Treasury Management Study Notes

Treasury Management Overview - Focus on Treasury Controls and Centralization.

Treasury Controls
  • Essential for managing large sums of cash in treasury transactions.
  • Duty segregation among staff required (front office vs. back office) to prevent fraud and errors.
  • Trades approved by senior treasury manager; reconciliation by another individual.
  • Regular comparison of brokerage fees by someone outside trading function.
  • Scheduled internal audits to ensure adherence to policies and procedures.
  • Treasurer to impose limit controls to prevent high-risk investments, e.g., maximum investment in a single security or asset class, or limits on counterparty exposure.
  • Case study reference: Nick Leeson and Barings Bank. The case of Nick Leeson at Barings Bank exemplifies the catastrophic consequences of inadequate segregation of duties and control failures, leading to significant financial losses.
Treasury Centralization
  • Companies may centralize treasury functions at headquarters for efficiency.
  • Common in multinational corporations (MNCs) to centralize treasury operations.
Advantages of Centralization
  • Stronger controls.
  • Economies of scale, by consolidating banking relationships and leveraging larger transaction volumes.
  • Lower operating costs.
  • Tax advantages for MNCs, through optimized intercompany financing and cash pooling structures.
  • Reduced autonomy for subsidiary personnel.
Decentralization
  • Companies with autonomous subsidiaries may adopt a decentralized structure.
  • Local personnel follow guidelines from headquarters, benefiting from local knowledge.
  • Familiarity with local language, customs, and banking practices.
Disadvantages of Decentralization
  • Potential duplication of efforts and resources, as each subsidiary might maintain separate banking relationships and treasury staff.
  • Increased compliance burden due to span of control issues, making it difficult to monitor adherence to corporate policies across diverse operations.
Hybrid Systems
  • Some large MNCs utilize regional treasury centers combining centralized and decentralized aspects.
  • Regional centers serve specific subsidiaries within geographic regions.
  • Incorporation of enterprise-wide accounting and automated treasury management systems connecting local transactional data with central oversight has led to hybrid systems.
  • Local staff enter information into centralized systems, while treasury staff manages overall operations and cash management.