment, purchase/sale of bonds or FX, etc.)
➢ Comply with regulatory requirements (ex. reserve requirement
against deposits, FCDU cover, etc.)
3. Generate Profit for Funding (Fixed Income, FX, Derivatives):
➢ Interest Income
➢ Trading Gain

* Treasury works together with other units like Credit Risk and also Market Risk Group, which measures and
monitors various risks including IRR and FX Risks.
TREASURY ACTIVITY CHART
TREASURER

FOR. CCY
FOREIGN TREASURY
LIQUIDITY, GS, FIXED INC
EXCHANGE SALES
& DERIVATIVES

BALANCE BALANCE
SHEET SHEET FX SPOT FX SALES
MANAGEMENT MANAGEMENT

LIQUIDITY FIXED INCOME

FIXED INCOME FX FORWARDS
MANAGEMENT SALES

FIXED INCOME DERIVATIVES FX OPTIONS DEPOSITS

PESO FINANCIAL
SWAPS / IRS SOLUTIONS
TD Rates
 SENIOR MANAGEMENT
· Approves Business Plans and Targets
· Establishes Policy Guidelines
SENIOR MANAGEMENT
· Sets Limits and Risk Tolerance
· Approves Business Plans and Targets
· Monitors Targets and Ensures Business Performance
· Establishes Policy Guidelines

TREASURY PROCESS FLOW

TRADING ROOM
· Sets Limits and Risk Tolerance
· Monitors Targets and Ensures Business Performance
· Takes on the Risk Exposure / Manages Risks within
Policies and Regulations
TRADING ROOM
· Ensures accurate deal capture
· Takes on the Risk Exposure / Manages Risks within
· Validates P & L SENIOR MANAGEMENT
Policies and Regulations
·· Approves Businessdeal
Ensures accurate Plans and Targets
capture
OPERATIONS ·· Establishes Policy Guidelines
RISK MANAGEMENT Validates P & L
· Confirms, Books and Settles the Trade · Sets Limits and Risk Tolerance
· Recommends Limits
· Reconciles Front with Back Office positions · Monitors Targets and Ensures Business Performance
· Develops Risk Policies OPERATIONS
· Books income and expense on outstanding portfolios
· Prepares Risk Reports, · Confirms, Books and Settles the Trade
· Prepares and books mark to market calculation on
Backtesting, and · Reconciles Front withTRADING ROOM
Back Office positions
outstanding positions ·· Takes on the Risk Exposure / Manages Risksportfolios
within
Stress Testing Books income and expense on outstanding
· Develops Models and Policies and Regulations
· Prepares and books mark to market calculation on
RISK CONTROL · outstanding
Ensures accurate deal capture
Templates positions
· Issues Daily Credit Limit Exposure Report RISK MANAGEMENT · Validates P & L
· Provides independent
· Monitors Limit Compliance · view
Recommends
on risk Limits RISK CONTROL
· Monitors and Reconciles FX positions · Develops Risk Policies · Issues Daily Credit LimitOPERATIONS
Exposure Report
· Prepares Risk Reports and Management Action Triggers
· Prepares Risk Reports, ·· Confirms,
· Manages Nostro / Cashflow Movements
Books and Settles
Monitors Limit Compliance the Trade
Backtesting, and ·· Reconciles Front
Monitors and with Back
Reconciles FX Office positions
positions
Stress Testing ·· Books income and expense on outstanding
Prepares Risk Reports and Management Actionportfolios
Triggers
CONTROLLERSHIP / MIS · Develops Models and · Prepares and books
Manages Nostro mark toMovements
/ Cashflow market calculation on
· Ensures integrity of P & L Templates outstanding positions
· Ensures compliance with Accounting Standards
· Provides independent CONTROLLERSHIP / MIS
· Manages business planning process view on risk · Ensures integrity of P RISK
& L CONTROL
·· Issues Daily Credit Limit
Ensures compliance withExposure Report
Accounting Standards
·· Manages
Monitors business
Limit Compliance
planning process
· Monitors and Reconciles FX positions
· Prepares Risk Reports and Management Action Triggers
· Manages Nostro / Cashflow Movements

CONTROLLERSHIP / MIS
 THE FINANCIAL MARKETS

Financial Markets

Foreign
Money Market Capital Market Derivatives
Exchange

Offshore Debt
Spot Options
Market (Fixed Income)

Local Market Equity Forwards Swaps

Futures

Structured
Products
Sale/Distribution of money-market
products
Money Market Products
Peso Government Securities
Commercial Papers
Peso Time Deposits
Dollar Time Deposits
 HOW DOES GS COMPARE TO BANK
PLACEMENTS?
•GS are guaranteed by the National Government, while
Time Deposits are guaranteed by the bank taking the
deposits
•GS cannot be “pre-terminated” while Time Deposits can
be.
Buyer already owns the GS; if cash flow is needed
back, the GS have to be sold to the market at current
market rate.
•GS such as FXTNs and RTBs have coupon payments
which the bondholder can expect to collect during the term
of the GS
 INTEREST RATE YIELD CURVE
The yield curve shows the relationship between the interest
rate (y-axis) and the term (x-axis) of an instrument in a given
currency. Also called the term structure of interest rates.
USD, EUR, GBP, JPY INTEREST RATE YIELD CURVE
1.0

USD EUR GBP JPY

0.5

0.0
1W 1M 2M 3M 4M 5M 6M 7M 8M 9M 10M 11M 1Y
COMPARING TYPES OF GOVERNMENT-ISSUED BONDS
T-Bill Cash Flow
 T-Bills (91 Day Discount Bond)
Disc Price = P 996,850.23
P 997,480.18
W/holding tax = P 629.95

Day 1 Day 91

Discount = P 3,149.77 or 1.25%

P 1,000,000
 FXTNs

2 YEARS TO GO FXTN: Coupon Rate = 6.375%

gross or 5.1% net
FV = P 1,000,000

P 25,500 P 25,500 P 25,500

P 1,000,000 + 25,500
 RTB or Retail Treasury Bonds

RTB 03-01: Coupon Rate = 10.75% gross or 8.6% net

P 1,000,000

P 21,500 coupon (net of tax)

P 1,000,000 + 21,500
2. FIXED INCOME – DESCRIPTION PAGE
BID OFFER BID OFFER
ISSUE PRICE PRICE YIELD YIELD

ISSUER
ISIN

ISSUER’S
COUPON CREDIT
FREQUENCY RATING
 2. FIXED INCOME – SAMPLE TRADE TICKET
TRADE
DATE

COUPON ISSUER
FACE VALUE (x 1000)
ISSUE

SETTLEMENT DATE

FACE VALUE x PRICE

ACCRUED INTEREST FOR

CURRENT COUPON PERIOD
SETTLEMENT
AMOUNT
 Time Deposit

➢Time deposits are generally short-term

interbank transactions with maturities
ranging from overnight (O/N, 1 day or until the
next banking day), to 1 week, 1 month and up
to least 12 months. (>1 Yr Capital Market).
“Price” of money is quoted in terms of yields
and each currency (Peso, USD, JPY, GBP,
EUR, etc.) has its own interest rate yield
curve.
 Time Deposit
FEATURES:
 Principal: Amount borrowed or lent
 Rate: Yield of instrument, Lending or Borrowing Rate
 Term: Contracted Period (Maturity Date – Value Date)
• Day Basis: 360 days +USD 10,000,000 Cashflow of Bank A (Borrower)
Maturity Date

Value Date 3 Months

Money Market Computation -USD 10,005,000

Simple Interest Computation:

Cashflow of Bank B (Lender) +USD 10,005,000
Principal x Rate x Term / 360
Value Date
USD10,000,000 x 0.20% x 90/360
= USD 5,000 (Interest for 3 months) 3 Months
Maturity Date
-USD 10,000,000
TD Rates
 EXERCISE: Time Deposit
At the end of the day, Imee ($ Liquidity Manager) has excess funds of $
50mln. Imee can lend to the following counterparties with the following
quotations applicable for O/N or 1 week:
BID OFFER
Deutsche Bank, Singapore 0.08% 0.12%
Commonwealth Bank of Australia 0.10% 0.12%
UBS, Hong Kong 0.07% 0.10%

Questions:
1. To which counterparty will Imee lend (assuming there is no restriction
in terms of amount)?
2. Compute for the interest if Imee will lend O/N or 1 week.
3. Assuming your counterparty in #1 can only accept $ 30mln, to which
counterparty will Imee lend the balance?
4. (Follow-up to #3) Assuming Imee will only lend O/N, compute for the
total interest she’ll receive for the entire $ 50mln.
 EXERCISE: Time Deposit
In the afternoon, Joan (Peso Liquidity Manager) noticed extra-
ordinarily huge withdrawals; clearing report also showed a huge
clearing loss. Joan realized she’ll fall short of the required reserves by
Php 100mln.

Upon checking with her counterparties the following O/N quotes were
given to her:
BID OFFER
BPI 2.125% 2.500%
PNB 2.000% 2.500%
PS Bank 2.125% 2.375%

With whom should she borrow?

How much interest will she pay O/N?
 EXERCISES: 2-WAY QUOTING
CALLING PARTY QUOTING PARTY
MONEY MARKET TD
UBP needs to borrow 1-month JPY UBP has a client that needs to borrow
Term Bid Offer and lend 3-month USD. Given market £ 10M for 1 month. If UBP wants to
USD 1M 0.20 0.24 quotes at the left, at what rate can make a spread (earn) of 0.125% on
3M 0.42 0.47 UBP borrow JPY and lend USD? the loan, what rate should UBP quote
GBP 1M 0.65 0.70 its client?
3M 0.98 1.04 UBP may borrow 1-month JPY at
JPY 1M 0.10 0.14 0.14% and lend 3-month USD at UBP may lend 1-month GBP at
3M 0.31 0.34 0.42% 0.825% to client. (UBP will borrow
GBP at 0.7%)

FIXED INCOME UBP is looking to sell P50 M of FXTN UBP has a client that is selling $2 M of
20-17. At what rate can the Bank sell ROP 37. UBP is willing to purchase
Security Bid Offer
the said GS? the security at market rate. At what
FXTN 20-17 6.050 5.985
rate will UBP buy the ROP 37 from
RTB 20-1 5.950 5.850 UBP may sell FXTN 20-17 at 6.05%. the client?
ROP 21 104.875 105.000
ROP 34 123.500 124.000
ROP 37 104.875 105.125 UBP will buy ROP 37 at 104.875.

FOREIGN EXCHANGE UBP needs to sell 1M EUR against UBP has a client that needs to sell
Currency Bid Offer USD and buy 2M USD against PHP. At USD10M against PHP. If UBP will
USD PHP 44.230 44.250 what rate can UBP transact the same? quote market rate, at what rate will
USD JPY 107.05 107.08 UBP buy the USD10 M from the
EUR USD 1.2953 1.2957 UBP will sell EURUSD at 1.2953 client?
GBP USD 1.6201 1.6203 and buy USDPHP at 44.250. UBP will buy USDPHP at 44.230
AUD GBP 0.9032 0.9035 from the client.
 Exercise: TD and Fixed Income Quotes

True or False?

1) A calling party buys peso GS at the highest offer yield available

2) A liquidity trader sells TD at the lowest offer rate available
3) A quoting party sells ROP at offer
4) A quoting party sells peso GS at bid
5) A liquidity trader buys TD at the lowest bid quote available
6) A calling party sells ROP at the highest bid price available
 Third Party Custodianship
How does it work?
• Through the delivery of cash or securities to an independent, third-
party custodian duly accredited by the Bangko Sentral ng Pilipinas.
• Instead of Unionbank safekeeping the securities for the client, the
accredited custodian bank will do the safekeeping of the securities
for a fee.
• Coupon and redemption payments are credited to the custodian’s
account
• It is the custodian’s responsibility to forward payment to the client
through the bank

How much will the client pay?

• 0.0155% of the face value, pro-rated (Peso)
• 0.0195% of the face value, pro-rated (Dollar)
 ASSET-LIABILITY MGT. /
LIQUIDITY & RESERVE MGT.
Several Roles of the Central Bank

34
Several Roles of the Central Bank
Monetary Policy

36
 Roles of the BSP in Treasury Business
Instruments used for monetary policy:

1. Open Market Operations:

0 Regular repos and reverse repos (O/N lending and deposit facilities)
0 Outright purchases and sales

2. SDA, TDF, BSP Bills

3. Buying and selling of foreign exchange against pesos

4. Changing the amount of reserves required for deposits

Interest Rate Corridor
MONEY MARKET TRANSACTIONS WITH BSP
• REPURCHASE AGREEMENT, REPO OR RP - the sale of securities with an
agreement to buy back the securities (used as collateral) at a later date.
• Borrow cash, lend securities (collateralized borrowing)
• REVERSE REPURCHASE, REVERSE REPO OR RRP – the purchase of
securities with an agreement to sell it back at a later date.
• Lend cash, borrow securities (collateralized lending)
BSP acting as borrower
or engaged in RP
UBP RRP WITH BSP UBP acting as
lender or engaged
in RRP
UBP lends BSP P10.0 B @ 4.0% overnight
(O/N)
On Value
Date:

BSP assigns collateral to UBP equivalent to P10.0

B
(resembling a sale of security by the borrower)

UBP receives P10.0 B principal plus interest from

On Maturity:

BSP

BSP takes back P10.0 B collateral assigned to

UBP
(resembling a purchase/buyback of security on maturity)
 RESERVE AGAINST DEPOSIT LIABILITIES
(MORB* Sec. X253 and X254) For every Php1.00 deposit
to UnionBank…
➢ Peso Deposits are subject to a unified 12%
Reserve Requirement.
Reserve
Req't, 0.2
➢ This reserve requirement will be in the form of
non-earning deposits with the BSP (via the Available
Demand Deposit Account) for
Investment
/ Loan, 0.8
➢ Cash-in-vault (CIV) will no longer be eligible
as form of compliance. Deposit

… only 88 centavos may be

used for investments, and 12
centavos must be set aside
for reserves.
* MORB - Manual of Regulations for Banks