Technical Guide on Internal Audit of Treasury ... - CAalley.com

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PREFACE In this financially globalized volatile world, bank’s treasury groups which are ultimately responsible for keeping their banks in business are witnessing tremendous changes. The change is being forced with rapid economic developments, globalizing industries and competition, new technologies and revolutionary changes in the regulatory environment. Apart from responding to these changes, treasury functions of banks are under pressure to add value to the banks through their operations and contribute to achieve strategic goals. Internal audit helps the organisations to achieve their stated objectives. Carrying out an internal audit of treasury functions in banks requires an in-depth understanding of the applicable statutes, systems and processes since it operates under a very regulated and governed atmosphere. Specialist knowledge in certain areas of banking is also of equal importance. In the wake of these developments in the field of treasury management in banks, the Internal Audit Standards Board of the Institute is issuing this publication “<strong>Technical</strong> <strong>Guide</strong> on Internal Audit of Treasury Function in Banks” for the members of the Institute as well as bankers. This publication is aimed to help the readers in understanding the roles and responsibilities of the treasury function in banks as well as in determining the nature of internal audit procedures to be undertaken. The <strong>Technical</strong> <strong>Guide</strong> has been divided into various chapters covering aspects such as treasury products and services, treasury dealing room, organisational structure of a bank’s treasury, investment portfolio, asset liability management, treasury risks. The guide also deals with the fundamental controls and the internal audit procedures with special reference to treasury/ market risk segments. It also contains detail checklist on internal audit of treasury operations, foreign exchange operations and domestic operations of treasury. It also includes a compilation of relevant circulars issued by the Reserve Bank of India applicable to treasury operations of a bank. For better understanding of the readers, the guide also contains an introduction section and also a glossary of some technical terms used in the <strong>Guide</strong>. At this juncture, I am grateful to CA. Rajkumar S. Adukia, Central Council Member and convenor of the Group ably assisted by other members of the Group, viz., CA. Pankaj Adukia, CA. Abhay Arolkar and CA. Vijay Joshi for v
squeezing out time out of their professional and personal commitments and preparing the basic draft of this <strong>Technical</strong> <strong>Guide</strong>. I would also take the opportunity of placing on record my gratitude to CA. Akeel Master for reviewing the draft and giving his valuable comments and suggestions. I also wish to thank CA. Uttam Prakash Agarwal, President and CA. Amarjit Chopra, Vice President for their continuous support and encouragement to the initiatives of the Board. I must also thank my colleagues from the Council at the Internal Audit Standards Board, viz., CA. Ved Jain, CA. Abhijit Bandyopadhyay, CA. Bhavna G. Doshi, CA. Pankaj I. Jain, CA. Sanjeev K. Maheshwari, CA. Mahesh P. Sarda, CA. S. Santhanakrishnan, CA. Vijay K. Garg, Shri Krishna Kant, Shri Manoj K. Sarkar and Shri K. P. Sasidharan for their vision and support. I also wish to place on record my gratitude for the coopted members on the Board, viz., CA. N. K. Aneja, CA. Verendra Kalra, CA. M. Guruprasad, CA. Dilip Kumar Vadilal Shah and CA. K. S. Sundara Raman as also special invitees on the Board, viz., CA. K. P. Khandelwal, CA. S. Sundarraman, CA. Ravi H. Iyer, CA. Rajiv Dave, CA. Pawan Chagti, CA. Ram Mohan Johri and CA. Arindam Guha for their devotion in terms of time as well as views and opinions to the cause of the professional development. I also wish to place on record the efforts put in by CA. Jyoti Singh, Secretary, Internal Audit Standards Board and CA. Arti Aggarwal, Senior Executive Officer, for their inputs in giving final shape to the publication. I am sure that the members of the Institute would find the <strong>Technical</strong> <strong>Guide</strong> immensely useful in understanding the intricacies of the subject matter and in carrying out their professional duties diligently. January 29, 2010 Hyderabad CA. Shantilal Daga Chairman Internal Audit Standards Board vi
Page 1 and 2: Technical
Page 3 and 4: © The Institute of Chartered Accou
Page 8 and 9: CONTENTS Foreword..................
Page 10 and 11: GLOSSARY Arbitrage The purchase or
Page 12 and 13: Glossary Currency Position Currency
Page 14 and 15: Glossary Inflation Initial Margin I
Page 16 and 17: Glossary Position Premium Primary D
Page 18 and 19: INTRODUCTION 1. Preface to the Stan
Page 20 and 21: CHAPTER 1 TREASURY- AN INTRODUCTION
Page 22 and 23: Treasury- An Introduction categorie
Page 24 and 25: CHAPTER 2 TREASURY PRODUCTS AND SER
Page 26 and 27: (vi) Treasury Products and Services
Page 28 and 29: Range of Products Treasury Products
Page 30: Treasury Products and Services deri
Page 33 and 34: Technical
Page 36 and 37: CHAPTER 4 ORGANISATIONAL STRUCTURE
Page 38 and 39: (b) (c) Back-Office Liquidity risk
Page 40 and 41: Organisational Structure of a Bank
Page 42 and 43: CHAPTER 5 INVESTMENT PORTFOLIO 5.1
Page 44 and 45: Investment Portfolio (iv) All the t
Page 46 and 47: Investment Portfolio (f) The Accoun
Page 48 and 49: Investment Portfolio b) Investment
Page 50 and 51: (c) Investment Portfolio Account. I
Page 52 and 53: Investment Portfolio investment por
Page 54: (c) (d) (e) (f) Investment Portfoli
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Technical
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Technical
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Technical
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Technical
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Technical
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Technical
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CHAPTER 8 TREASURY UNIT - FUNDAMENT
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Treasury Unit - Fundamental Control
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(e) (f) Treasury Unit - Fundamental
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Document Security Treasury Unit - F
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CHAPTER 9 INTERNAL AUDIT OF TREASUR
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Internal Audit of Treasury Operatio
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(i) • Risk tolerance • Back-up
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(n) (o) (p) (q) Internal Audit of T
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Risk Perspectives Internal Audit of
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Internal Audit of Treasury Operatio
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(i) (ii) (iii) (h) (i) (j) (k) (l)
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ANNEXURE - A SPECIMEN CHECKLIST FOR
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Annexure - A d VI. a b Check sector
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Annexure - A X a XI a b Documentati
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ANNEXURE - B SPECIMEN CHECKLIST FOR
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Annexure - B u Whether any unusual
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Annexure - B same are brought to th
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Annexure - B VI a b c d Nostro Reco
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Annexure - B mirror accounts or whe
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Annexure - B b c d e f g h Whether
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Annexure - C c d e f g h Whether th
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Annexure - C e f g h i j k m n o p
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Annexure - C e Whether any forward
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Annexure - C X d e f g h i j k l A
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Annexure - C i j k l m n o p q r Wh
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Annexure - C b c d e f g h i D a b
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Annexure - C a F Certificate of Dep
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Annexure - C a b c d a b c XII iii.
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ANNEXURE - D GUIDANCE NOTE ON MARKE
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Annexure - D Sensitivity and Value
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Annexure - D 1.2.5 Risk Reporting:
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Annexure - D iii) management and re
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Annexure - D TYPICAL ORGANISATIONAL
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activity. Annexure - D • Dealing
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Annexure - D usage of risk against
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Annexure - D inflows of funds, i.e.
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Annexure - D environment are duly a
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Annexure - D separate analysis of i
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Annexure - D 4.4 Generally, the app
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Annexure - D • There is still som
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Annexure - D Chapter 5- Foreign Exc
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135 Annexure - D convertible, this
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Annexure - D another, where the hol
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Annexure - D Chapter 6- Treatment o
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Annexure - D to some extent on the
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Annexure - D Managing Market Access
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Annexure - D Principle 5: It is imp
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Annexure - D Sources, effects and m
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149 Annexure - D Earnings perspecti
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151 Annexure - D Gap analysis: Simp
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Annexure - D absolute value). Highe
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Annexure - D Value at Risk (VaR) An
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Annexure - D as to be close to real
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Annexure - D Stress Testing Techniq
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Annexure - D A well-understood limi
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Annexure - E more sophisticated sys
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Annexure - E Asset - Liability Mana
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Annexure - E for all banks feasible
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Annexure - E meetings. 5.3 Composit
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Annexure - E relationship with cust
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Annexure - E loans and advances and
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Annexure - E receive it within the
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Annexure - E Maturity Profile Liqui
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Annexure - E 3. Balances with other
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Annexure - E (ii) Unavailed portion
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4. Term Deposits and Certificates o
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Annexure - E 7. NPAs (Advances and
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Annexure - E (iv) Others 6.Lines of
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Annexure - E 14. Export Refinance f
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Annexure - E Adjustment (iii) Provi
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Annexure - E ANNEXURE - III Name of
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Annexure - E % of the cumulative ca
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Annexure - E (ii) Provisions (iii)
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Annexure - E and Investments) * 7.
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Annexure - E Heads of Accounts Clas
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Annexure - E Heads of Accounts (i)
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Annexure - E D. Financing of Gap: I
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ANNEXURE - F RBI MC GUIDE PRIMARY D
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Annexure - F Table of Contents Sect
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Annexure - F Section I: Regulations
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Annexure - F Note: The decision to
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iii. iv. Annexure - F In respect of
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Annexure - F bids in the auction ag
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Annexure - F 03.64.00 / 2000-01 dat
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Annexure - F 3.7.1 PDs may avail of
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commodities, gold and foreign excha
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the approval of their Board of Dire
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ii. iii. iv. 227 Annexure - F All s
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ii. iii. iv. should be put in place
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vi. Annexure - F Indirect access to
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8. Business through brokers Annexur
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Annexure - F as proposed by FIMMDA
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237 Annexure - F case of any qualif
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PDs. Annexure - F 3.5 It is clarifi
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Annexure - F To By UNDERTAKING The
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Annexure - F /99-2000 dated Decembe
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Annexure - F Annex II A. Statements
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Annexure - F Annex II A Statements
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Annexure - F Bids submitted under A
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Annexure - F PD Wise eligible commi
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Annexure - F Annex IV Illustrations
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Annexure - F c) Call Money Borrowin
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Annexure - F PDR - II Format Annex
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Annexure - F REPURCHASE AGREEMENTS
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Annexure - F Name of the Primary De
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Annexure - F Interest Expenses 1. C
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Annexure - F Average duration of th
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Annexure - F Expenses Interest Admi
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Annexure - F List of circulars cons
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Annexure - F No Circular no Date Su
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ANNEXURE - G RBI MC CAPADEQRM 2009
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Annexure - G (ii) (iii) (iv) (v) pe
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vi. vii. viii. ix. Annexure - G 30/
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Annexure - G 6 Risk reporting of de
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(iv) (v) (vi) Primary Dealers inclu
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(c) Interest Rate Contracts Annexur
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A1. For fixed income instruments An
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Annexure - G Horizontal disallowanc
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289 Annexure - G with a short posit
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• equity swaps are to be treated
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Annexure - G SUMMATION OF CAPITAL A
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Annexure - G (h) less : Capital fun
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Annexure - G outside the market bor
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Annexure - G FUNDED RISK ASSET •
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Appendix II PDR-III Statement 3 Qua
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Details of the VaR calculation - fo
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Appendix V Details of stress testin
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Annexure - G Capital funds of the f
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309 Annexure - G actual daily chang
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Annexure - G B.2 Specification of m
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Annexure - G This assessment is int
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Annexure - G 315 Annex F “BACK TE
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Annexure - G In case large number o
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Annexure - G Annex H List of circul
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Annexure - H Master Circular Call/N
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Annexure - H 3. Primary Dealers (PD
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To Annex - II Annexure - H Daily Re
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Annexure - H Annex III Definitions
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Annexure - H Sr. No. Circular Numbe
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ANNEXURE - I RBI MC CD 2009 RBI/200
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Annexure - I Introduction Certifica
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Security Aspect Annexure - I 14. Si
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Annexure - I Name of the Bank / Ins
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Annexure - I II CDs issued on Float
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Annexure - I 14. DBOD.No.BP.BC.43/2
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Annexure - J consolidates and updat
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Annexure - J Introduction Commercia
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Annexure - J (FIIs). However, inves
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(c) (iii) (iv) (v) (vi) Annexure -
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Annexure - J Schedule I (NAME OF TH
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Annexure - J Schedule II Proforma o
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Annexure - J Schedule III CERTIFICA
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Annexure - J Definitions Annex II I
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Annexure - J Appendix List of Circu
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ANNEXURE - K RBI MC PRUNORMSINVESTT
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Annexure - K 3.1 Held to Maturity 3
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Annexure - K (b) (c) (d) (e) (f) a
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iii) 367 Annexure - K (f) Dealings
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(f) (g) (h) (i) (j) (k) 369 Annexur
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Annexure - K applicable penal rate
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Annexure - K accordance with the pr
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Annexure - K (h) (i) (j) (k) (l) (m
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ii) (g) Exceptions: Annexure - K to
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Annexure - K recognised and banks s
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(d) (e) (f) Equity/debt instruments
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383 Annexure - K 1.2.14 With effect
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Annexure - K shares, convertible bo
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Annexure - K 1.3.4 Investment Portf
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(b) (c) other banks acquired for in
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Annexure - K However, it will be pe
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(iv) Annexure - K (items as indicat
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3.6 Unquoted SLR securities 3.6.1 C
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loan of equivalent maturity. Annexu
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399 Annexure - K by SC / RC is limi
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(ii) (iii) (iv) (v) (vi) 401 Annexu
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4.5.2 Repo Interest Income / Expend
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Annexure - K d) In a repo transacti
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Annexure - K r) Similarly, at the e
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Annexure - K Short sale in Governme
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Annexure - K noted that the permiss
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Annexure - K Category Reissued secu
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Annexure - K (vii) Director or the
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Annexure - K Sr. No. Issue Raised R
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Annexure - K Annexure III Para 1.2(
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421 Annexure - K the execution of T
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Annexure - K Annexure - IV Para 1.2
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(b) (c) (d) Debentures & Bonds Subs
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General instructions for compiling
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Annexure - K Disclosures Annexure -
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Annexure - K First leg Accounting D
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Annexure - K Second Leg Accounting
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Annexure - K b) Entries in Seller's
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Annexure - K Second Leg Accounting
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Annexure - K (b) Entries in Seller'
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Annexure - K No. Circular No. Date
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Page 464:
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