WEEK #1: TREASURY MANAGEMENT AND ITS FUNCTIONS WORKING CAPITAL MANAGEMENT

- A key component of cash forecasting and cash availability is working

TREASURY capital, which involves changes in the levels of current assets and
- It involves the management of money and financial risks in a business. current liabilities in response to a company’s general level of sales and
- Its priority is to ensure the business has the money it needs to manage various internal policies.
its day-to-day business obligations, while also helping develop its long- - The treasurer should be aware of working capital levels and trends
term financial strategy and policies. and advise management on the impact of proposed policy changes on
working capital levels.
TREASURY MANAGEMENT / TREASURY OPERATIONS CASH MANAGEMENT
- includes management of an enterprise's holdings, - The treasury staff uses the information it obtained from its cash
- with the goal of managing the firm's liquidity and forecasting and working capital management activities to ensure that
- mitigating its operational, financial and reputational risk. sufficient cash is available for operational needs.
Treasury Management includes a firm’s: - The efficiency of this area is significantly improved using cash pooling
▪ Collections systems.
▪Disbursements - Ensures that there are an effective collection and payment system in
▪ Concentration the organization.
▪ Investment and funding activities INVESTMENT MANAGEMENT
▪ Financial risk management (for larger firms) - The treasury staff is responsible for the proper investment of excess
funds.
TREASURY MANAGEMENT - The maximum return on investment of these funds is rarely the
- Treasury Management can be understood as the planning, organizing primary goal.
and controlling holding, funds and working capital of the enterprise in - It is much more important to not put funds at risk, and to match the
order to make the best possible use of the funds, maintain firm’s maturity dates of investments with a company’s projected cash needs.
liquidity, reduce the overall cost of funds, and mitigate operational and TREASURY MANAGEMENT
financial risk. - The interest rates that a company pays on its debt obligations may
vary directly with market rates, which present a problem if market rates
BANKS IN THE PHILIPPINES are rising.
- Large banks in the Philippines have a division devoted to treasury - A company’s foreign exchange positions could also be at risk if
management. exchange rates suddenly worsen.
- A bank's treasury management/cash management division is a highly - In both cases, the treasury staff can create risk management
specialized area designed to meet the unique investment and risk strategies and implement hedging tactics to mitigate the company’s
coverage needs of institutional and corporate customers. risk.
- The Treasury Management of a bank is responsible for balancing and FUND RAISING
managing the daily cash flow and liquidity of funds within the bank. - A key function is for the treasurer is to maintain excellent relations
with the investment community for fund - raising purposes.
MODERN CORPORATION CREDIT GRANTING
- The Treasury occupies a central role in the finances of the modern - The granting of credit to customers is useful for the treasury staff to
corporation. manage, since it allows the treasurer some control over the amount of
- It takes responsible for the company’s liquidity—ensures that a working capital locked up in accounts receivable.
company always has enough cash available to meet the needs of its
primary business operations. TREASURY MANAGEMENT
- Simply put, treasury management is the management of all financial
FUNCTIONS OF TREASURY MANAGEMENT affairs of the business such as raising funds for the business from
- Treasury Management aims to ensure that adequate cash is available various sources, currency management, cash flows and various
with the organization, during the outflow of funds. strategies and procedures of corporate finance.
- It also contributes to the optimum utilization of funds and makes sure - Ultimately, the treasury department ensures that a company always
that there are no unutilized funds kept in the firm for a very long term. has sufficient cash available to meet the needs of its primary business
▪ Cash Forecasting ▪ Treasury Risk Management operations.
▪ Working Capital Management ▪ Fund Raising - Clearly, the original goal of maintaining cash availability has been
▪ Cash Management ▪ Credit Granting expanded by the preceding points to encompass some types of asset
▪ Investment Management management, risk management, working capital management, and the
lead role in dealing with banks and credit rating agencies.
CASH FORECASTING - Thus, the treasury department occupies a central role in the finances
- The accounting staff generally handles the receipt and disbursement of the modern corporation.
of cash, but the treasury staff needs to compile this information from
all subsidiaries into short - range and long - range cash forecasts.
- These forecasts are needed for investment purposes, so the treasury
staff can plan to use investment vehicles that are of the correct duration
to match scheduled cash outflows.
- The staff also uses the forecasts to determine when more cash is
needed, so that it can plan to acquire funds either using debt or equity.
WEEK #2: SEGREGATION OF DUTIES

SEGREGATION OF DUTIES
- Roles that define segregation of duties and control across a treasury.
1. A Front office
2. A Back-office
3. A Middle Office

FRONT OFFICE - It is the dealer or trader who books the trades and
executes it.
Three main responsibilities of Front Office: PRINCIPLE OF TRANSFER POOL RATE
1. Fund Management a. Deposit TPR (bid; ceiling rate)
2. Foreign Exchange / Interest Rate Management - An interest rate ceiling is the maximum interest rate permitted in a
3. Risk Management particular transaction.
- It is the opposite of an interest rate floor.
▪ Fund Management b. Loan TPR (offer; floor rate)
- Ensure day-to-day cash requirements and long-term needs. - An interest rate floor is an agreed-upon rate in the lower range of
- Maximization of idle resources. rates associated with a floating rate loan product.
- Analyzing reason for inability to fund cash outflows from cash - Interest rate floors are utilized in derivative contracts and loan
inflows. agreements.
▪ Foreign Exchange / Interest Rate Management - This contrasts with an interest rate ceiling (or cap).
- Ensuring liquidity in foreign exchange funds without
compromising profitability.
- Handling multicurrency exposures.
- Managing complicated dynamics fluctuating exchange/interest
rates/tax position management.
▪ Risk Management
- Identification of risks faced by the firm and level of risk acceptable
(maximize return and minimize cost at level acceptable to the firm)
- Formulate risk management strategy (active management
engagement in minimizing risk by using various hedging techniques)

CONCEPT OF FUND GENERATION / DEPLOYMENT

SOURCE AND USER OF FUNDS (BANKS)

Source HOW TO COMPUTE FOR TRANSFER POOL RATE
INVESTORS / DEPOSITORS- Receives a reward (capital gain/interest) LIABILITY RATE = ASSET RATE – COST
for contributing funds to the pool. ▪ TPR deposit at 5%
Capital – funds infused by stockholders ▪ Funds deployed at 9%
Liability – funds received from depositors (bank) via deposit / ▪ Bank received deposits of 1,000,000 @ 3% per annum
placement a. Compute Income for 1 day
User 1,000,000 X 1 day X 0.05 = Php 138.89 (TPR Income)
CORPORATE BANKING, TREASURY, BANK BRANCHES- Charged a 360 days
penalty (pay interest to investors) from withdrawing funds from the 1,000,000 X 1 day X 0.03 = Php 83.33 (Interest Expense)
pool. 360 days
Income for 1 day = Php 55.56
WHAT TO DO WITH THE FUNDS? b. Compute Income for 30 days
TOTAL FUNDS FUNDS DEPLOYMENT 1,000,000 X 30 days X 0.05 = Php 4,166.67 (TPR Income)
▪ Capital Assets: Investment and loans 360 days
▪ Deposits Operating Cost: Building, Equipment, Salaries 1,000,000 X 30 days X 0.03 = Php 2,500.00 (Interest Expense)
360 days
TRANSFER POOL RATE Income for 30 days = Php 1,666.67
Principle of Transfer Pool Rate
- It is the process of establishing an internal price of funds among MANAGEMENT PROFITABILITY REPORT
users and providers of funds within the bank. - It summarizes Assets (USE) and Liabilities/Capital (SOURCE)
- Pool of funds are established and managed by Treasury. generated by the business segments and Treasury, Corporate
Basis for Transfer Pool Rate Banking, Business Banking and Executive Office.
a. Bank’s Liquidity Position - It reflects the net profit and loss derived from:
b. Market Interest Rate a. the difference between the asset and income less TPR expense
c. Market Outlook on Interest Rate and
b. the liability expense less the TPR income.
BACK OFFICE (Support / Processing / Operations and Documentation)
- Its function is responsible for settlement, processing and
documentation, confirmation and accounting.
- To perform the processing and risk monitoring functions that are
carried out independently from the trading function.
- To ensure that control points are in place for all aspects of the day
to–day process in order to control the Market, Credit, and
Operational risks arising from Front Office transactions.
- Transactions are done at market rates.
- Review and follow up of outgoing and incoming confirmation of
trades.
- Recording and documentation of trades.
- Ensuring deals are within the trading limit and properly authorized.
- Evaluated as to applicable risks.
- Settlement

MIDDLE OFFICE
- It is responsible to enforce and review risk limits and exceptions.
- Its role is to issue policy guidelines relative to management and
reporting of all trading risks.
- Review organizational issues.
- Clear designated authorities.

Week 3
Concepts of Internal Deals

Front Office – dealer or trader who books the trades and execute
▪ Trading desk – only allowed with trading position within the
bank, salesman only.
▪ Sales/ Distribution desk – deals with a customer/ counterparty it
must buy or sell the corresponding financial instrument or currency
from the Trading desk.

Internal Desk – bank to bank

Customer >> S/D desk >> Trading desk sells to >> Customer

Concept of Internal Deals – the internal linkages between the trading

and the Sales/ Distribution desk creates the “internal deals”

Scenario:
Customer wants to buy 1M usd, Sales/ Distribution desk buys 1M usd
from Trading desk, Trading desk sells 1M usd to the Sales/ Distribution
desk.

Why we store money?

▫ Investment
▫ Trading

--- Trading desk: Sells usd 1M to theales/ Distribution desk. Sells to

Sales/ Distribution desk at 48.00
--- Sales/Distribution desk: Buy usd 1M from Trading desk at 48.00.
Sells at 48.10 to the customer.
WEEK 3
CONCEPT OF INTERNAL DEALS

SEGREGATION OF DUTIES
Roles that define segregation of duties and control across a treasury.
1. A Front office
2. A Back-office
3. A Middle Office

CONCEPT OF INTERNAL DEALS

FRONT OFFICE
It is the dealer or trader who books the trades and executes it.
▪ Trading Desk- It is the only one allowed to take trading position within
the bank.
▪ Sales / Distribution Desk- If it deals with a customer/counterparty, it
must buy or sell the corresponding financial instrument or currency
from the Trading desk.

CONCEPT OF INTERNAL DEALS

The internal linkages between the Trading and the Sales/Distribution
desks creates the “internal deal”

▪ Sales/Distribution Desk – customer wants to buy USD 1M

▪ Sales/Distribution Desk – buys USD 1M from Trading Desk
▪ Trading Desk – sales USD 1M to the Sales Distribution Desk
MONEY MARKET
▪ Trading Desk – Sells USD 1M to the Sales/Distribution Desk. Sells to ▫ is a marketplace for the trading of short-term cash and debt
Sales/Distribution Desk at 48.00 ▫ Maturities range from overnight to one year and the participants
▪ Sales/Distribution Desk – Buys USD 1M from Trading Desk at 48.00. include private individuals (necessarily of a high net worth),
Sells at 48.10 to the customer. corporations, public bodies and financial institutions
▫ It has very low risk and liquid
Assuming that USD to PHP moves to 47.00
▪ Bank Gain/Loss – (48.10 -- 47.00) = Php 1.1M gain (as reflected in the ▪ NON-FINANCIAL INSTITUTION PARTICIPANTS – operate in the
general ledger) market largely to invest cash surpluses or to fund short-term borrowing
▪ Trading Desk - (48.00 -- 47.00) = Php 1M gain requirements
▪ Sales/Distribution Desk - (48.10 -- 48.00) = Php 100k gain ▪ FINANCIAL INSTITUTIONS – use the money market both to manage
Note: The internal deal income will be reflected in the Management their own positions and to provide a service to their corporate
Profitability Report (MPR) of Treasury customers
Assuming that USD to PHP to 49.00 IMPORTANCE OF MONEY MARKET
▪ Bank Gain/Loss – (48.10 -- 49.00) = Php 1.9M loss (as reflected in the ▫ The money market has an organized banking system
general ledger) ▫ It comprises of many submarkets dealing with various forms of credit
▪ Trading Desk - (48.00 -- 49.00) = Php 1M loss instruments
▪ Sales/Distribution Desk - (48.10 -- 49.00) = Php 100k loss ▫ An established money market consists of near-capital assets of
Note: The internal deal income will be reflected in the Management different kinds, such as exchange bills, treasury bills, and bonds.
Profitability Report (MPR) of Treasury ▫ It also has access to both domestic and foreign-investment financial
outlets.
WEEK 4 ▫ The money market securities are considered highly liquid and are
MONEY MARKET TREASURY PRODUCTS, OPERATIONS AND fixed-income securities with a shorter period of maturity.
TRANSACTIONS ▫ Money market instrument issuers have strong credit scores.
Therefore, the instruments of the money market are suitable for
MONEY MARKET investment purposes.
▫ One of the key characteristics of money market instruments is that
they are sold against face value at a discounted price.

DIFFERENT INSTRUMENTS UNDER MONEY MARKET

MONEY MARKET INSTRUMENTS

Treasury Bills - government securities issued every Wednesday via
electronic auction at BSP.
Commercial Papers - Issued by private corporations to meet its short-
term working capital obligations (usually 1-270 days).
Promissory Notes - Issued by banks to private investor to raise funds.
Negotiable Certificate of Deposit - short term, with maturities ranging
from two weeks to one year. Interest is usually paid either twice a year
or at maturity, or the instrument is purchased at a discount to its face
value. Interest rates are negotiable, and yield from an NCD is
dependent on money market conditions.
Interbank Call Loans - Overnight lending and borrowing among banks.

INTERBANK CALL LOANS

It happens every day in the late afternoon when banks finished their
days' transaction (overall withdrawal and deposit) creating liquidity
position which could be:
▫ positive or excess of cash
▫ negative or short of cash or
▫ sometimes square wherein the difference in the deposit versus
withdrawal transactions is insignificant. Interbank settlement will be calculated on the basis of the current
Daily IBCL is used as the benchmark of daily market interest rate. interbank rate and the three days (3) if it falls on Friday.
Example:
MAJOR TRANSACTIONS IN BANK Bank A borrows from Bank B ;
▪ Deposits - Comprises of all the money going into the bank like Value date: 2022 Feb 18
deposit, interest income on bank investment or proceeds from Amount: 50,000,000.00
matured investment, inward online payment. SSS, Meralco, BIR, Rate: 6.375%
matured loan payment to the bank etc.
▪Withdrawals - Comprises of all payouts like withdrawals, interest How much will be the settlement amount on the following business
payment to the client, outward remittances, releasing of approved day?
loan, bank investment, etc.
50,000,000 X 6.375%= Php 88,541.67
Bank A has 500 branches. Every day, before 6:00 P.M., these branches 360 days
should have already sent the summary of all the two major 50,000,000 + 88,541.67 = Php 50,088,541.67 for 1 day
transactions to Treasury Department which will determine the liquidity 50,000,000 + 265,625.00 = Php 50,265,625.00 for 3 days (Friday)
position for the day.
Are banks allowed not to correct any of its days’ liquidity position?
THREE TYPES OF LIQUIDITY POSITION NO, BSP penalizes banks for not correcting its liquidity position
▪ Excess of Cash - resulted from overall heavy deposit transactions reflected in their demand deposit account with BSP.
during the day.
▪ Short of Cash - resulted from overall heavy withdrawal transactions
during the day. WEEK 5
▪ Square - deposits and withdrawal almost the same (with the given TREASURY PRODUCTS, OPERATIONS AND TRANSACTIONS
acceptable margin for example 100 million)
TREASURY BILLS
INTERBANK CALL LOANS
▫ Bank with excess cash must lend it out to the bank whose position is
negative (borrow) as against their DDA or demand deposit account
with the BSP where all deposits and withdrawals transactions of bank
ref lect affecting Reserve Requirement
▫ Interbank Call Loan is done in an overnight basis.
▫ Banks which are not able to correct the position will be penalized.
TREASURY BILLS EXAMPLE OF TREASURY BILLS SERIES
▫ are short-term evidences of indebtedness issued by the Philippine
government backed by the Bureau of the Treasury of the Republic.
▫ With a maturity of less than a year; it can be 91 days, 182 days and
364 days.
▫ Usually sold in denominations of P1,000, P50,000, P10,000.
▫ These are the most actively traded zero-coupon debt instrument in
the Philippine bond market.
▫ It serves as a form of government internal borrowing from the
public.
▫ Large domestic banks are obligated to participate (bid) every
Wednesday via electronic auction.

WEEK 6
IMPORTANCE OF TREASURY BILLS BOND MARKET
Government as borrower:
▫ It is used for the effective management of short-term funding needs BOND MARKET AND THE BASICS OF FIXED INCOME SECURITIES
of the government.
▫ It is easily marketable and widely held as liquid assets.
▫ It is regarded very safe.
▫ With the security they offer, the yield on treasury bills is lower than
that on eligible bills accepted by banks.

T-BILLS TRUE DISCOUNT FORMULA

TREASURY BILLS
▫ It is usually sold at a discount to its face value and redeemed at face
value (at par).
▫ The additional amount of money received by the investor at
maturity is the investor's income for holding the security.

TREASURY BILLS TRUE DISCOUNT FORMULA

Par Value X 360 days DEBT vs. EQUITY
[(360 days + (yield X term)}
Wherein:
Par value = face amount of investment
Yield = rate
Term = computed as actual days
 PARTIES INVOLVED IN FIXED INCOME SECURITIES

FIXED INCOME SECURITY

It is a debt instrument wherein the issuer (debtor) borrows money from
the investors (creditor) with a promise to pay a fixed amount of interest
CAPITAL MARKET
(coupon) each year for a fixed time period and repay the face value of
▫ Primary Market
the bond on the maturity date.
- Securities are created, issued and sold for the first time.
- Ex. Government securities via auction - participants are large banks
Terms
and other eligible financial institutions. (public or bonds)
▪ Issuer (debtor) - borrows money from the investors
Initial Public Offering (IPO) for private entities (bonds or shares of
▪ Investors (creditor) - lends money to the issuer
stock)
▪ Coupon rate / Yield – stated rate of interest; fixed amount of interest
each year for a fixed time period.
*the number of coupon payments made per year is known as the frequency ▫ Secondary Market
(semi-annual or quarterly) - Already issued securities are traded.
▪ Face value / Par value – amount paid to the bondholder on maturity - Ex. Large banks and other financial institutions to trade (buy & sale)
date of the bond. authorized by SEC.
▪ Maturity date – date when the issuer will repay the face value and - Banks receive commissions and spread on their trades.
the last coupon for coupon-paying bonds.
BOND MARKET
Common types of Fixed Income Securities - are promissory notes issued by a government or a private entity,
a. Money Market (Short-term Instruments) primarily to raise funds for business operations and growth purposes.
o Treasury Bills - Stipulated upon issuance is the interest at a given rate and interval,
o Promissory notes and the principal at a specific point in time in the future.
o Short-term Commercial Papers
b. Bonds (Medium to Long-term instruments) TYPES OF INTEREST
o Fixed Rate Coupon Bonds (RTBs, FXTNs) ▫ Fixed-rate bond – interest is fixed until the final maturity of the debt
o Zero Coupon Bonds securities.
o Perpetual Bonds ▫ Floating-rate bond - rate of interest is reset periodically (based on a
specified interest rate benchmark)
The fixed income securities market is the largest part of the capital
market in the Philippines. METHOD OF INTEREST
▫ Discounted – paid upfront at the transaction / issue date.
TYPES OF BORROWERS / ISSUERS ▫ Accrued interest - paid at the end of preset payment periods (semi-
▫ Government - Issues bond generally to finance current government annually)
expenditures, projects and budget deficit.
▫ Corporation- Issues bond to raise funds to finance the corporation’s FREQUENCY OF INTEREST PAYMENT
expenditures, expansions and acquisitions. ▫ Coupon – interest payments are spread over the life of the
instrument. (Installment)
TYPES OF INVESTORS ▫ Bullet – interest is paid on the final maturity date of the debt paper
(zero coupon).

GOVERNMENT SECURITIES
- It is a form of debt issued by the government through the Bureau of
Who are willing to lend their funds in exchange for interest payments. the Treasury.
- It generally promise to make fixed interest payments and to repay the
principal (face value) on maturity date.
- It is backed by the full taxing power of the national government,
considered as free from default.
CORPORATE BONDS
- type of debt security that is issued by a firm and sold to investors.
- The company gets the capital it needs and in return, the investor is
paid a pre-established number of interest payments at either a fixed or
variable interest rate normally every six months.
- These are relatively long-term commercial papers.