Treasury Business and How to Look into It

1. Treasury Business and How to Look into It Satian Tantanasarit September 23, 2010 1

2. Nature of the market • “Near” Perfect Competition • Never sleep market • High volatility • Innovative and ever changing • Sensitive to news

3. Role Play • Intermediary • Buyer Seller • Investor • Speculators $ $ Bank x x $ Bank Financial Institutional x

4. The underlyings have extremely exposed to the • movement of the markets. • Exposures are not limited to Market Risk (price • movement) but also Credit Risks (Default Risk) • and Liquidity Risk (Got Stuck) • The major risk, therefore, is still market risk.

5. The Three Lines of Defenses Model Clients Business Flow

6. Business management • BU are required to ensure that their engagement • of business activities comply with relevant laws of regulation as well as business principles, practices • and related code of conduct. • BU are also responsible for managing compliance • risk of their day-to-day business activities and the • result of non compliance conduct.

7. Compliance • Assist management to identify compliance • requirements and related risk via compliance • checklist. • The list help BU in identifying activities to • mitigate the risk.

8. Audit Provide management with independent; objective assurance on the overall effectiveness of the design and operation of internal controls.

9. Key considerations for financial product examinations • Price movement (Out of Range?) • Exposure (In line with Risk Appetite of organization?) • Client knowledge (Do we understand our clients? • Do clients understand the market and underlying • they have undertaken?) • Risk Mitigation (do BUs mitigate the risk? And How?)

10. Price Movement • The initial price of the underlyings reflects the value • of it at any given time. Therefore the value of the • underlyings must be “mark to market”, ideally, at all • time. Practically, as often as possible. • The range of price movement reflects the true value • of the underlyings in a specific period of time, e.g. • one day, one week, one month or one year. This is • to prevent the BUs from any intended “biding” • the value either for their own positions or facilitating • clients transaction.

11. Example • A bought US$ 1,000,000 value spot at 32.30/US$. • Assume that US$/THB moved between 32.00-32.50 • on that day, A intended to book the deal at a lower • exchange rate to avoid the overlimit exposure. • What A did is called an off market rate deal. • Rate reasonableness must be checked by an • independent party outside dealing room such as • Treasury Operations or Risk manager.

12. Exposure • No need to randomly check an individual deals. • Rather, check on how the Bank (clients) expose to • the price movement via Operational limits • (counterparty limit). • Various types of Operational limits. Essentially, take • a look at Delta limits for foreign exchange and PV01 • for interest rate. • On the clients’ side, to certain institution, their • exposure should be periodically marked to market to • see the current exposure.

13. Client Knowledge • To ascertain that clients have a knowledge and • understanding in the offered products BEFORE • entering with the Bank into the transactions. • Clients Suitability check list. • Can be one sided check list or properly signed • by clients.

14. Risk Mitigation • Always ask the question “how do we hedge?” • Randomly pick a number of deals to check and • learn hoe the Bank hedge that particular deal. • Keep in mind that It is not a serious issue if the • traders do not hedge such exposure as long as it • is within limits. • Work together with Risk Manager to consider if • such hedges (or unhedges) reasonable.

15. Example of Products Scrutinization FX Spot and Forwards (two business days up to 360 days) Price Movement : (volatile to very volatile) Take a look at off market rate reports. Exposure : Take a look at Delta limits held on aggregate and individual limits and PV01 limits. Clients knowledge : No Clients Suitability required if up to one year. Risk mitigation : may ask but not necessary.

16. FX options Price Movement : (very volatile) Exposure : Take a look at all the “Greek” limits especially Delta hedges. Clients knowledge : A must Risk mitigation : Discuss and ask the famous question Work together with market risk to justify the hedges.

17. Bond, Interest Rate Swaps and Currency Swaps Price Movement : very volatile to extremely volatile. Exposure : Take a look at PV01 limits Ask the Question of How liquid the underlyings are? Clients knowledge : A must Risk mitigation : important but not necessary

18. Treasury Operations • Maintain a Check and Balance mechanism. • Early warning person (watchdog) when front office • breaks the rules (intentionally or unintentionally) • Accountable for settlement risk thru payment • instruction/money transfer (some selected • counterparties) • Accountable for legal binding thru contract/ • confirmation with counterparties (corp. clients in • particular)

19. Key Considerations • Communication between Front and Back office (Effectives?) • Process in handling the payment/ money transfer (Straight • through/ manual?) • Contract/ Confirmation between Bank and Counterparty • (Especially Corporate Clients, # of overdue contract signing) • Generate Reports reflecting the activities performed by • front office. • Type of reports • Who are the recipients of such report.

20. Transaction and Settlement Flows FX Spot 5. ตกลงทำสัญญา 3. quote ราคาซื้อ/ขาย 7. Tradersquare position กับ bank counterparty 1.2 แจ้งทำรายการ ซื้อ/ขายเงิน ลูกค้า FX Sales Trader Interbank Counterparty 2. ขอราคาต้นทุน 4. แจ้งราคาซื้อ/ขาย ซึ่งบวกกำไรแล้ว 6. Confirm ราคา 8. Inputdeal ในระบบ Murex; TMO verify deal 1.1 ส่งเอกสารการโอน 9. Inputdeal ในระบบ Murex; TMO verify deal 10. แจ้ง ref# IBO สาขา TMO SWIFT CONFIRM 11. แจ้งรายการโอนเงิน rate & ref# พร้อม fax เอกสาร

21. Transaction and Settlement Flows FX Forward 3. quote ราคาซื้อ/ขาย 7. Tradersquare position กับ bank counterparty 1. แจ้งทำรายการซื้อ/ขายเงิน Trader FX Sales Interbank Counterparty ลูกค้า 2. ขอราคาต้นทุน 4. แจ้งราคาซื้อ/ขาย ซึ่งบวกกำไรแล้ว 6. Confirm ราคา 8. Inputdeal ในระบบ Murex; TMO verify deal 5. ตกลงทำสัญญา 9. Inputdeal ในระบบ Murex; TMO verify deal TMO 10.ส่ง Fax Confirmation ในวันที่ทำรายการ และส่ง Forward Contract สำหรับ deal ที่มีอายุมากกว่า spot SWIFT CONFIRM

22. Transaction and Settlement Flows IRS/CRS 5.1. ส่ง Preliminary Confirmation 3. quote ราคา 7. Tradersquare position กับ bank counterparty 1. ขอราคา Trader FPA /Inst.Sales Interbank Counterparty ลูกค้า 2. ขอราคา 4. เสนอราคาซึ่งรวมกำไรแล้ว 5. ตกลงทำสัญญา 6. Confirm ราคา 8. Inputdeal ในระบบ Murex, TMO verify deal 9. Inputdeal ในระบบ Murex, TMO verify deal TMO SWIFT CONFIRM 10. ส่ง Long Form Confirmation

23. Transaction and Settlement Flows IRS/CRS (Fixing Date) ลูกค้า FPA /Inst.Sales Trader 1. Print rate source เช่น THBFIX 2. ส่ง Payment Fixing Advice TMO

24. Transaction and Settlement Flows IRS/CRS (Settlement Date) ลูกค้า FPA /Inst.Sales Trader TMO 1. รับและส่งมอบเงินตาม Payment Fixing Advice

25. Transaction and Settlement Flows CAP 3. quote ราคา 5.1. ส่ง Preliminary Confirmation 7. Tradersquare position กับ bank counterparty ลูกค้า 1. ขอราคา FPA /Inst.Sales Trader Interbank Counterparty 2. ขอราคา 4. เสนอราคาซึ่งรวมกำไรแล้ว 5. ตกลงทำสัญญา 6. Confirm ราคา 8. Inputdeal ในระบบ Murex, TMO verify deal 9. Inputdeal ในระบบ Murex, TMO verify deal TMO SWIFT CONFIRM 10. ส่ง Long Form Confirmation

26. Transaction and Settlement Flows CAP (Fixing Date) ลูกค้า FPA /Inst.Sales Trader 1. Print rate source เช่น THBFIX TMO 3. ส่ง Payment Fixing Advice 2. TMOinput Fixing Rate

27. Transaction and Settlement Flows CAP (Settlement Date) ลูกค้า FX Sales Trader 1. รับและส่งมอบเงินตาม Payment Fixing Advice TMO • ถ้า Fixing Rate สูงกว่า Cap Rate ธนาคารจะจ่ายส่วนต่างของดอกเบี้ยให้แก่ลูกค้า • ถ้า Fixing Rate ต่ำกว่า Cap Rate จะไม่มีรายการ settlement