5_5-Internal Audit for Treasury Market Risk Management
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Transcript of 5_5-Internal Audit for Treasury Market Risk Management
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Internal Audit for Treasury
Market Risk Management
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Treasury Dealing Room
Authorized by the banks risk management committee.
Interface to international and domestic financial markets.
Clearing house for matching.
Managing and controlling market risk.
Provide funding, liquidity, investment support
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Internal Control System
Functional separation of trading, settlement, monitoring ,
control and accounting.
Functional separation of trading and back office
functions such as investment accounts of banks, clients
portfolio management scheme, brokers accounts.
External audit of portfolio management scheme of
clients.
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Internal Control System
Dealing slip for each transaction by the trading desk
Nature of deal
Number of counter parties
Direct deal or deal through a broker
Amount of securities traded
Price of securities traded
Contract date and time
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Reporting to Top Management
Reports on a weekly basis.
Details of transactions in securities.
Details of SGL transfer forms issued by other banks that
have bounced.
Bank receipts outstanding for more than one month.
Review of investment transactions.
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Monitoring by the Audit Committee
Total exposure of the bank to capital market (fund based
and non fund based).
Ensuring the compliance of RBI guidelines.
Monitoring of risk management system.
Monitoring of internal control system.
Ensure that stock brokers as directors in the bank Board
do not take part in investment committee decisions.
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Treasury Risk
Market risk
Risk to the banks earnings and capital through
changes in market rates, security prices, foreign
exchange and equity instruments
Liquidity risk
Ability of banks to meet its liabilities
Funding risk
Time risk
Call risk
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Treasury Risk
Interest rate risk
Possibility that interest rates adversely affects thebanks financial position
Banks earnings measured through net interest
margin
Economic valuation of banks
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Treasury Risk
Foreign exchange rate risk
Loss suffered by banks due to adverse movement of
exchange rate
Credit Risk
Possible loss of principal and or interest
Operational risk
Risk of direct or indirect loss from inadequate internal
processes, people, systems, external events
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Market Risk Limit
Past performance of the trading unit
Experience and expertise of the traders
Quality of internal control
Pricing, valuation and measurement systems in place
Projected level of trading activity
Liquidity of products and markets
Efficiency of systems in place to settle trades
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Market Risk Limits
Notional or volume limit
Stop loss limit
Gap or maturity band limit
Value-at-risk limit
Options limit
Delta limit
Gamma limit
Vega limit
Theta limit
Rho limit
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Guidelines on Internal Control System
Risk identification processes
Control environment
Reliability and integrity of management informationsystem
Statutory compliance of internal regulator
Budgetary control
Verification of investment trades
Compliance with the internal audit report
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Risk Based Internal Audit
Review of risk systems
Compliance with money laundering regulations
Identification of potential internal business risks
Identification of measures and systems to control risks
Establishment of corrective parameters
Follow up of review reports by the internal auditcommittee
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Stages of Internal Audit
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Checklist for Internal Audit
I. General
Policies for all treasury activities.
Policies in tune with the nature of operations.
Responsible persons are associated with the policies.
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Checklist for Internal Audit
I. General
Policy specifies types and purposes of the financial
instruments.
Policy specifies frequency of reporting and reporting
authority.
Maintenance of cash reserve ratio and statutory liquidity
ratio requirements.
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Checklist for Internal Audit
II. Organisation Structure
Treasury activities are supervised by an officerindependent of day-to-day activities.
Effective segregation of key duties (treasury dealing,
settlement of accounting, reconciliation of accounts).
Policies and procedures are documented and easily
accessible to all staff.
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Checklist for Internal Audit
II. Organisation Structure
Defined job descriptions and delegations for key treasurypositions.
Availability of sufficient resources to operate the treasury
effectively.
Segregation between functions of authorization,
execution and recording of transactions.
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Checklist for Internal Audit
IV. Deal Execution Process
Confirmation of transactions concluded by the dealingroom with the back office manager.
Systematic filing of procedure.
Examine third party payment.
Outward confirmations are recorded in a register.
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Checklist for Internal Audit
V. Limits
Counterparty exposure limit for all brokers, lenders, etc.
Dealing limits (maximum amount, a person can transact
without seeking higher level approval).
Product limits (maximum exposure in a particular
instrument or product).
Sector limits (maximum investment in a particular
sector).
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Checklist for Internal Audit
VI. Recording Control
i) Control over Documents
Timely and accurate execution of money marketdeals and recordings.
Receipt of all documents and statements fromconcerned parties (brokers, bankers, lenders,etc.).
Numbering and filing of copies for easereference.
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Checklist for Internal Audit
VI. Recording Control
ii) Control over Accounting Procedures
Adequate systems to track all matured investments.
Accurate recording and accounting of positions.
Counter checking of records by an independentperson.
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Checklist for Internal Audit
VI. Recording Control
ii) Control over Accounting Procedures
All deals are recorded in the General Ledger.
Account reconciliation has been done and time framehas been set for clearing all outstanding items.
Inspection of source documents.
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Checklist for Internal Audit
VII. Reconciliation of Bank Accounts and Treasury Records
with the General Ledger
Bank balance with bank statement.
Reconciliation of treasury records with the generalledger.
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Checklist for Internal Audit
VIII. Cash Management
Effective procedure for monitoring the daily cash
position.
Planning of the liquidity needs for normal operating
conditions and emergency situations by management.
Trend analysis of cash forecasting.
Bank statements.
Review of liquidity position.
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Checklist for Internal Audit
IX. Investment
Review and follow up of investment strategy.
Authority level and monetary limits set for investment in
different instrument.
Documentation of list of investments.
Analyse of investment portfolio statements.
Holding of investments in the banks name.
Documents with regard to ownership of investments.
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Checklist for Internal Audit
IX. Investment
Bank utilises third party investment managers.
Control of the investment managers activities.
Appraisal of investment managers
Compliance of investment policies by investment
managers.
Evaluation of internal / external investment managers
performance.
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Checklist for Internal Audit
X. Documentation for Derivative Transactions
(i) Usage of International Swaps and Derivatives
Association (ISDA) documentation, with suitable
modifications.
(ii) Confirmation for each derivative transaction withdetails of the terms of the contract such as gross
amount, rate, value date, etc.
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Checklist for Internal Audit
X. Documentation for Derivative Transactions
(iii) Individual transaction confirmation.
(iv) Evaluation of legal capacity, power and authority of the
counterparty to enter into derivative transactions.
(v) Documentation of the agreement with the counterparty
prior to undertaking any derivatives business with them.
(vi) Documentation regarding customer suitability,
appropriateness, etc.
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Checklist for Internal Audit
XI. Investment in Debt Securities
Frequency of interest payments.
Information about the issuer and the credit rating.
Terms of issue such as use of issue proceeds, monitoring
agency, formation of trustees, secured or unsecured nature ofbonds, assets underlying the security and credit-worthiness of
the organisation.
Comparison of the Yield To Maturity (YTM) of the debt
security with the YTMs of other comparable debt securities of
the same class and features.