Treasury-Product Selection and Dealing Cases - Article

Introduction

Treasury questions often become difficult not because the individual products are complicated, but because several products appear capable of meeting the same requirement.

For example, a bank needing funds for one day may consider:

• Call Money;

• repo;

• TREPS; or

• another available liquidity source.

The correct choice depends on more than tenor.

Treasury must ask:

• Is the bank borrowing or investing?

• How long are funds required?

• Is collateral available?

• Is the requirement in INR or foreign currency?

• Is the objective liquidity, investment, hedging, or trading?

• How much credit, market, and refinancing risk is acceptable?

• Is the product permitted for the participant and purpose?

• Does the transaction remain within approved limits?

The current IIBF CAIIB BFM syllabus places Foreign Exchange Market Products, Money Market Products, Securities Market Products, and Domestic and Global Markets together under Module C – Treasury Products.

This makes integrated product-selection cases especially important.

Learning Objectives

After studying this topic, you should be able to:

• identify the treasury requirement before choosing a product;

• match funding tenor with the appropriate money-market instrument;

• distinguish secured from unsecured borrowing;

• select suitable products for temporary surplus liquidity;

• distinguish funding products from investment products;

• select appropriate foreign-exchange products according to exposure;

• identify unsuitable dealing decisions; and

• apply treasury controls and regulatory checks to integrated cases.

Start with the Treasury Requirement

Never begin a case by asking:

“Which product gives the highest return?”

Begin by asking:

“What problem must treasury solve?”

The requirement usually falls into one of these categories:

Liquidity Deficit

Treasury needs cash.

Possible products may include:

• Call Money;

• Notice Money;

• Term Money;

• Repo; or

• TREPS.

Temporary Surplus

Treasury has cash available for investment.

Possible alternatives may include:

• lending in eligible money markets;

• reverse repo/TREPS;

• Treasury Bills; or

• other permitted short-term instruments.

Longer Investment Requirement

Treasury wants securities for income, liquidity, SLR, or portfolio management.

Possible choices may include:

• Government securities;

• State Government Securities;

• corporate debt; or

• other permitted debt securities.

Foreign-Currency Requirement

Treasury needs to:

• obtain currency immediately;

• fix a future exchange rate;

• manage temporary foreign-currency liquidity; or

• hedge currency risk.

Possible products include:

• spot;

• forward;

• FX swap;

• currency swap; or

• options, subject to eligibility and applicable rules.

Treasury Product-Selection Framework

A useful CAIIB decision sequence is:

Purpose → Tenor → Security/Collateral → Currency → Risk → Regulation → Cost/Return

1. Purpose

Is treasury trying to:

• borrow;

• lend;

• invest;

• hedge;

• manage liquidity; or

• alter a market position?

2. Tenor

How long does the requirement exist?

This immediately eliminates many unsuitable products.

3. Collateral

Can eligible securities be provided?

If yes, secured funding such as repo may be available.

If no, treasury may have to consider an eligible unsecured market.

4. Currency

Is the requirement:

• INR;

• USD;

• EUR; or

• another currency?

Foreign-currency requirements can need different products from rupee liquidity.

5. Risk

Consider:

• market risk;

• liquidity risk;

• credit/counterparty risk;

• refinancing risk;

• operational risk; and

• settlement risk.

6. Regulatory Eligibility

The transaction must satisfy:

• RBI/FEMA requirements;

• participant eligibility;

• permitted purpose;

• internal policy;

• exposure limits; and

• authorised dealer/dealer powers.

7. Cost or Return

Only after suitability and risk have been considered should treasury compare:

• borrowing cost;

• investment yield;

• spread;

• liquidity value; and

• other economic benefits.

Quick Product-Selection Map

Under RBI's operative Call, Notice and Term Money framework, Call Money is overnight unsecured funding, Notice Money covers above overnight to 14 days, and Term Money exceeds 14 days up to one year.

Case 1: One-Day Liquidity Shortage

A bank expects a large inflow tomorrow but faces an overnight ₹400 crore liquidity deficit today.

It owns Government securities but is also eligible to access the unsecured money market.

Analysis

The requirement is:

• borrowing;

• INR liquidity;

• overnight; and

• temporary.

Two broad alternatives may be relevant:

Call Money – overnight unsecured borrowing.

Repo/TREPS – secured borrowing against eligible collateral.

Treasury should not automatically choose Call Money merely because the requirement is overnight.

It should compare:

• unsecured versus secured funding cost;

• collateral availability;

• available limits;

• market liquidity; and

• operational requirements.

CAIIB Learning

Tenor identifies possible products; it does not always identify the final product.

If the question specifically states overnight unsecured borrowing, Call Money is the direct answer.

If eligible collateral is provided and secured funding is required, repo/TREPS may be more appropriate.

Case 2: Seven-Day Funding Requirement

Treasury needs ₹250 crore for seven days. No collateral is to be provided.

A dealer proposes borrowing Call Money every night for seven consecutive nights because overnight rates are currently low.

Analysis

A seven-day unsecured requirement falls within Notice Money, because RBI defines Notice Money as unsecured borrowing or lending above overnight and up to 14 days.

Repeated Call Money borrowing creates rollover risk.

Overnight rates may rise, or funds may become difficult to obtain.

Better Reasoning

If treasury knows the requirement genuinely lasts seven days, a matching Notice Money borrowing may provide greater funding certainty, subject to pricing and limits.

CAIIB Learning

Do not choose the shortest-tenor product simply because today's rate is cheaper.

Consider refinancing risk.

Case 3: Surplus Funds Needed Again After Three Months

A bank has surplus funds today but expects a major loan disbursement approximately three months later.

A dealer proposes buying a ten-year Government bond because its yield is higher than the available 91-day T-Bill yield.

Analysis

The proposal focuses only on return.

The bank's investment horizon is approximately three months.

A long-duration security can expose treasury to:

• significant market-price risk;

• interest-rate risk; and

• possible loss if the security must be sold after three months.

A 91-day T-Bill or another suitable short-term product may match the liquidity horizon more closely.

RBI identifies T-Bills as short-term Central Government securities, with 91-day, 182-day and 364-day standard maturities.

CAIIB Learning

Match:

investment maturity with expected liquidity requirement.

Case 4: Corporate Needs Short-Term Market Funding

A financially eligible corporate needs funds for six months.

Its finance team proposes issuing a Certificate of Deposit because CD rates currently appear attractive.

Analysis

The product has been selected incorrectly.

A Certificate of Deposit is fundamentally a funding instrument issued by eligible banks under RBI's CD framework.

An eligible corporate may consider Commercial Paper, subject to the current RBI CP framework and other applicable conditions.

RBI's current Master Directions list the Commercial Paper and Non-Convertible Debentures of original or initial maturity up to one year Directions, 2024 separately from the Certificate of Deposit Directions.

CAIIB Learning

Always ask:

Who is the issuer?

A similar tenor does not make CP and CD interchangeable.

Case 5: Bank Wants Short-Term Market Funding

A bank needs funding for four months and management suggests issuing Commercial Paper.

Analysis

For a bank seeking negotiable short-term market funding, Certificate of Deposit is the directly relevant product under the applicable RBI framework.

CP and CD can have similar short-term characteristics, but their issuer frameworks differ.

CAIIB Learning

Remember:

Eligible corporate/institutional issuer → CP

Eligible bank → CD

Issuer identity can be more important than maturity when selecting the instrument.

Case 6: Importer Must Pay USD After Three Months

A bank customer has a genuine USD payment due after three months and wants certainty regarding the INR cost.

The customer is worried that USD may appreciate.

Analysis

The exposure is:

• foreign currency;

• future;

• known payment; and

• requires exchange-rate certainty.

A suitable foreign-exchange forward may lock the future rate, subject to current RBI/FEMA rules and customer eligibility.

RBI's current forex framework permits foreign-exchange forwards among eligible OTC derivative products, and FCY-INR derivative transactions are used for hedging exchange-rate risk under the applicable framework.

Why Spot Is Not Enough

A spot purchase would obtain USD now.

But the customer's actual payment is due after three months.

Buying the currency immediately could create an unnecessary funding or carrying requirement.

CAIIB Learning

Known future currency exposure + desire for rate certainty → think Forward.

Case 7: Temporary USD Requirement

A bank needs USD temporarily for one month but expects USD inflows after that period.

A dealer recommends permanently buying USD spot and maintaining the currency position.

Analysis

The requirement is temporary.

A foreign-exchange swap may be more closely aligned with the objective because the bank can exchange currencies for the near date and reverse the transaction for the far date, subject to applicable rules.

A permanent spot purchase can leave treasury with an unwanted currency position after the temporary need ends.

RBI's current foreign-exchange framework recognises FX swaps as permitted products for eligible users.

CAIIB Learning

Temporary currency liquidity → think FX Swap

rather than automatically creating a permanent open currency position.

Case 8: Customer Wants Protection but Also Upside

An eligible customer has a future USD payment.

The customer wants protection if USD rises but would also like to benefit if USD becomes cheaper.

A dealer recommends a forward because it has no option premium.

Analysis

The recommendation gives exchange-rate certainty but does not meet the customer's stated desire for flexibility.

An eligible option-based hedge may provide protection while preserving contractual upside, subject to:

• user classification;

• permitted product;

• suitability;

• premium cost; and

• current RBI/FEMA requirements.

RBI's current framework permits specified call/put options and related structures depending on whether the user is retail or non-retail.

CAIIB Learning

Do not select a hedge only because it appears cheaper initially.

Compare the customer's actual objective:

certainty versus protection with flexibility.

Case 9: Liquidity Required Against Government Securities

A bank owns high-quality eligible Government securities but needs temporary rupee liquidity.

The dealer proposes selling the securities outright.

Analysis

An outright sale will permanently reduce the securities holding unless treasury later buys the securities again.

If the requirement is only temporary, repo/TREPS may permit treasury to obtain secured funds against eligible securities while preserving the economic purpose of holding them.

RBI distinguishes market repo from outright securities sales and describes repo as collateralised borrowing against securities with an agreed reversal.

CAIIB Learning

Ask:

Does treasury need cash permanently or only temporarily?

Temporary cash need against securities often points toward repo, not outright sale.

Case 10: Dealer Chooses Highest-Yield Corporate Bond

Treasury has funds available for investment.

Three instruments are available:

• Central Government security;

• State Government Security;

• corporate bond.

The corporate bond offers the highest yield, so the dealer selects it without further analysis.

Analysis

This is incomplete treasury reasoning.

Higher corporate yield may compensate investors for additional:

• credit risk;

• liquidity risk;

• spread risk; and

• concentration risk.

Government securities have a different credit-risk profile from corporate debt. RBI describes domestic Government securities as carrying negligible conventional credit/default risk while remaining exposed to market risk.

Treasury should compare:

• credit quality;

• yield;

• maturity;

• duration;

• liquidity;

• regulatory treatment;

• concentration;

• collateral usefulness; and

• portfolio objectives.

CAIIB Learning

Yield should be evaluated after risk, not instead of risk.

Case 11: Profitable Deal Exceeds Dealer Limit

A treasury dealer identifies an attractive Government-bond opportunity.

The authorised dealer limit permits a ₹100 crore position.

The dealer takes ₹140 crore because market conditions are favourable.

The position produces a substantial profit.

Analysis

The transaction remains a limit breach.

Profit does not retrospectively convert an unauthorised exposure into an authorised one.

The relevant control process should:

• detect the breach;

• report it;

• escalate it according to policy; and

• examine why the control failed.

CAIIB Learning

Good market view does not override delegated authority.

Treasury dealing combines product knowledge with control discipline.

Case 12: Dealer Chooses Product from Expected Rate Direction Alone

Treasury expects interest rates to fall and purchases a long-duration bond.

However, the bank knows that it may need the funds shortly.

Analysis

The rate view may ultimately be correct, but the product choice can still be unsuitable.

A long-duration bond can show significant price volatility.

If treasury is forced to sell before its expected rate movement occurs, the position may generate a loss or create liquidity pressure.

CAIIB Learning

Treasury selection should combine:

market view + liquidity horizon + risk capacity

not market view alone.

Product Selection Is Not Product Substitution

Two products may appear economically similar but still be different.

Examples:

Call Money ≠ Overnight Repo

Both may provide overnight funds, but Call Money is unsecured whereas repo is secured.

CP ≠ CD

Both are short-term money-market instruments, but issuers differ.

Spot ≠ Forward

Spot meets a current currency requirement; forward manages a future one.

FX Swap ≠ Currency Swap

FX swaps commonly manage shorter-term currency liquidity, whereas currency swaps can address longer-term currency and funding exposures.

G-Sec ≠ Corporate Bond

Both are debt securities, but their credit-risk characteristics differ.

CAIIB case studies often test these distinctions indirectly.

Dealing Controls Before Execution

Even when the correct product has been identified, the dealer should not execute automatically.

Important checks include:

• product authorisation;

• dealer authority;

• counterparty eligibility;

• counterparty limit;

• position limit;

• stop-loss or other applicable limits;

• available collateral;

• maturity limits;

• documentation;

• underlying exposure where required;

• regulatory purpose;

• pricing; and

• settlement capability.

A technically suitable product can still become an unauthorised transaction if these conditions are ignored.

Front, Mid and Back Office Roles

Front Office

Identifies market opportunity and executes authorised trades.

Mid Office

Independently monitors:

• exposures;

• risk;

• limits;

• valuations; and

• exceptions.

Back Office

Handles:

• confirmation;

• settlement;

• accounting;

• documentation; and

• reconciliation.

Product selection therefore does not end when the dealer presses the execution button.

A complete treasury case includes execution + risk control + settlement.

CAIIB Exam Focus

Identify the treasury objective first.

Do not start with expected return.

Tenor is a major product-selection factor.

Overnight unsecured → Call Money.

Above overnight to 14 days unsecured → Notice Money.

Above 14 days to one year unsecured → Term Money.

Collateral changes the decision.

Secured short-term borrowing may point toward Repo/TREPS rather than unsecured money markets.

Issuer matters.

Eligible non-bank/institutional short-term issuer → CP.

Eligible bank funding → CD.

Liquidity horizon matters for investment.

Do not invest short-term surplus automatically in long-duration securities merely for higher yield.

Foreign-exchange product must match the exposure.

Current requirement → Spot.

Known future rate requirement → Forward.

Temporary currency liquidity → FX Swap.

Flexibility/protection → eligible Option structure.

FCY-INR derivatives are governed by current RBI/FEMA requirements and permitted-purpose rules.

Highest return is not automatically best.

Consider market, credit, liquidity, refinancing and operational risks.

Dealer limits remain binding even when the transaction ultimately earns profit.

Product suitability and dealing control are separate requirements.

Both must be satisfied.

Common Exam Traps

Trap 1: Overnight Requirement Always Means Call Money

Incorrect.

If secured funding against eligible collateral is intended, repo/TREPS may be relevant.

Trap 2: Lowest Current Rate Always Means Lowest Funding Risk

Incorrect.

Repeated short-term borrowing can create refinancing risk.

Trap 3: Highest-Yield Investment Is Always Best

Incorrect.

Treasury must consider maturity, liquidity, credit and market risk.

Trap 4: Corporate Can Issue CD If Its Credit Rating Is Strong

Incorrect.

Issuer eligibility, not merely credit quality, determines whether CD is available.

Trap 5: Spot Is the Best Hedge for Every Future FX Exposure

Incorrect.

A future exposure may be more appropriately managed through a permitted forward or derivative structure.

Trap 6: FX Swap and Spot Have the Same Purpose

Incorrect.

Spot makes a current currency exchange. FX swap combines near- and far-leg transactions and can manage temporary currency liquidity.

Trap 7: Repo and Outright Sale Are Equivalent

Incorrect.

Repo contains an agreed reversal and economically represents secured funding.

Trap 8: Government Security Has No Risk

Incorrect.

It can still carry substantial interest-rate and market-price risk.

Trap 9: Profitable Limit Breach Can Be Regularised Merely Because No Loss Occurred

Incorrect.

Authorisation must exist when the exposure is taken.

Trap 10: Correct Product Means Correct Deal

Incorrect.

A deal can use the right product but still violate:

• limits;

• documentation;

• regulatory requirements;

• segregation of duties; or

• settlement controls.

Trap 11: Longer-Term Funding Can Always Be Replaced by Daily Call Borrowing

Technically repeated borrowing may be possible, but it creates rollover and rate uncertainty. Product tenor should be matched to the funding need.

Trap 12: Treasury Should Choose Products Based Only on Market Forecast

Incorrect.

A market view must fit the bank's liquidity horizon, risk appetite, limits, and balance-sheet requirements.

Memory Technique

Use P-T-C-R before choosing any treasury product:

• P – Purpose

• T – Tenor

• C – Collateral/Currency

• R – Risk and Regulation

Then ask:

Borrow? Lend? Invest? Hedge?

Only after these questions should treasury compare price, cost, or yield.

For CAIIB dealing cases, remember the final rule:

Right Need → Right Product → Right Limit → Right Control