essential learning for ctp candidates texpo conference
TRANSCRIPT
Essential Learning for CTP CandidatesTEXPO Conference 2019 – Session #SU02
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TEXPO Conference 2019:Essential Learning for CTP CandidatesSession SU2 (Sunday. 3:45 – 5:00 pm)
ETM5-Chapter 3:Banks and Financial Institutions
ETM5-Chapter 4:Payment Systems
ETM5-Chapter 7: Relationship Management and Vendor Selection
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Essentials of Treasury Management, 5th Ed. (ETM5) is published by the AFP which holds the copyright and all rights to the related materials.
As a prep course for the CTP exam, significant portions of these lectures are based on materials from the Essentials text.
Overview of Chapter 3 Topics
Introduction
Financial Institutions: Functions and Services
Global (Non-U.S.) Financial Institutions
U.S. Commercial Banks
Investment Banking and Brokerage Firms
Other Financial Institutions
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Financial Institutions: Functions and ServicesGlobal (Non-US) Financial InstitutionsU.S. Commercial BanksInvestment Banking and Brokerage
FirmsCredit Union and Special Purpose
Financial Institutions
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Essential Learning for CTP CandidatesTEXPO Conference 2019 – Session #SU02
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Services Offered by Global Financial InstitutionsDepository accts & transaction svcsShort-term lending & investmentsForeign exchange (FX)Information reportingInvestment bankingOther Services Trade services Agent & fiduciary servicesRisk managementConsulting
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Regulation of Global FIs Outside the U.S.
Country Guidelines“Know Your Customer”
Rule Level of RegulationsFI/Customer
Relationships Legal Lending Limits
Nationwide BranchingMulticurrency Accounts
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U.S. Commercial Banks
Commercial bank is an FI possessing a federal or state charter that accepts deposits and makes commercial loansFull range of sizesBank holding
companiesRegulatory
environment
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Group Exercise
Working in your groups, answer the following questions:What are the services typically offered
by a large commercial bank?Where do you think the bank makes
most of its revenues and/or profits?
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Services Offered byCommercial BanksDeposit AccountsCredit ServicesInvestment Banking ServicesTransaction ProcessingTrade ServicesForeign Exchange(FX) ServicesRisk Management ServicesFiduciary ServicesConsulting ServicesOther Financial Services
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Deposit AccountsDemand Deposit (DDA)
or current account Time Deposit (TDA) or
noncurrent account Certificate of Deposit (CD)
Nonresident AccountsAccount IdentificationRTN vs. IBAN
Deposit Insurance (FDIC)
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More on Deposit Accounts
A DDA is both a store of value and a vehicle through which an account holder uses a bank to transfer funds to, and, receive deposit from, a third partyDDAs may be interest-bearing
or non-interest bearingUse of overdraft accounts (US
vs. most other countries)
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Credit ServicesWide range of business loans that vary
by type of borrower, use of proceeds and maturities
Medium- to long-term secured loans for the purchase of PP&E
Long-term loans for capital equipmentLeasingShort-term working
capital loansTerm loansRevolving line
of credit (revolver)
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More Bank ServicesTrade Services
Foreign Exchange (FX) Role of large global banks
Risk Management FX, Interest Rates, Commodity Prices
Fiduciary Trust dept, registrar,
agency, custody
Consulting
Other Services Broker/dealer,
securities, insurance© 2018 - The Treasury Academy, Inc. - All Rights Reserved 12
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Other Banking Services
Investment Banking Services
Transaction Processing (Payment and Collection Services)
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Group Exercise
Working in your groups, answer the following questions:How are investment banks different
from commercial banks?What was the primary legislation that
that originally separated their functions?What’s happening today?
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Investment Banking and Brokerage FirmsInvestment Banks Underwriting Facilitating M&A Acting as Broker or Financial Advisor
Investment Banking Process Origination, Underwriting, Distribution Buy side vs. Sell side and Insider Trading
Institutional and Retail Brokerage Firms Sales of securities Discount vs. full-service Investment advisory/mgmt
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Credit Unions
Not-for-Profit financialcorporations in the U.S.
Chartered by either federal or state agencies
Originally only member/consumer oriented, but now expanded to include businesses
Provide services similar to othertypes of FIs
Generally offer higher investmentrates and lower borrowing rates
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Special Purpose Financial Institutions
Industrial Banks
Captive Finance
Companies
Factors
Insurance Companies
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Overview of Chapter 4 Topics
IntroductionPayment System OverviewCash PaymentsCheck-Based PaymentsLarge-Value Electronic
Funds Transfer(EFT)/Wire Transfer Systems
Small-Value Transfer or Automated Clearinghouse(ACH) Systems
Card-Based Payment Systems
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Essential Learning for CTP CandidatesTEXPO Conference 2019 – Session #SU02
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Payment Systems Overview
A way to transfer value, usually involving a financial institution – cash, checks, cards, electronic payment systems.
The combination of a payment instrument, a clearing channel and a settlement mechanism constitutes a payment system.
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A. Basic PaymentsPayment instrument, clearing channel and
settlement mechanism that transfers monetary value from one party to another.
The two parties are generally: Payor: Makes the payment
Payee or Beneficiary: Receives the payment
Most payment systemsare defined by theprimary instrumentused in the system
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ETM5: Chapter 4
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Essentials of Treasury Management, 5thEd. (ETM5) is published by the AFP, which holds the copyright and all rights to the related materials.
As a prep course for the CTP exam, significant portions of these lectures are based on materials from the Essentials text.
ETM5-Chapter 4:Payment Systems
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The Payment Process Payment instructions Information contained in an
electronic transfer or a check
Payment generation Where the instructions are entered into the
payment system itself
Clearing Process where FIs use the payment information
to transfer money between themselves
Settlement Final step in the process when the
beneficiary’s bank account is creditedand the payor’s bank account is charged
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Key Participants in the Payment Clearing Process
Paying Bank
Depository (Receiving) Bank
Correspondent Bank
Central Bank or
Monetary/Banking Authority
Bank Clearinghouse
Third-Party Clearing Entity
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The Settlement ProcessThe most common
methods include: Bilateral exchange
of value Correspondent
bank accounts Reserve accounts
at a central monetaryor banking authority
Key factor to consider is the timing of the clearing versus the settlement for payment
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Settlement VS. Finality
Settlement versus finalitySettlement is only final
when a payment is unconditional and irrevocable Often significant
delays in paper-based systems
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Types of Payments Cash Payments Currency and coin
Paper System Checks/drafts (debit-based)
Presentment & value dating
RTGS or Large-Value Electronic RTGS = Real Time Gross Settlement
ACH or Small-Value Electronic ACH = Automated Clearing House
Card-based Payments Debit, Credit, Stored-value, ATM,
EBT, Payroll Cards, etc.
Emerging Payments Mobile wallets, mobile payments,
P2P payments & Virtual Currencies
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What if cash is normal method of payment? Concerns include: payment security/integrity, fraud,
cost of managing payments
Global paper-based payment systems involve the clearing and settlement of checks or drafts within and between countries Cross-border check clearing is often a slow,
complicated and expensive process
Checks and drafts are typically collection items settled through correspondent banks
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Cash & Paper Payments
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Check Clearing Process
ClearingSystem
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Payor Payee
Drawee Bank
Bank ofFirst
Deposit
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Sample Business Check
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• MICR line at bottom of check enables automated check clearing• Auxiliary Field distinguishes a business check
– typically used for check #• RTN or ABA number uniquely identifies the paying bank• Bank of first deposit encodes the amount of the check• Today, the check is typically scanned into an IRD• Clearing of checks and IRDs is governed by Reg CC
Source: ETM5 - © AFP
Check ClearingRole of cash letters Impact of Check21Key event is presentmentOn-Us Check ClearingTransit Check Clearing Clearinghouse Correspondent bank Direct send or direct exchange Federal Reserve System (Fed)
Foreign Checks Image-Based Clearing Many checks now clear same day, with remainder
settling in one day Finality may be delayed due to returned items
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Other Paper-Based InstrumentsPayable Through Draft (PTD)Remotely Created Check (RCC)Money OrderTraveler’s CheckSight Draft/Time DraftCashier’s Check/Certified CheckGovernment Warrant
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Large Value Electronic Funds Transfer(EFT)/Wire Transfer Systems
Real-Time Gross Settlement(RTGS) System
Clearing House Interbank Payments System(CHIPS)
TARGET2 and the Single Euro Payments Area (SEPA)
Continuous Linked Settlement(CLS)
Society for Worldwide Interbank Financial Telecommunication(SWIFT)
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Sender/Payor Beneficiary/Payee
Sender’s/Payor’sBank
Beneficiary’s/Payee’s Bank
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Large Value Electronic Funds Transfer(EFT)/Wire Transfer Systems
Central Bank
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Essential Learning for CTP CandidatesTEXPO Conference 2019 – Session #SU02
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Clearing & Settlement of a Wire Transfer
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Society for Worldwide Interbank Financial Telecommunication
The global provider of secure financial messaging services
Enables banks/members to send authenticated electronic messages in standard formats
An information system, NOT a settlement system
Corporations may join either directly or through one of their banks
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Originator (Payor) Receiver (Payee)
Payor’s FI(ODFI)
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Credit Transaction in an ACH System
ACH Network
Payee’s FI(RDFI)
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Uses of ACH Credits
Payroll Direct DepositGovernment Transfer PaymentsDividend PaymentsCorporate-to-Corporate Payments
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Receiver (Payor) Originator (Payee)
Payor’s FI(RDFI)
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Debit Transaction in an ACH System
ACH Network
Payee’s FI(ODFI)
ACH DebitRequest
ACH DebitRequest
Uses of ACH Debits
Cash ConcentrationConsumer PaymentsDistributor PaymentsUtility PaymentsTax PaymentsCorporate-to-Corporate
PaymentsCheck Conversions
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Essential Learning for CTP CandidatesTEXPO Conference 2019 – Session #SU02
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Card-Based Payment SystemsCredit Cards Credit card transaction
participants Lifecycle of a credit card
transaction Pmt card industry data
security standards (PCI DSS) Merchant card fees Open Loop (Bank Issued) Closed Loop (Gas, Retailer) EMV Chip cards
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Credit Card Transaction Process
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1B/D. Authorization request
3/2A. Charges sent for clearing
1B/D. Authorization granted
Merchant Merchant Bank
Credit CardNetwork
ConsumerAccount
1. Credit card presented tomerchant for purchase
2C. Hold convertedto charge
2B/3. Funds remitted
1C. Hold placed on credit limit
Authorization = Clearing = Settlement =
Issuing Bank
© 2018 - The Treasury Academy, Inc. - All Rights ReservedSource: ETM5 - © AFP
Overview of Chapter 7 Topics
Introduction
Relationship Management
Vendor Selection
Bank Compensation
Practice
Assessing Service
Provider Risk
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Relationship Management
Number of Bank RelationshipsDocumentationPerformance Measurement and
Evaluation
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Bank Relationship Management
There are some unique considerations due to the type of documentation required, the method of monitoring risk, and the methods of compensation
Treasury is the focal point for bank relationship mgmt.
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FSP Relationship ManagementFactors that increase the mutual benefit
and profitability of the relationship are: Open and frequent two-way communication Regular and timely feedback Documentation of expectations of both parties
in agreements and legal contracts Fairly priced, efficient and effective financial
services and products Complete, candid and timely disclosure of
information by both parties Compliance with a current legal contract Use of service level agreements
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More Issues in Bank Relationship Management
Number of Bank Relationships Many companies have multiple
bank relationships, with one or two lead institutions
Costs related to relationship Optimize both internal and external
costs and number of banks Banks often have sophisticated
relationship management systems See lists of pricing factors in text
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Documentation in Bank Relationship ManagementDocumentation Service agreement or contract
Service level agreement (SLA)
Account resolution
Signature cards and account terms
Performance Measurement and
Evaluation Bank scorecard
Relationship review
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Soliciting Info from FSPs
Request for Information (RFI) Used to narrow the field and solicit ideas
Request for Proposal (RFP) Formal document used to obtain bids Should address all the relevant selection criteria Technical RFP will focus more on level and
quality of services rather than pricing Request for Quote (RFQ) Similar to RFP, but is best suited to products
and services that are essentially standardized and/or commoditized
The Selection Decision Weighted scores on all relevant factors should
be used in the selection decision Qualitative factors are sometimes more
important than quantitative Outside consultants may help in the process
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Essential Learning for CTP CandidatesTEXPO Conference 2019 – Session #SU02
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Other Issues in Bank Relationship Management
Bank Compensation Practices Use of account analysis
Fees Versus Balances Compensation
Comparing Costs Among Service Providers
Billing for Bank Services
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Account Analysis in the U.S. Commercial Banking System
A record of the services provided to a customer by the bank, along with detailed information on balances and credits earned for those balances, information typically includes: Services provided
Balances maintained
Volumes processed
Charges assessed
Earnings credit allowances
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Example of Account Analysis
Statement
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Account Analysis Terminology
Average Ledger Balance
Average Deposit Float
Average Collected Balance
Reserve Requirement
Available or Investable Balance
Service Charges
Earnings Credit Rate (ECR)
Earnings Credit Allowance
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Earnings Credit
Where:EC = Earnings creditCB = Average collected balancesAB = Average available balancesRR = Reserve requirementECR = Earnings credit rateD = Number of days in the month
DEC = CB × (1 RR) × ECR365
D= AB × ECR365
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Source: ETM5 - © AFP
Earnings CreditAssume the following scenario:
Average ledger balance $250,000Deposit float $ 30,000Reserve requirement 10%Earnings credit rate 1%Service charges for the month $ 1,000Days in month 30
Average Balance Calculations:Average ledger balance $250,000Less: Deposit float ($30,000)Equals: Average collected balance $220,000Less: Reserve Requirement ($22,000)Equals: Average available balance $198,000
DEC = CB × (1 RR) × ECR 365
30= $220,000 × (1 0.10) × 0.01365
= $162.76
DEC = AB × ECR 365
30= $198,000 × 0.01365
= $162.76
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Source: ETM5 - © AFP
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Collected/Available Balances Required
Where:CB = Average collected balances required to pay service chargesAB = Average available balances required to pay service chargesSC = Service chargesECR= Earnings credit rateRR = Reserve requirementD = Number of days in the month
SCCB =DECR × × (1 RR)
365SCAB =
DECR × 365
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Source: ETM5 - © AFP
Collected/Available Balances RequiredAssume the following scenario:
Monthly service charges $1,000Earnings credit rate 1%Reserve requirement 10%Days in month 30
SCCB =DECR × × (1 RR)
365
$1,000=
300.01 × × (1 0.10)365
=$1,000
= $1,351,716.68(0.0007398)
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Source: ETM5 - © AFP
Fee vs. Balance Compensation Why Compensate by Fees?
Short-term investments may offer a higher yield than the ECR
Ability to use excess balances to reduce short-term debt
Easier to budget & compare fees relative to other treasury costs
Why Compensate by Balances?
Allows the firm to take advantage of excess collected balances
May get more favorable pricing on loans and other services
Earnings credits are not taxable, while interest on S/T investments is
ECRs may exceed available S/T investment rates
Issues with Balances
ECRs are not always known until after applicable billing period
Excess earnings are unstable & not carried over period to period
Balances over FDIC insurance may be at risk in event of bank failure
Some Banks like Fees, Others like Balances
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Assessing Operational Risk of FSPs
Assessing Operational Risk
SSAE 16 Audit Reports
Assessing Financial Risk of Global Banks
Basel Accords
Assessing Financial Risk of US Banks
Uniform Bank Performance Report (UBPR)
Counterparty Risk
Sovereign & Political Risk
Confidential Info & Conflicts of Interest
Legal and Ethical Issues (FCPA)
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What did we learn from this lecture?
What topics do we want to learn more about?
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Session Wrap-upSession SU2: Banks, Payment Systems & Relationship Management
TEXPO Conference 2019Essential Learning for CTP Candidates
End of This Session
We will reconvene at 9:45 am Monday.
The topic will be:
More Key ConceptsWorking Capital Management
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