Session 2

Introduction
 With the growth of International business and the
spread of Multinational Enterprise, the treasury
function has acquired a new meaning.

 No longer the treasury operations restricted to

borrowing and lending of funds only to one money
market.

 The treasury function now includes a diversity of

currencies which can be converted into one another
through the exchange markets and which are
transacted in money markets.
The Role….
 Managing Asset & liabilities of the bank.

 Managing 'gaps' and the 'risks'.

 Maximizing profits operating within acceptable risk

parameters,

 Maximizing yield on treasury/inter bank investment.

 Providing rates to branches and customers.

Inter-Dept Chart….
Treasurer

Head of M.M Head of Equity Head of FX

C. Desk

 Repo and Rev Repo

Transaction.
 SLR and CRR management.
 Govt. Securities.

 Investment in Shares.
 CFS/Badla Transaction.
 IPO’s and Pre IPO’s.
 Ready Future Arbitrages.

 Spot and Forward Transaction.

 FX Swaps.
 Third Currencies.
 Nostro Management.

 Dealing with branches and

clients.
Functionality….
Lending to
Borrower Branches Borrowing
Funding

Excess
Liquidity
Spread
Branch TREASURY Investment
Front Office

Treasury
Reserve
Depositor Back Office
Requirement
Functions
• Branches Receive Deposits
• Branches Lend To Customers
• Branches Remit Excess liquidity to try at an average rate (Pool Rate)
• Try maintenance reserve with SBP.
• Invest in MM Instruments
• Invest in Govt. Securities
• Invest in Debt Securities
• Capital Market
• Fund FCY Trade Nostro Account
• Lend to Other Branch
The Money Market
 The money market is a wholesale market for low risk, highly liquid, short-term &
long term debt instruments.

 It serves as an avenue through which banks and financial institutions can offload
their excess liquidity or meet their funding requirements.

 To the government an organized money market represents a means for it to

implement it’s monetary policies in a more efficient manner. Moreover, it provides it
with a liquid market for securities through which it can finance it’s own borrowing
requirements.

 The large role of commercial banks in the money market can be easily envisioned by
looking at their assets and liabilities.

 A major portion of their liabilities are demand deposits. Another large portion of
bank liabilities are time deposits.

 On the asset side, in addition to loans banks have part of their assets invested in
marketable securities.
M.M Objective….

 Managing liquidity and interest risk.

 Coordinating with corporate/retail banking departments for

assets/liability pricing.

 To deploy excess funds in order to save liquidity wastage

 To manage funding requirements which may arise from

time to time keeping in view the cost and interest scenario.
Purpose of M. M….

 The need for financial institutions to indulge in money

market transactions arises primarily from the reserve
requirements imposed by the State Bank.

 All commercial banks are required to maintain 24%

Statuary Liquidity Requirements (SLR) of their Demand
and Time Liabilities (DTL).

 Commercial banks also have to maintain a certain portion

of their DTL in a cash reserve maintained with the SBP at
0% interest. This ratio is known as the CRR (Cash Reserve
Requirement) and stands at 5.00%.
M.M Instruments & Transactions….
 Pakistan Investment Bonds
 Treasury Bills
 Repo / Rev. Repo Transactions
 Call / Clean Money
 Term Finance Certificate
 Certificate of Investments
 Commercial Papers
M.M Instruments & Transactions….
 Pakistan Investment Bonds: These are long term bonds of three, five, ten,
fifteen, twenty & 30 years, maturity issued at market price and carrying a
different coupon rate according to the interest rates scenario. Moreover,
another reason for issuing PIBs is to set up a yield curve and corporate,
mutual funds etc. to invest in long term.

 Treasury Bills: T-Bills are short term securities issued by the State Bank on
behalf of the Ministry of Finance through auctions. They are zero-coupon
bonds issued at a discount, have a par value of Rs 100 and a maturity of
three, six or twelve months. Bank borrowing is one of the various
measures the government takes to fill it’s budgetary deficit and this bank
borrowing currently takes place against T-Bills.

 Term Finance Certificate: TFCs are redeemable capital instruments and

may be issued by a company directly to the general public, which includes
institutions. Unlike straight bonds, they are redeemable capital and are of
long tenors. Issued by corporate to raise long-term fund.
M.M Instruments & Transactions….
 Repurchase Transactions: Borrowing secured by collateral in the form
of securities.

 Rev. Repo Transactions: Lending secured by collateral in the form of

securities.

Call transactions consist of non-collateralized lending

 Call Money:
and borrowing of Funds.

 Clean Money: Cleanfunds are similar to call funds in the sense that
this is unsecured lending/ borrowing of funds. The only
difference is that this sort of borrowing is done by investment
banks and leasing companies.
Interest Rate….

 The interest rate used in determining the present value

of future cash flows.

OR

 The interest rate that an eligible depository institution

is charged to borrow short-term funds directly from a
Central Bank.
Yield….

 The income return on an investment. This refers to the interest or

dividends received from a security and is usually expressed annually as
a percentage based on the investment's cost, its current market value
or its face value.

 There are two stock dividend yields. Cost Yield & Current Yield.

 Bonds have following yields: Coupon (the bond interest rate fixed at
issuance), current (the bond interest rate as a percentage of the current
price of the bond), and Yield to maturity (an estimate of what an
investor will receive if the bond is held to its maturity date).

Yield Curve….
 A line that plots the interest rates, at a set point in time, of bonds
having equal credit quality, but differing maturity dates”. OR “The yield
curve is the relationship between an interest rate and the time to
maturity for a given debt”.
Yield

Maturity

■ The shape of the yield curve is closely monitored because it helps to give an idea of future interest rate
change and economic activity.
 Normal Yield Curve: Is one in which longer maturity bonds have a higher yield compared to
shorter-term bonds due to the risks associated with time.

Yield Curve

17%
16%
15%

Interest Rate
14%
13%
12%
11%
10%
9%
8%

Maturity Cycle

 Inverted Yield Curve: Is one in which the shorter-term yields are higher than the longer-
term yields, which can be a sign of upcoming recession.
Yield Curve

17%
16%
15%
Interest Rate

14%
13%
12%
11%
10%
9%
8%

Maturity Cycle
 T-bills
Treasury bills are sold at a discount. The difference between the auction
sales price and the value of the T-bill at maturity represents the income
from the T-bill. Yields on T-bills are calculated using the bank discount
method, as shown below:

Discount Rate = Par Value - Purchase Price x ______365 days______

Par Value No. of days to maturity
For example, a price of $990.13 per $1,000 of face amount for a 91-day bill
would produce an annualized rate of return equal to 4.00 per cent,
computed as follows:

per cent
What Moves Treasury Bill Interest Rates
Up and Down?
Demand for risk-free fixed-income securities in general—For example, a
"flight to safety" caused by concerns about default or liquidity risk in
other financial markets may cause investors to shift to T-bills to avoid
risk.
Supply of T-bills by the government--for example, federal budget
surpluses reduce the supply of some Treasury securities issues
Economic conditions may influence rates--for example, T-bill rates
typically rise during periods of business expansion and fall during
recessions.
Monetary policy actions by the Central Bank--SBP actions that affect the
Discount rate likely will influence interest rates for other close
substitutes, including short-term T-bills.
Inflation and inflation expectations also are factors in determining
interest rates--for example, periods of relatively high (low) rates of
inflation usually are associated with relatively high (low) interest rates
on T-bills
 Pakistan’s Bond Market
1. Government Debt Market
 MTBs
 Zero Coupon bonds sold at a discount to their face values
 Issued in three tenors of 3-month, 6-month and 12-months
maturity
 Purchased by individuals, institutions and corporate
bodies including banks irrespective of their residential
status.
 Can be traded freely in the country’s secondary market.
The settlement is normally through a book entry system
through Subsidiary General Ledger Accounts (SGLA)
maintained by banks with State Bank of Pakistan (SBP).
Physical delivery could be affected if required.
 Pakistan’s Bond Market
 After the suspension of auctions of the long term Federal
Investment Bonds (FIBs) in June 1998, there was no long
term marketable government security that could meet the
investment needs of institutional investors. Therefore, in
order to develop the longer end of the Government debt
market for creating a benchmark yield curve and to boost
the corporate debt market, the Government decided to
launch Pakistan Investment Bonds in December 2000.
These bonds have the following features:
 Issued in five tenors of 3, 5, 10, 15, 20 and 30-years maturity.
 Script less security managed
 Purchased by individuals, institutions and corporate bodies
including banks irrespective of their residential status.
 Coupon and target amount announced by SBP in
consultation with Ministry of Finance
 Pakistan’s Bond Market
Auction Mechanism
 SBP is acting as an agent on behalf of the government for raising short
term and long term funds from the market. The MTBs and PIBs are sold
by SBP to eleven approved Primary Dealers through multiple price
sealed bids auction.
 The Auction for MTBs is held under a fixed schedule on fortnightly
basis.
 The Auction for PIB is held on quarterly basis. Since September 2003,
the sale of PIBs is done under Jumbo issuance mechanism under which
the previous issues are reopened in order to enhance the liquidity in the
secondary market.
 Securities issued by Statutory Corporations
 Securities issued by Corporate
 Pakistan’s Bond Market
2. Corporate Debt Market

 In order to develop the corporate bond market, National Saving

Schemes (NSS) been linked with the yields on market based
instrument i.e. PIB of different maturities and Govt. has also
barred institutional investors from investment in NSS in March
2000, which has substantially benefited the corporate debt
market.
 On the investment side, commercial and investment banks are
main investors in private sector TFC’s. In 1997, listed TFC’s
became “ approved securities” for the purpose of meeting
statutory liquidity requirement (SLR) for NBFI’s.
 The investment cap was raised for provident funds to invest in
stocks and listed fixed income securities from 10% to 30%.
 Furthermore the Government has reduced stamp duties and
taxation including withholding tax on profits of TFCs.
 Pakistan’s Bond Market
2. Corporate Debt Market

 In order to develop the corporate bond market, National Saving

Schemes (NSS) been linked with the yields on market based
instrument i.e. PIB of different maturities and Govt. has also
barred institutional investors from investment in NSS in March
2000, which has substantially benefited the corporate debt
market.
 On the investment side, commercial and investment banks are
main investors in private sector TFC’s. In 1997, listed TFC’s
became “ approved securities” for the purpose of meeting
statutory liquidity requirement (SLR) for NBFI’s.
 The investment cap was raised for provident funds to invest in
stocks and listed fixed income securities from 10% to 30%.
 Furthermore the Government has reduced stamp duties and
taxation including withholding tax on profits of TFCs.
 Pakistan Government Borrowings in FY10
 PIBs

The Government raised a net amount of Rs64.31 billion,

as against the target of Rs60 billion, through the
auctions of Pakistan Investment Bonds in FY10 due to
reopening of the previous issues throughout the year,
Investors seemed most interested in 10-year PIBs, as
about 60 per cent of the money was raised through this
tenor. As a result of these borrowings, the outstanding
balance of the PIBs increased to Rs 505.29 billion at the
end of FY10 compared to Rs 440.99 billion at the end of
FY09.
 Pakistan Government Borrowings in FY10
 PIBs (continued…..)

PIB Yield for 10 Year Notes declined 154 basis points

during the last 12 months. From 2002 until 2011
Pakistan's Government Bond Yield for 10 Year Notes
averaged 9.84 percent reaching an historical high of
16.65 percent in December of 2008 and a record low of
4.17 percent in March of 2003. The yield required by
investors to loan funds to governments reflects
inflation expectations and the likelihood that the debt
will be repaid.
 Pakistan Government Borrowings in FY10
 MARKET TREASURY BILLS

A net amount of Rs467 billion (face value) was generated by

the Government by means of Market Treasury Bills (MTBs)
in 2009-10 compared to net Rs304 billion in the previous
year.
A total of 25 auctions were held by SBP during the year in
which the primary dealers offered an accumulative amount
of Rs3.2 trillion against the target amount of Rs1.36 trillion.

In an effort to broaden the investor base, SBP allowed non-

competitive bids in June 2009 - a process that allows
individuals, small investors and non-banks to invest directly
in MTBs. A total amount of Rs20 billion (face value) was
raised through non-competitive bids during FY10.
Liquidity Management
 Concept of Liquidity – Liquidity is not just to have
enough cash in hand and in bank - Or enough
securities or instruments, which maybe be
converted into cash – but the ability to fulfill all
monetary & financial obligations with or without
access to the money market
Liquidity Management
 The concept of liquidity risk revolves around the
ability of a bank to maintain sufficient funds to
meet its commitments, which may, in turn, be
related to its ability to attract deposits. It is about
the ability of matching the maturity of assets and
liabilities daily and coping with any short-term
pressures that may arise in the process of ensuring
the assets are fully funded.
Liquidity Management
 Liquidity management has always been an
important matter for banks. As a result, it is
increasingly important that banks plan for their
liquidity needs.
 There are three basic approaches to liquidity
management:
 Asset Management
 Liability Management
 Capital Management
Liquidity Management
 Liability management involves managing a bank’s
deposits and other acceptances to meet its funding
needs.
 The three approaches are often used in
combination to manage a bank’s liquidity position.
 Asset and liability management are short-term
approaches while capital management tends to be
longer term approach
EQUITY MARKET
STOCK EXCHANGE
 Primary market for issuing and raising capital

 Secondary market used as an avenue for trading of

securities.
 The securities traded on a stock exchange include:
shares issued by companies, unit trusts, derivatives,
pooled investment products and bonds
Equity Investments
 Equity Investments are considered more riskier then
the other transactions

 They generate a return greater than the inflation rate

 Like wise Bank’s also place a certain portion of it’s

portfolio into the equity market
Equity Investments
Risk’s:
Chance that an investment's actual return will
be different than the expectation. This includes the
possibility of losing some or all of the original
investment
Reward:
Is the return in the form of capital gain and dividends
earned through potential investments at the Stock
Market
Trade off between Risk & return:
 The fundamental idea in finance is the relationship
between risk and return

 The greater the amount of risk that an investor is

willing to take on, the greater the potential return.

 The reason remains that the investors needs to be

compensated for taking on additional risk
KSE 100 Index – Market Benchmark
 The KSE-100 index is the full Market
Capitalization based performance benchmark of
the Pakistan's largest and most liquid stock market

 International best practices reveal that Free Float

Methodology driven Benchmarks are more
representative and appropriate short-hand of the
market
KSE 100 Index – Market Benchmark
Contd.
Therefore, are more acceptable to international fund
managers. Free Float Methodology is better due to
following reasons:

 It is the international trend

 It is more representative
 It reduces changes of manipulation
 It enhances transparency
 It is more acceptable to international investors
Other Index at KSE

 Karachi Meezan Index (KMI-30)

 Karachi Stock Exchange 30 Index (KSE-30 Index)

 All shares Index

Regulatory Bodies & Intermediaries
 State Bank of Pakistan (SBP)
 Securities and Exchange Commission of Pakistan
(SECP)
 Karachi Stock Exchange (KSE)
 National Clearing Company Pakistan Limited
(NCCPL)
 Brokers (As Members of KSE)