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

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

Role Play Intermediary Buyer Seller Investor Speculators $ x $ x $ x

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.

Clients Business Flow The Three Lines of Defenses Model 1st2nd3rd Regulator external Auditor BusinessRisk ManagementAudit ManagerCompliance Legal Finance

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. Business management

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

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

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?) Key considerations for financial product examinations

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. Price Movement

A bought US$ 1,000,000 value spot at 32.30/US$. Assume that US$/THB moved between 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. Example

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. Exposure

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. Client Knowledge

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. Risk Mitigation

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. Example of Products Scrutinization

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. FX options

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 Bond, Interest Rate Swaps and Currency Swaps

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) Treasury Operations

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. Key Considerations

Transaction and Settlement Flows FX Spot ลูกค้า สาขา Interbank Counterparty Interbank Counterparty TMO Trader FX Sales 1.2 แจ้งทำ รายการ ซื้อ / ขายเงิน 2. ขอราคา ต้นทุน 3. quote ราคา ซื้อ / ขาย 4. แจ้งราคา ซื้อ / ขาย ซึ่งบวกกำไร แล้ว 5. ตกลงทำ สัญญา 6. Confirm ราคา 7. Trader square position กับ bank counterparty 8. Input deal ใน ระบบ Murex; TMO verify deal 10. แจ้ง ref# IBO 1.1 ส่งเอกสาร การโอน 9. Input deal ในระบบ Murex; TMO verify deal 11. แจ้งรายการโอนเงิน rate & ref# พร้อม fax เอกสาร SWIFT CONFIRM

FX Forward ลูกค้า Interbank Counterparty Interbank Counterparty TMO Trader FX Sales 1. แจ้งทำ รายการซื้อ / ขายเงิน 2. ขอราคา ต้นทุน 3. quote ราคา ซื้อ / ขาย 4. แจ้งราคา ซื้อ / ขาย ซึ่ง บวกกำไรแล้ว 5. ตกลงทำ สัญญา 6. Confirm ราคา 7. Trader square position กับ bank counterparty 8. Input deal ในระบบ Murex; TMO verify deal 9. Input deal ในระบบ Murex; TMO verify deal 10. ส่ง Fax Confirmation ในวันที่ทำ รายการ และส่ง Forward Contract สำหรับ deal ที่มีอายุมากกว่า spot SWIFT CONFIRM Transaction and Settlement Flows

IRS/CRS ลูกค้า Interbank Counterparty Interbank Counterparty TMO Trader FPA /Inst.Sales 1. ขอ ราคา 2. ขอ ราคา 3. quote ราคา 4. เสนอ ราคาซึ่ง รวมกำไร แล้ว 5. ตกลงทำ สัญญา 6. Confirm ราคา 7. Trader square position กับ bank counterparty 8. Input deal ใน ระบบ Murex, TMO verify deal 9. Input deal ในระบบ Murex, TMO verify deal 10. ส่ง Long Form Confirmation 5.1. ส่ง Preliminary Confirmation SWIFT CONFIRM Transaction and Settlement Flows

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

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

CAP ลูกค้า Interbank Counterparty Interbank Counterparty TMO Trader 1. ขอ ราคา 2. ขอ ราคา 3. quote ราคา 4. เสนอ ราคาซึ่งรวม กำไรแล้ว 5. ตกลงทำ สัญญา 6. Confirm ราคา 7. Trader square position กับ bank counterparty 8. Input deal ในระบบ Murex, TMO verify deal 9. Input deal ใน ระบบ Murex, TMO verify deal 10. ส่ง Long Form Confirmation 5.1. ส่ง Preliminary Confirmation SWIFT CONFIRM FPA /Inst.Sales Transaction and Settlement Flows

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

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