T h on Internal Audit of l G Treasury Function in Banks i e I

Technical Guide on Internal Audit of Treasury Function in Banks

The Institute of Chartered Accountants of India

(Set up by an Act of Parliament)

New Delhi

Technical Guide on Internal Audit of Treasury Function in Banks

DISCLAIMER: The views expressed in the Technical Guide are those of author(s). The Institute of Chartered Accountants of India may not necessary subscribe to the views of the author(s).

The Institute of Chartered Accountants of India

(Set up by an Act of Parliament) New Delhi

? The Institute of Chartered Accountants of India

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior permission, in writing, from the publisher.

Edition

: January, 2010

Committee / Department

: Internal Audit Standards Board

Email

: cia@

Website

:

Price

: Rs. 150/- (Including CD)

ISBN No.

: 978-81-8441-296-3

Published by

: The Publication Department on behalf of The Institute of Chartered Accountants of India, ICAI Bhawan, Post Box No. 7100, Indraprastha Marg, New Delhi-110 002.

Printed by

: Sahitya Bhawan Publications, Hospital Road, Agra-3. May/2010/1,000 Copies (Reprint)

ii

FOREWORD

With the significant developments that have taken place in the capital, money and foreign exchange markets in the recent years affecting volatility in exchange rates and accentuating liquidity constraints, organisations have started paying closer attention to the treasury management function. The globalization of the economy with mobilization and deployment of funds from/in other countries is also necessitating increased attention in the area of treasury management. Banking industry has been all long focusing on successful treasury management, which is extremely necessary for their strong, viable and profitable existence.

In view of the complexity, volume and growth of treasury function in banks, internal auditors have a dynamic role to play to support the banks in helping to achieve the strategic goals. Internal auditors can strengthen the bank's treasury functions by reviewing critical control systems and risk management processes and providing valuable suggestions.

I am happy to note that the Internal Audit Standards Board of the Institute is issuing this publication "Technical Guide on Internal Audit of Treasury Function in Banks" containing extensive knowledge on this complex subject.

I congratulate CA. Shanti Lal Daga, Chairman, Internal Audit Standards Board and the members of the Board on issuance of this publication. I am confident that this comprehensive publication would help the members as well as other readers in acquiring good knowledge of products, practices and regulations of treasury function in banks.

January 12, 2010 New Delhi

CA. Uttam Prakash Agarwal President

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iv

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 "Technical Guide 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 Technical Guide 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 Guide.

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

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squeezing out time out of their professional and personal commitments and preparing the basic draft of this Technical Guide. 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 Technical Guide 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

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CONTENTS

Foreword................................................................................................... iii Preface....................................................................................................... v Glossary.................................................................................................... ix Introduction ............................................................................................ xvii CHAPTER : 1. Treasury- An Introduction .............................................................. 1 - 4 2. Treasury Products and Services ............................................. 1 - 7 3. The Treasury Dealing Room................................................... 1 - 3 4. Organisational Structure of A Bank's Treasury........................ 1 - 6 5. Investment Portfolio..................................................................... 1 - 13 6. Asset Liability Management...........................................................1 ? 6 7. Treasury Risks....................................................................... 1 - 6 8. Treasury Unit ? Fundamental Controls........................................ 1 - 13 9. Internal Audit of Treasury Operations............................................ 1 - 6 ANNEXURES : Annexure A- Specimen Checklist for Internal Audit of Treasury Operations...... Annexure B - Specimen Checklist for Internal Audit of Foreign

Exchange Operations of Treasury......................................... Annexure C- Specimen Checklist for Internal Audit of Domestic

Operations of Treasury........................................................ Annexure D- Guidance Note on Market Risk Management ................... Annexure E - Assets Liability Management (ALM) System.................... Annexure F- RBI Mc Guide primary dealers 2009................................. Annexure G RBI Mc Capadeqrm 2009 .................................................

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