Mention the auction procedures of Treasury Bills and Bonds in Bangladesh

 In Bangladesh, the government issues Treasury Bills (T-Bills) and Bangladesh Government Treasury Bonds (BGTB) through auctions conducted by the Bangladesh Bank (BB). Here’s an overview of the auction procedures, eligibility, and sale procedures for these financial instruments.

Eligibility:

1.     Residents:

·        Individuals and institutions resident in Bangladesh, including banks, non-bank financial institutions, insurance companies, corporate bodies, and authorities managing provident funds and pension funds, are eligible to purchase BGTBs.

   2. Non-Residents:

·        Individuals and institutions not resident in Bangladesh can also purchase BGTBs, provided the following conditions are met:

·        The purchase is made using funds from a non-resident foreign currency account with a bank in Bangladesh in the purchaser’s name

·        BGTBs purchased by non-residents cannot be resold to residents in Bangladesh within one year of purchase. However, resale to other non-residents is allowed if the above conditions are fulfilled.

Sale Procedure in Primary Issues:

1.     Auction Calendar:

·        Primary issues of BGTBs are sold by the BB’s through auctions, as per the auction calendar announced before each financial year and specific auction notices announced one week before each auction.

2.     Bidding Process:

·        Banks and financial institutions maintaining current accounts with the BB for Cash Reserve Requirement (CRR) fulfillment, including Primary Dealers (PDs) designated for secondary trading, ay submit bids on their behalf and for other eligible purchasers.

·        Bid must be submitted in the form BGTB-1 for face value amounts in multiples of taka 1.00 lac

·        Bidding banks/financial institutions must ensure sufficient balance in their current accounts with the BB to cover the full purchase price and any premium

3.     Submission and opening Bids:

·        Separate bids must be submitted for BGTBs of different maturities.

·        Bids in sealed covers are received up to 10.00 am on the auction date at the Public Debt Office at the BB Motijhel Office

·        The Bids are opened at 11.00 am on the same day, listed in ascending order of yields (in form BGTB-2) and placed before the Auction Committee

4.     Announcement and Issuance:

·        Auction results are announced by 3.00 pm on the auction day.

·        BGTBs are issued against the accepted bids on the following day by debiting the current accounts of the bidders with the BB for the purchase price, with advice in form BGTB-3.

5.     Registration and Settlement:

·        BGTBs are issued as registered stocks in uncertificated form, with no paper scrip

·        Transactions are processed as book-based clearing and settlement through SGL (Subsidiary General Ledger) Accounts, representing ownership of securities. Transfers are completed by debiting and crediting the relevant accounts.

Sale Procedure in Secondary Trading

1.     Secondary Market Trading:

·        BTGBs purchased in primary issues through auctions can be freely traded subsequently.

·        Primary Dealers (PDs) facilitate such secondary purchases and sale by quoting two-way prices. Transfers involved in these sales are booked in the SGL accounts with the BB Motijhel office upon application in Form BGTB-5 along with a transfer declaration in form BGTB-6

2.     Transfers within and between Accounts:

·        Transfers between own and IPS (Investor portfolio Securities) account, or between Ips accounts of the same bank/financial institution involving no payment settlement through the current account with the BB, are booked immediately upon receipt of duly filled application, declaration form, and transfer fee.

·        Transfer fees received are credited to account of BB Motijheel Office.

3.     Reporting Requirements:

·        PDs report their secondary market trading in BGTBs to BB Motijheel daily in form BGTB-7, separately for each issue, from the date of the first auction.

·        Other banks and financial institutions report their total holdings on a weekly basis using the same form

The auction procedures for Treasury Bills and Bonds in Bangladesh involve a structured process to ensure transparency and efficiency in the issuance and trading of these government securities. The primary and secondary market operations are governed by specific rules and forms, facilitating participation from both resident and non-resident investors. The Bangladesh Bank oversees the entire process, ensuring compliance and smooth operation in line with the stipulated guidelines.

Describe the sources of funds of a banking sector

 The banking sector obtains funds from various sources to carry out its operations and provide financial services. Here are some of the key sources of funds for the banking sector:

1.     Deposits: The primary and most significant source of funds for banks is customer deposits. Bank accept deposits from individuals, businesses and other entities. The deposits can be in the form of current accounts, savings accounts, fixed deposits, and other types of deposit accounts. Depositors entrust their money to the bank, which in turn uses these funds of lending and other activities while providing depositors with interest payments.

2.     Borrowing: Banks may borrow funds from other financial institutions, such as other bank or central bank, to meet short-term liquidity needs or to manage their reserve requirements. Borrowings can occur through interbank lending, repurchase agreements (repos), or borrowing facilities provided by the central bank. These borrowed funds help banks maintain sufficient liquidity and meet their financial obligations.

3.     Equity Capital: Banks raise funds by issuing shares to investors in exchange for equity capital. This capital represents the ownership stake of the shareholders in the bank. Banks can issue shares through initial public by central bank. These borrowed funds help banks maintain sufficient liquidity and meet their financial obligations.

4.     Retained Earnings: Banks generate profits through their operations, and a portion of these profits is retained within the bank. Retained earnings are accumulated over time and form a significant source of internal funds for banks. These funds can be reinvested into the bank’s operations, expansion, or used to strengthen the capital base.

5.     Debt Issuance: Banks can raise funds by issuing debt securities to investors. These debt instruments, such as bonds or debentures, are typically offered in the capital markets and carry fixed or floating interest rates. Investors purchase these debt securities, providing banks with funds while earning interest on their investments. Debt issuance allows banks to diversify their funding sources and manage their long-term financing shortage of funds.

6.     International Markets: Banks can raise funds from international markets through foreign currency borrowing or by issuing international bonds. Large banks with global operations and strong credit ratings can tap into international capital market to raise funds at favorable terms. This source of funding provides banks with additional liquidity and diversification.

7.     Central Bank Facilities: Banks can access funds from the central bank through various facilities. Central banks provide lending facilities, such as discount windows or standing lending facilities, to address short-term liquidity needs. These facilities help banks maintain their reserve requirements and manage temporary shortage of funds.

It’s important to note that the specific mix of funding sources can vary depending on the type and size of the bank, its business model, regulatory requirements, and market conditions. Banks aim to maintain a diversified funding base to mitigate risks and ensure a stable supply of funds to support their lending and other activities.

Describe the types of government transactions

 Government accounting is a handling of governments’ financial affairs. Government accounts prepare financial statements, budgets and provide accurate information pertaining to financial practices.

Basically, this account shows the activities of the government, likely to affect the rest of the economy. Unlike most private sector organizations, governmental entities must be responsible for to a number of different groups and organizations, including elected officials, other units of government, investors, creditors, and citizens that are focused on monitoring their activities. All forms of monitoring include collecting and interpreting data, and this oversight function is often performed through information provided in governmental reports.

Govt. transactions are summarized into five groups, revenue, grants, expenditure, net lending and financing.

 

·        Revenue includes all non-repayable receipts, required and unrequited, other than grants from other governments and international intuitions. Revenues can be divided into current and capital; the latter includes only receipts from the sale of capital assets. Current revenue embraces all tax revenue and current non-tax revenue. Taxes are compulsory, unrequited, non-repayable contributions exacted for public purposes.

·        Grants are defined as unrequited, non-repayable, non-compulsory receipts from other governments or international institutions.

·        Expenditure consists of all non-repayable payments by government, whether requited or unrequited and whether for current purposes. Only requited payments contribute directly to production, consumption and capital formation, while unrequited expenditures or transfers redistribute the effective demand among the different sectors of the economy.

·        Financing is equal to the balance of revenue, grants expenditure and net lending. It covers all transactions involving the government’s holding or currency and deposits, government liabilities and any financial assets held by the government for the purpose of financial management rather than public policy.

 

What is balance of payment account? Write a brief note on BOP account

 The balance of payment accounts is the set of accounts that keeps record of the economy’s transactions with the rest of the world. Every economy’s balance of payments must be organized in conformity with the International Monetary Fund Balance of Payment Manual.

The balance of payments has two parts:

1. The Current account (CA) that records current transactions, it has three parts:

·        Balance of goods and services which records exports and imports of goods and services.

·        Balance of primary incomes which records not only labor income, but also investment income on holding of assets like dividends on shares, and interest on bonds or loans.

·        Balance of current transfers which includes workers remittances, international aid, payments to and from the EU budget.

 

The Capital Account (KA): Records capital transactions (capital transfers, direct investment, portfolio investment and it covers transactions in financial assets and liabilities)

What are the major objectives of macroeconomics? Write a brief definition of each of these objectives. Explain carefully why each of these objectives is important

 What are the major objectives of macroeconomics? Write a brief definition of each of these objectives. Explain carefully why each of these objectives is important.

Macroeconomics studies the behavior and performance of an economy as a whole, focusing on aggregate changes such as unemployment, growth rate, GDP, and inflation. Governments and corporations use macroeconomic models to formulate economic policies and strategies. The primary objectives of macroeconomic policy are:

1.     Full Employment:

·  Definition: Achieving a situation where all available labor resources are being used efficiently, minimizing unemployment.

·  Importance: Reduces involuntary idleness of labor, increasing aggregate unemployment output and economic productivity. Became a key focus after the Great Depression.

     2. Price Stability:

·  Definition: Maintaining a stable price level over time, avoiding large fluctuations in inflation.

·  Importance: Prevents economic instability and promotions steady economic growth. Ensures predictability for consumers and businesses.

      3. Economic Growth:

·        Definition: Increase the output of goods and services in an economy over time.

·        Importance: Enhances the standard of living and quality of life. Driven by labor force growth, capital formation, and technological progress. Must balance with price stability.

      4. Balance of Payments Equilibrium and Exchange Rate Stability:

·  Definition: Achieving a stable and balanced flow of goods, services, and assets internationally.

·  Importance: Ensure stable international monetary reserves and healthy economic performance. Important for maintaining foreign exchange reserves and avoiding deficits.

      5. Social Objectives:

· Definition: Promoting social welfare through fair and equitable income distribution and economic freedom.

· Importance: Ensures social justice and allows individuals to make economic decisions freely, contributing to overall societal well-being.

Implementing these objectives helps governments and policymakers create a stable, growing and equitable economy, addressing both economic and social needs.

 

 

 

What are the common money market instruments? Describe briefly

 The money market refers to trading in very short-term debt investments. Short-term debt instruments are traded on the money market. It involves an ongoing exchange of funds between businesses, governments, banks and other financial institutions for terms that can range from one night to as long as a year. At the wholesale level, it involves large-volume trade between institutions and traders. At the retail level, it includes money market mutual funds bought by individual investors and money market accounts opened by bank customers.

In all of these cases, the money market is characterized by a high degree of safety and relatively low rates of return.

There are several different types of money market instruments that are traded in the money market. These are:

1.     Certificate of deposit: It is a negotiable term deposit accepted by commercial banks. It is usually issued through a promissory note. CD’s can be issued to individuals, corporations, trust, etc. Also, the CD’s can be issued by scheduled commercial banks at a discount. And the duration of these varies between 3 months to 1 year. It functions similarly to a fixed deposit, but with better negotiating power and more flexible liquidity conditions.

2.     Commercial Paper:  Corporate issue Commercial Paper (CP’s) to meet their short-term working capital requirement. Hence serves as an alternative to borrowing from a bank. Also, the period of commercial paper ranges from 15 days to 1 year. This money market product functions as a promissory note created by a business or organization to raise short-term capital. It is an unsecured instrument, meaning there is no connected collateral.

3.     Treasury bills: Treasury Bills are one of the most popular money market instruments. They have varying short-term maturities. It can only be issued by a nation’s central government, when necessary, funds are needed to fulfil its immediate obligations. These do not pay interest but do allow for capital gains because they can be bought at a discount and paid in full when they mature. Due to the government’s backing of Treasury Bills, there is very little risk.

4.     Repurchase Agreement: Repurchase agreements are short-term borrowing instruments in which the issuer receiving the funds makes a promise to pay it back or repurchase it in the future Government securities are typically traded under repurchase agreements.

5.     Banker’s Acceptance: In the financial industry, this popular money market product is exchanged. With a signed promise of future repayment, a loan is issued to the designated bank after a banker’s acceptance. A Banker’s Acceptance (BA) is a short-term financial instrument that serves as a guarantee of payment from a bank.

6.     Call Money: It is a segment of the market where scheduled commercial banks lend or borrow on short notice (say a period of 14 days). In order to manage day-to-day cash flows. The interest rates in the market-driven and hence highly sensitive to demand and supply. Also, the interest rates have been known to fluctuate by a large % at a certain time.

Briefly Describe the functions of integrated treasury

 In a banking setup, the function of an integrated treasury typically provides:

a)    Reserve management and investment:

                   i) Fulfilling CRR/SLR commitments:

                ii) Assembling a roughly balanced investment portfolio to maximize yield and duration.

b) Liquidity and Fund Management: It involves:

                i)            Providing a balanced and well-diversified liabilities base to fund the various assets on the bank’s balance sheet.

             ii)            Analyzing major cash flows resulting from asset-liability transactions.

          iii)            Providing policy inputs to bank’s strategic planning group on funding mix (currency, tenor, and cost) and yield expected in credit and investment.

  c) Asset Liability Management: ALM calls for determining the optimal size and growth rate of the balance sheet and pricing the assets and liabilities in accordance with prescribed guidelines.

d) Risk Management: Integrated treasury manages all market risks associated with a bank’s liabilities and assets. The market risk of liabilities pertains to floating interest rate risks and asset and liability mismatches. Market risk for assets can arise from:

       i)            Negative adjustment to interest rates

    ii)            Increasing levels of disintermediation

 iii)            Securitization of assets and

  iv)            Emergence of credit derivatives etc.

The Treasury would observe the cash flow impact of changes in asset prices due to changes in interest rates by adhering to prudential exposure limitations while the credit department would continue to be in charge of assessing credit risk.

e) Transfer Pricing: The treasury is responsible for making sure that the bank’s money is used as efficiently as possible without sacrificing yield or liquidity. An integrated treasury unit has direct access to numerous markets as well as knowledge of the bank’s overall funding requirements (like money market, capital market, forex market, credit market). In order to inform different industry groups and product categories of the best business strategy to employ, the treasury should ideally give benchmark rates after taking on market risk.

f) Derivative Products: For the purpose of hedging a bank’s own exposures, the treasury can create interest rate swaps and other currency-based/cross currency derivative products. It can also offer these products to clients or other banks.

g) Arbitrage: In order to maximize profit with the last amount of risk. Treasury units of banks engage in arbitrage by simultaneously purchasing and selling the same type of asset in two marketplaces.

h) Capital adequacy: This function is connected with the quality of the assets, and Return on Assets (ROA) is a crucial metric for gauging the effectiveness of the funds that have been allocated. One of the main profit centers is an integrated treasury. Its own profit and loss measurements exist. Through proprietary trading, which involves transactions made to profit from changes in market interest and currency rates, it takes exposures that might not be necessary for ordinary banking.

 By performing these functions and integrated treasury in a banking setup aims to optimize the management of financial resources, enhance risk management practices, ensure regulatory compliance and contribute to the overall profitability  and stability of the bank.

Describe about the nature and benefits of integrated treasury. What is the meaning of integrated treasury? What is the benefit of it? Describe the integrated treasury management system in terms of meaning functions and structure

 In a banking set-up, Integrated Treasury refers to integration of domestic and foreign exchange operations. A comprehensive strategy for funding the balance sheet and allocating capital across domestic, international, and foreign exchange markets is known an integrated treasury. With this strategy, the bank is able to maximize asset-liability management and take advantage of arbitrage opportunities. Prior to integration of two departments, these departments work independently without any communication between them.

Let’s consider a commercial bank that operates multiple branches and provides a wide range of financial services to its customers. Traditionally, each branch may have its own treasury function responsible for managing cash, liquidity, and risk associated with the branch’s operation.

However, the bank realizes that by integrating these treasury functions, it can achieve better control over its financial resources, enhance risk management and improve profitability. It decides to establish an integrated treasury department at the bank’s headquarters to centralize and coordinate these activities.

 

The integrated treasury department becomes responsible for managing the bank’s overall liquidity position, including monitoring cash flows, optimizing cash balances and, ensuring sufficient funds are available to meet operational and regulatory requirements. By consolidating cash management activities, the bank can minimize idle cash, optimize interest income, and efficiently allocate funds across different branches and business units.

Furthermore, The Integrated Treasury Departments oversees asset-liability management, which involves balancing the bank’s assets (loans, investments) and liabilities (deposits, borrowings) to optimize interest rate risk and maintain a healthy funding profile. By aligning the maturity and repricing characteristics of assets and liabilities, the bank can mitigate interest rate risk and improve net interest margins.

The integrated treasury setup also facilitates risk management within the bank. The department monitors and manages various risk, such as liquidity risk, market risk, credit risk, and operational risk. For example, it may implement risk mitigation strategies like hedging, diversification, and stress testing to protect the bank from adverse market conditions and ensure compliance with regulatory requirements.

Key components of an integrated treasury typically include:

Cash Management: This involves managing the organization’s cash flows, monitoring liquidity positions, forecasting cash requirements, and optimizing cash balances across various accounts and entities.

Liquidity Management: It focuses on maintaining adequate liquidity levels to meet operational and financial obligations. Integrated treasury systems help optimize cash pooling, intercompany lending, and cash concentration to maximize the utilization of available funds.

Risk Management: Integrated Treasury aims to identify, assess, and manage financial risks, such as foreign exchange risk, interest rate risk, credit risk, and market risk. It involves implementing hedging strategies, monitoring exposures and employing risk mitigation techniques.

Financial Planning: Integrated Treasury facilitates financial planning and budgeting processes by providing accurate and timely financial data. It helps align treasury strategies with overall organizational objectives and assists in capital allocation decisions.

Treasury Operations: This includes transaction processing, settlement, reconciliation, and reporting related to treasury activities. An integrated treasury system streamlines these operations through automation, integration with banking platforms and efficient reporting tools.

Implementing an integrated treasury approach offers several benefits, including improved cash visibility, reduces costs, enhanced risk management, better decision-making, and increased operational efficiency. It also enables organizations to respond more effectively to market dynamics, regulatory changes, and financial uncertainties.

By integrating these treasury functions, the bank benefits from improved efficiency, risk management and profitability. The consolidated approach allows for better coordination and decision-making across the bank’s treasury activities, enabling a holistic view of the bank’s financial position and risks. It also facilitates the implementation of standardized policies, procedures and controls throughout the organization.

It's worth noting that the specific implementation and structure of Integrated Treasury in a banking setup may vary depending on the size, complexity, and regulatory environment of the bank. The example provided above represents a general scenario, but banks may tailor their integrated treasury functions to suit their specific needs and strategic objectives.

There are several benefits associated with the implementation of a robust treasury management solution, that’s given below:

1.     Reducing overall costs: With a central system that has complete and current information about company’s finances, anyone able to immediately see any costs associated with a payments and transactions. This makes the transfer of funds-e.g. for paying invoices-much quicker, easier, and in some cases, cheaper.

2.     Treasury integration improves efficiency: By streamlining company’s financial obligations, one can manage absolutely everything from one single place. Treasury management solutions create efficiency by providing one place to do everything.

3.     Automatic auditing system: Digital audits can automatically be generated within a treasury management system tool, and these can be used for the several different purposes, process and commercial decisions. Each time that one makes a payment, a treasury management system will generate useful analytical data including communication logs.

4.     Reduce mistakes and errors: A digitized treasury process helps anyone cut out any guesswork involved, dramatically reducing the chance of human errors. Automatic payment authorization an routing, amongst other things, are just a few of the ways treasury management tools reduce mistakes.

5.     A more efficient team: All in all, the amount of time that a treasury management tool saves one is one of the primary benefits. Over time, all this can add up every little help! Because treasury tends to be an understaffed part of any business, there’s not a huge shortage of value by using an automated treasury system instead of a full-time member of staff.

An integrated treasury serves as a hub for hedging and arbitrage activities. In order to maintain a proactive profit center, it aims to maximize its currency portfolio and allow for unrestricted transfers of BDT money between other currencies. Banks with integrated treasures will have the opportunity to develop multi-currency balance sheets and benefit from strategic positioning as a result of the incremental liberation of capital account convertibility.

Discuss the risks of Treasury Management in Bangladesh

 Treasury management in Bangladesh, like any other country, involves certain risks that need to be carefully managed. Here are some important risks associated with treasury management in Bangladesh:

1.     Liquidity Risk: Liquidity risk refers to the possibility of not being able to meet short-term funding requirements or fulfill financial obligations. In treasury management, liquidity risk can arise from a mismatch between cash inflows and cash outflows, unexpected changes in market conditions, or disruptions in the financial system. This risk can be particularly relevant for banks and financial institutions that manage liquidity to support their operations and meet regulatory requirements.

2.     Interest Rate Risk: Interest rate risk arises from fluctuations in interest rates that can affect the value of financial instruments and cash flows. In treasury management, banks and other financial institutions may be exposed to interest rate risk due to their investment portfolios, fixed-rate lending or borrowing, or floating-rate assets and liabilities. Changes in interest rates can impact on the profitability, net interest income, and market value of these positions.

3.     Foreign Exchange Risk: Foreign Exchange risk stems from the potential volatility in exchange rates, which can impact the value of foreign currency-denominated assets, liabilities and transactions. In Bangladesh, where there is significant international trade and cross-border transactions, entities engaged in treasury management face foreign exchange risk when dealing with foreign currencies. This risk can affect importers, exporters, and financial institutions exposed to currency fluctuations.

4.     Credit Risk: Credit risk refers to the possibility of counterparty default or failure to fulfill financial obligations. In treasury management, credit risk can arise from lending activities, investments in debt securities, and transactions with other financial institutions. Entities managing treasury operations need to assess the creditworthiness of counterparties, monitor credit exposures, and implement risk mitigation measures to manage this risk effectively.

5.     Regulatory and Compliance Risk: Treasury management in Bangladesh is subject to various regulatory requirements and compliance standards set by the central bank and other regulatory authorities. No-compliance with these regulations and standards can result I penalties, reputational damage, and legal consequences. Treasury functions need to ensure adherence to regulatory guidelines related to liquidity management, capital adequacy, reporting, and risk management practices.

6.     Operational Risk: Operational risk encompasses a wide range of risks arising from internal processes, systems human error, and external events. In treasury management operational risk can arise from inadequate internal controls, technology failures, fraud, data breaches, or disruptions in financial markets. It is essential for treasury departments to have robust operational risk management frameworks in place to identify, assess and mitigate these risks.

7.     Market Risk: Market risk refers to the potential losses arising from changes in market prices or factors that affect the value of financial instruments. In treasury management, market risk can arise from fluctuations in interest rates, exchange rates, equity prices, commodity prices, or other market variables. Financial institutions need to employ risk management techniques such as hedging, diversification, and stress testing to mitigate market risk.

To effectively manage these risks, entities involved in treasury management in Bangladesh should have comprehensive risk management frameworks, robust internal controls, and well-defined policies and procedures. Regular monitoring, risk assessment, and the use of risk mitigation tools and strategies are essential to ensure the stability and soundness of treasure operations. Close coordination with regulatory authorities and staying updated with changes in the regulatory landscape are also critical to managing risk effectively.