Year: 2020

Structured Financial Messaging System (SFMS) is a secure messaging standard developed to serve as a platform for intra-bank and inter-bank applications. It is an Indian standard similar to SWIFT (Society for World-wide Interbank Financial Telecommunications) which is the international messaging system used for financial messaging globally.

Payment and settlement systems play a vital role in the efficient functioning of the financial system. IDRBT Hyderabad developed and launched the Structured Financial Messaging System on December 14, 2001.  It is messaging system that can be used for speedy funds transfer and for all purposes for secure communication within the bank (inter-bank) and between banks (intra-bank). SFMS is an Indian standard similar to SWIFT (Society for World-wide Interbank Financial Telecommunications) an international messaging system used globally for financial messaging. SFMS is an EDI (Electronic Data Intervention) for banks and it uses INFINET as the communication medium. This system is connected to banks gateways with HUB located at IDRBT, Hyderabad. Banks secure intra-bank transactions messages by means of standard encryption and authentication services conforming to ISO standards. SFMS messages from a bank branch to another bank branch are delivered via Bank Gateways and the Hub. The Hub and the bank gateway are connected via VSAT communication links or dedicated leased lines or dial up lines depending on proximity and the volume of traffic with Bank Servers. The bank servers are connected to the branches in the offline mode.

The inter-bank messaging is useful for applications like Electronic Funds Transfer (EFT), Real Time Gross settlement System (RTGS), Delivery Versus Payments (DVP), Centralized Funds Management System (CFMS) etc.

Security aspect of SFMS

Authentication, Confidentiality, Non-Repudiation, Integrity are the main security aspect of SFMS. Security is taken care by using Public Key Infrastructure (PKI).  Under Public Key Infrastructure each entity has a public key and a private key. Messages sent through SFMS are digitally signed.

Advantages of SFMS

SFMS reduces transaction time, cost and make trade finance operations more efficient.  The electronic handling of communications reduces considerable reduce risk of fraudulent transactions. SFMS facilitates inter-bank and intra-bank transactions in cash and securities, in treasury operations, forex transactions, Letters of Credits and in negotiation of bills drawn against the Letters of Credit. With SFMS banks would be able to avoid paper based transactions.

SFMS can be used for secure communication within the bank and between banks. The SFMS was launched on December 14, 2001 at IDRBT. It allows the definition of message structures, message formats, and authorization of the same for usage by the financial community.[citation needed] SFMS has a number of features and it is a modularized and web enabled software, with a flexible architecture facilitating centralized or distributed deployment. The access control is through Smart Card based user access and messages are secured by means of standard encryption and authentication services conforming to ISO standards.

The intra-bank part of SFMS is used by banks to take full advantage of the secure messaging facility it provides. The inter-bank messaging part is used by applications like electronic funds transfer (EFT), real time gross settlement systems (RTGS), delivery versus payments (DVP), centralized funds management systems (CFMS) and others. The SFMS provides application program interfaces (APIs), which can be used to integrate existing and future applications with the SFMS. Several banks have integrated it with their core or centralized banking software.

Centralised Funds Management System:

 The centralised funds management system (CFMS) was set up by the Reserve Bank of India. It is operated and maintained by RBI. There are two components;

• The Centralised Funds Enquiry System (CFES)
• Centralised Funds Transfer System (CFTS)

Centralised funds management system provides a centralised view of balance positions of the accounts maintained by banks with RBI at various locations. It enables banks to operate and transfer funds from one account to another account maintained with different Deposit Accounts Department (DADs).

Only those banks who maintain current account with the Deposit Accounts Department (DAD) of RBI and are the members of INFINET can become the member of this system. Each member is required to install on its own cost and maintain in good order computer/s, servers, telecommunication equipment and other electronic equipment as required / prescribed for the purpose. All funds transfer messages received by the Central system for debiting of any current account are digitally signed. Each message is identified by a unique identifier for tracking at a future point of time.

On the successful completion of a transaction, the originator of the message is informed by the Bank Level Funds Management System (BLFMS) / Local Banks Funds Management System (LBFMS). The CFMS normally operates on all days on which at least two Deposit Accounts Departments of Reserve Bank of India function.

The Centralised Funds Transfer System (CFTS) provides services through:

• Apex Level Server (ALS) built in the main frame computer maintained at Mumbai.
• Local Funds Management System (LFMS): The facility is provided by those Regional Offices of RBI which have the Deposit Accounts Department (DAD).
• Bank Level Funds Management System (BLFMS): RBI provides the software to CFMS members for the use of Treasury Department / Central Accounts Department.
• Local Banks Funds Management System (LBFMS): RBI provides this facility to the CFMS members for accessing local DAD.

The Negotiated Dealing System, or NDS, is an electronic trading platform operated by the Reserve Bank of India to facilitate the issuing and exchange of government securities and other types of money market instruments. The goal was to reduce inefficiencies stemming from telephone orders and manual paperwork, while increasing transparency for all market participants.

Understanding Negotiated Dealing System (NDS)

The Negotiated Dealing System was introduced in February 2002 to help the Reserve Bank of India, or RBI, enhance the dealings of fixed income investments. Prior to the NDS, the country’s government securities market was primarily telephone-based, which meant that buyers and sellers had to place trades over the phone, submit physical Subsidiary General Ledger transfer forms, and issue checks for the settlement of funds to the Reserve Bank of India. These slow and inefficient procedures led to the development and implementation of the NDS.

In August 2005, the RBI introduced the Negotiated Dealing System – Order Matching system, or NDS-OM, an electronic, screen-based, anonymous, order-driven trading system for dealing in government securities. The system is designed to bring transparency to secondary market transactions, while enabling members to place bids and offers directly on the NDS-OM screen.

There are two types of NDS-OM members, including:

Direct Members: Direct members have current accounts with the RBI and can directly settle trades on NDS-OM.

Indirect Members: Indirect members do not have current accounts with the RBI and must settle through NDS-OM members that have direct accounts. Most foreign institutional investors have indirect access, while resident entities may have direct access.

Many other countries have similar electronic systems in place for managing government securities, money market accounts, and related securities to increase transparency and lower costs.

Functions of Negotiated Dealing System

The NDS facilitates members to submit bids for government securities electronically. These bids for the purchase of government securities can be made when the RBI conduct auctions for them. The auction process take place in the primary market using the NDS platform. Participants are primary dealers, commercial banks etc.

In the secondary market (market for trading the already issued G-Secs), the NDS facilitates the settlement of transactions in G-Secs. Here, it provides an interface to the Public Debt Office, RBI, Mumbai for the settlement of transactions conducted in the secondary market. Secondary market trading in Government securities mostly happen over-the-counter (OTC).

The Negotiated Dealing System (NDS) has thus two modules one for the primary market and the other for the secondary market.

Membership in NDS

Membership to the NDS is restricted to members holding SGL and/or Current Account with the RBI, Mumbai.

NDS-OM

Secondary market trading is vital to give liquidity to Government Securities. For enhancing secondary market activity in G-Sec segment, the RBI launched Negotiated Dealing System-Order Matching system (NDS-OM) in 2005. The NDS-OM is a screen based electronic anonymous order matching system for secondary market trading in Government securities.

This is an order driven electronic system, where the participants can trade anonymously by placing their orders on the system or accepting the orders already placed by other participants. The Clearing Corporation of India on behalf of the RBI operates the NDS-OM.

The NDS-OM brings transparency in secondary market transactions in Government securities as there is anonymity about the traders who offer trading. Members can place bids (buy orders) and offers (sell orders) directly on the NDS-OM screen. Being order driven, the system matches bids and offers on price/ time priority.

Negotiated Dealing System Modules

The Negotiated Dealing System consists of two modules, which are designed for different types of member institutions.

These modules include:

• Primary Market Module: The RBI uses the primary auction platform for the auction of federal and state securities, as well as treasury bills. The platform enables participants to electronically submit their bids in primary auctions and receive allotment reports.
• Secondary Market Module: Over-the-counter trading often happens over the phone, but everyone is required to report these trades using the NDS secondary market module. The data then flows to the Clearing Corporation of India Ltd. for clearing and settlement, which avoids the need for paper-based settlement processes.

Securities Settlement Systems

System which permits the transfer of securities: either free of payment, such as free delivery (for example in the case of pledge), or against payment.

Settlement of securities occurs on securities deposit accounts held with a Central Securities Depository (private CSDs or a central bank acting as a CSD) or with a central bank (safe custody operational accounts).

In the latter case, the central bank acts as the intermediate custodian of the securities. The final custodian is normally a CSD.

Settlement of cash occurs in an interbank funds transfer system (IFTS), through a settlement agent.

As an essential part of a nation’s financial sector infrastructure, securities clearance, and settlement systems must be closely integrated with national payment systems, so that safety, soundness, certainty, and efficiency can be achieved at a cost acceptable to all participants. Central banks have paid considerable attention to payment systems, but securities clearance, and settlement systems have only recently been subjected to rigorous assessment. The Western Hemisphere Payments and Securities Clearance and Settlement Initiative (WHI), led by the World Bank, and in cooperation with the Centro de Estudios Monetarios Latinoamericanos (CEMLA), gave the authors a unique opportunity to observe how various countries in Latin America, and the Caribbean undertake securities clearance, and settlement. To do so, the authors developed a practical, and implementable assessment methodology, covering key issues that affect the quality of such systems. In this paper they discuss the objectives, scope, and content of a typical securities system, identify the elements that influence the system’s quality, and show how their assessment methodology works. They focus on the development of core principles, and minimum standards for integrated systems of payments, and securities clearance and settlement.

An electronic check, or e-check, is a form of payment made via the Internet, or another data network, designed to perform the same function as a conventional paper check. Since the check is in an electronic format, it can be processed in fewer steps.

Additionally, it has more security features than standard paper checks including authentication, public key cryptography, digital signatures, and encryption, among others.

Advantages

Electronic checks, also known as e-checks provide convenient and simple ways for your customers to make payments online, and your company to reap the benefits. E-checks implement a way for customers to electronically process their transactions online without forcing them to pay with a debit or credit card. So what are the advantages against other forms of payment?

Save Money: E-checks are a more efficient way for your business to save money. Companies that process e-checks electronically instead of processing paper checks significantly reduce their costs when it comes to converting these transactions.

Instant: Paper check processing involves more work, and takes more time. When using paper checks, your business has to process their data in bundles, whether that’s daily, weekly or monthly, whereas electronic checks allow for instant processing.

Global Acceptance: E-checks open new avenues for companies, letting them engage in different markets without limiting their business opportunities. Because of easy online accessibility, any global bank or type of currency can be accepted with e-checks.

Security: Electronic checks use the same system as direct payments and deposits, which relay the same security and comfort factors that all customers want, maintaining the satisfaction component.

Less Error: E-checks reduce the amount of errors because customers are authorized to input their specifics into the system, thus eliminating inaccuracy.

Electronic Checking Benefits:

Payhub Payments’ electronic checking process is fast, reliable, efficient and secure for all your transactions. We save you time and effort by using our system because we convert paper checks into electronic at the point-of-sale and automatically deposit the funds into your banking account. Let us reduce your paperwork and runs to the bank, we’re here to help.

How an Electronic Check Works

An electronic check is part of the larger electronic banking field and part of a subset of transactions referred to as electronic fund transfers (EFTs). This includes not only electronic checks but also other computerized banking functions such as ATM withdrawals and deposits, debit card transactions and remote check depositing features. The transactions require the use of various computer and networking technologies to gain access to the relevant account data to perform the requested actions.

Electronic checks were developed in response to the transactions that arose in the world of electronic commerce. Electronic checks can be used to make a payment for any transaction that a paper check can cover, and are governed by the same laws that apply to paper checks. This was the first form of Internet-based payment used by the U.S. Treasury for making large online payments.

The Benefits of Electronic Checks

Generally, the costs associated with issuing an electronic check are notably lower than those associated with paper checks. Not only is there no requirement for a physical paper check, which costs money to produce, but also electronic checks do not require physical postage in cases of payments being made to entities outside the direct reach of the entity issuing the funds.

4 main steps to processing an electronic check:

1. Request Authorization: The business needs to gain authorization from the customer to make the transaction. This can be done via an online payment form, signed order form, or phone conversation.
2. Payment Set Up: After authorization is complete, the business inputs the payment information into the online payment processing software. If it is a recurring payment, this information also includes the details of the recurring schedule.
3. Finalize and Submit: Once payment information is properly entered into the software, the business clicks “Save” or “Submit” and starts the ACH transaction process.
4. Payment Confirmation and Funds Deposited: The payment is automatically withdrawn from the customer’s bank account, the online software sends a payment receipt to the customer, and the payment itself is deposited into the business’s bank account. Funds are typically deposited into the merchant’s bank account three to five business days after the ACH transaction is initiated.

• The Rangarajan Committee recommended that extending outreach on a scale envisaged under NRFIP would be possible only by leveraging technology to open up channels beyond branch network.
• Adoption of appropriate technology would enable the branches to go where the customer is present instead of the other way round. This, however, is in addition to extending traditional mode of banking by targeted branch expansion in identified districts.
• The Business Facilitator/Business Correspondent (BF/BC) models riding on appropriate technology can deliver this outreach and should form the core of the strategy for extending financial inclusion.
• The Committee has made some recommendations for relaxation of norms for expanding the coverage of BF/BC. Ultimately, banks should endeavour to have a BC touch point in each of the 6, 00,000 villages in the country.

FI as a policy initiative entered the banking lexicon only after the recommendations of the Rangarajan Committee in 2008. It began to attract the attention of stakeholders when banks realised the significance of connecting with more people for business growth. The span of financial services included provision of basic savings accounts, and access to adequate credit at affordable costs to vulnerable groups such as the excluded sections of the society and low-income households. The experience of microfinance units in India and abroad shows that vulnerable groups who pay usurious interest rates to local moneylenders, can also be worthy borrowers of banks. One of the broader objectives of FI is to pull the poor community out of the net of exploitative moneylenders. But despite such emphasis, the penetration of banking services was initially mostly confined to urban areas and major cities, after which they started spreading to the hinterland. FI thus became an integral part of the business domain of banks, with RBI advising all public and private banks to submit a board-approved, three-year FI plan (FIP) starting from April 2010. These plans broadly included self-set targets in terms of bricks-and-mortar branches in rural areas, clearly indicating coverage of unbanked villages with population above 2,000 and those with population below 2,000; deployment of Business Correspondents¹ (BCs) and use of electronic/kiosk modes for provision of financial services; opening of no-frills accounts; and so on. For the dispensation of credit, Kisan Credit Cards (KCC), General Credit Cards (GCC), and other specific products designed to cater to the financially excluded segments, were introduced. Such accelerated microcredit was part of priority sector lending schemes of banks. Further, banks were advised to integrate FIPs with their business plans and to include the criteria on FI as a parameter in the performance evaluation metrics of their staff.

Among associated developments, RuPay – an Indian domestic debit card – was introduced on 26 March 2012 by the National Payments Corporation of India (NPCI). It has been a game changer in creating better digital infrastructure and enabled faster penetration of debit card culture.

The progress of financial inclusion

Faster implementation of FIPs is seen after 2010-11. Commercial banks opened new rural branches, increased coverage of villages, set up ATMs and digital kiosks, deployed BCs, opened no-frills accounts, and provided credit through KCCs and GCCs. The introduction of core banking technology and proliferation of alternate delivery channels aided the process of inclusion on a larger scale. The statistics on key banking network give a sense of the pace of progress of banking outreach as part of FI.

Progress of financial inclusion at a glance

Banking software is enterprise software that is used by the banking industry to provide and manage the financial products they provide. Within retail banks, banking software typically refers to core banking software and all its interfaces that allows them to connect to other modular software and to the interbank networks. Within investment banking, banking software typically refer to the trading software used to access capital markets.

Retail banks

Commercial or retail banks use what is known as core banking software which record and manage the transactions made by the banks’ customers to their accounts. For example, it allows a customer to go to any branch of the bank and do its banking from there. In essence, it frees the customer from their home branch and enables them to do banking anywhere. Further, the bank’s databases can be connected to other channels such as ATMs, Internet Banking, payment networks and SMS based banking.

Banking software is used by millions of users across hundreds or thousands of branches. This means that the software must be managed on many machines even in a small bank. The core banking system is a major investment for a retail banks and maintaining and managing the system can represent a large part of the cost of running a bank.

Investment Banks

Investment banks use software to manage their trading desks and their clients accountants. These systems often connect to financial markets such as securities exchanges or third party providers of such as Financial data vendors.

For example, a company such as Bloomberg is financial software, news, and data company that offers financial software tools such as analytics and equity trading platform to financial companies around the world through the Bloomberg Terminal. Another example is Reuters whose products specialize in financial information management, purchase order management, positions and risks, and financial instrument sales.

These types of companies provides solutions for control and overall productivity for corporate treasury, improved workflow, central banking, bank treasury, Forex trading and global back-office operations. Examples of these back-office tasks include IT departments that keep the phones and computers running (operations architecture), accounting, and human resources (customer relations) and sales and marketing where they come in contact with their customers.

With the help of these software companies, there is efficiency and proper management of transactions both in the front and back offices of the banking firms and other financial institutions.

Banking Software Features & Capabilities

Features common to core banking software are:

• Real-time account & transaction processing
• Financial product builder
• Customizable interface and product workflow
• Customer self-service portal & management
• Online payment processing & bill pay
• Source capture & remote deposit
• Customer interaction (e.g. live chat)
• Account-holder transaction history tracking
• Account-holder data & document store
• Multi-currency funds management
• Financial instrument workflow
• Accounting workflow
• Mobile app development

Banking Software Integrations & Ancillary Products

Because of compliance rules peculiar to banking, banking software vendors offer suites of ancillary products. These may cover the business needs for specific kinds of financial institutions. Some modules and add-ons from popular vendors cover:

• Fraud risk management
• Financial crime mitigation
• Line of credit & credit background check
• Loan origination & servicing
• Corporate supply chain financing
• Customer wealth management
• Investor servicing & accounting
• Enterprise content management
• Marketing resource management and automation
• Banking investment & operational intelligence
• Support for Islamic banks

Pricing Information

Because banks vary widely in size and specialty costs of banking software vary in the extreme. Few banks meet their needs with simple subscription-based offerings. Banking software tends towards very high modularity and pricing depends on the breadth of modules and services required, as well as licenses and installations.

The back office is the portion of a company made up of administration and support personnel who are not client-facing. Back-office functions include settlements, clearances, record maintenance, regulatory compliance, accounting, and IT services. For example, a financial services firm is segmented into three parts: the front office (e.g., sales, marketing, and customer support), the middle office (risk management), and the back office (administrative and support services).

How the Back Office Works?

The back office can be thought of as the part of a company responsible for providing all business functions related to its operations. Despite their seemingly invisible presence, back-office personnel provide essential functions to the business. The back office is an essential part of any firm and associated job titles are often classified under “Operations.” Their roles enable and equip front-office personnel to perform their client-facing duties. The back office is sometimes used to describe all jobs that do not directly generate revenue.

 The term “back office” originated when early companies designed their offices so that the front portion contained the associates who interact with customers, and the back portion of the office contained associates who have no interaction with customers, such as accounting clerks.

Example of Back-Office

Today, most back-office positions are located away from the company headquarters. Many are located in cities where commercial leases are inexpensive, labor costs are low, and an adequate labor pool is available.

Alternatively, many companies have chosen to outsource and/or offshore back-office roles to further reduce costs. Technology has afforded many companies the opportunity to allow remote-work arrangements, in which associates work from home. Benefits include rent savings and increased productivity. Additionally, remotely employing back-office staff allows companies to access talent in various areas and attract a diverse pool of applicants.

Some firms offer incentives to employees and applicants who accept remote positions. For example, a financial services firm that requires high-level accounting could offer a $500-per-month housing subsidy to experienced CPAs to work from home. If it costs $1,000 per month to secure office space per individual, a housing subsidy of $500 per month would result in an overall savings of $6,000 per year. The cost savings can be significant when employing many remote professionals.

Though this saves money for the company, the employee may also have to accept a lower salary if they are moving from a Front Office position in a central location to a more remote location or even a work-at-home arrangement.

Although back-office staff members do not interact with customers, they tend to actively interact with front-office staff. For example, a manufacturing equipment salesperson may enlist the help of back-office staff to provide accurate information on inventory and pricing structures. Real estate marketing professionals frequently interact with sales agents to create attractive and relevant marketing materials, and IT professionals regularly interact with all divisions within the company to ensure proper functioning systems.

Many business school students from non-target colleges and universities see Back Office work as a way to gain experience within a firm and potentially network up into the Front Office roles. Though it varies from one firm to another, the work in the Back Office roles is significantly different from the Front Office and, with the exception of corporate credit risk roles, may not provide a Front Office hopeful with the needed experience to make such a transition.

• The back office is the portion of a company made up of administration and support personnel, who are not client-facing.
• Back-office functions include settlements, clearances, record maintenance, regulatory compliance, accounting, and IT services.
• The term “back office” originated when early companies designed their offices so that the front portion contained the associates who interact with customers, and the back portion of the office contained associates who have no interaction with customers, such as accounting clerks.

Treasury Management can be understood as the planning, organizing and controlling holding, funds and working capital of the enterprise in order to make the best possible use of the funds, maintain firm’s liquidity, reduce the overall cost of funds, and mitigate operational and financial risk.

It covers working capital management, currency management, corporate finance and financial risk management.

Simply put, treasury management is the management of all financial affairs of the business such as raising funds for the business from various sources, currency management, cash flows and various strategies and procedures of corporate finance.

Functions of Treasury Management

Treasury Management aims to ensure that adequate cash is available with the organization, during the outflow of funds. Further, it also contributes to optimum utilization of funds and makes sure that there are no unutilized funds kept in the firm for a very long term. The functions of treasury management are discussed below:

1. Cash Management

Treasury Management includes cash management, and so it ensures that there are an effective collection and payment system in the organization.

2. Liquidity Management

An optimum level of liquidity should be maintained in the business, for the better and smooth functioning of the business, i.e. the company must be able to fulfil its financial obligation when they become due for payment, such as payment to suppliers, employees, creditors, etc. And to do so, cash flow analysis and working capital management act as the most important tool for treasury management, to achieve its strategic goals.

3. Availability of funds in adequate quantity and at the right time

The treasury manager has to ensure that the funds are available with the organization in sufficient quantity, i.e. neither be more nor less, to fulfil the day to day cash requirement for the smooth functioning of the enterprise. Further, timely availability of funds also smoothens the firm’s operations, resulting in the certainty as to the amount of inflows available with the company at a particular point in time.

4. Deployment of funds in adequate quantity and at the right time

The deployment of funds has to be done in right quantity such as the acquisition of fixed assets, purchase of raw material, payment of expenses like rent, salary, bills, interest and so forth. For this purpose, the treasury manager has to keep an eye on all receipts of funds and the application thereof. Further, the funds must be available at the time of need, which may be different for different firms and also for the purpose for which they are used. The period may differ from a week to month when it comes to acquisition of the fixed assets and two to three days in case of working capital requirement.

5. Optimum utilization of resources

Treasury Management also aims at ensuring the effective utilization of the firm’s resources, to reduce the operating costs and also prevent liquidity shortage in the coming time.

6. Risk Management

One of the primary objectives of the treasury management is to manage financial risk to allow the enterprise to meet its financial obligations, as they fall due and also ensure predictable performance of the business. It tends to identify, measure, analyse and manage risk in order to mitigate losses, that has the potential to affect the company’s profitability and growth in any way. Hence, treasury management is accountable for all types of risk that can influence the business entity.

Further, the treasury management intends to maximise return on the funds available with the company, by making such investments which have higher return and low risk.

Advantages of Centralized Treasury Management

Under the centralized cash management, the treasury department is setup in head office which will look after the management of funds of multi-locational centers of the organization.

The important advantages of centralized treasury department are as follows:

(a) It avoids a mix of cash surpluses and overdrafts at different centers of the firm.

(b) The bulk cashflows allows the company to negotiate with its bankers for lower rate of interest and timely availability of funds.

(c) The surplus cash can be efficiently invested in short-term and marketable securities to earn interest on it.

(d) Borrowings in bulk might necessitate to raise funds from international money and capital markets at cheaper rates of interest.

(e) Foreign currency risk can be efficiently managed by adopting hedging techniques.

(f) It will use the services of experts with specialized knowledge of dealing in forward contracts, futures, options, euro currency markets, swaps etc.

(g) The balance of funds to be maintained for entire organization, on precautionary measures.

(h) Efficient utilization of funds is ensured by centralized funds management.

Advantages of Decentralized Treasury Management:

The decentralized treasury management is advocated for the following reasons:

(i) Sources of finance can be diversified and can match local assets.

(ii) Greater autonomy can be given to subsidiaries and divisions because of the closer relation­ships they will have with the decentralized cash management function.

(iii) The decentralized treasury function may be able to be more responsive to the needs of individual operating units.

(iv) Since cash balances will not be aggregated at group level, there will be more limited opportunities to invest such balances on a short-term basis.

Cash Management Vs. Treasury Management

The cash management is very closely linked with the treasury operations of any business organization.

The treasury operations of any organization can broadly be divided into two parts as follows:

(a) Short-term investment of surplus funds in the money market to maximize the benefit arising out of availability of surplus funds.

(b) Short-term borrowings of funds from banks or market for normal working capital require­ments and for temporary shortage of funds at the lowest possible cost to the company.

The broad objective of cash management with regards to the treasury operations of the organizations is to maximize the availability of funds at any point of time and at the desired place for investment purposes and/or also to minimize the deficit or shortfall in the requirement of funds at any point of time, i.e., what cash management seeks to do for treasury operations is to convert its sales, whether on cash or credit into ‘available cash’ as fast as possible.

The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all aspects of buying, selling and exchanging currencies at current or determined prices. In terms of trading volume, it is by far the largest market in the world, followed by the credit market.

The main participants in this market are the larger international banks. Financial centers around the world function as anchors of trading between a wide range of multiple types of buyers and sellers around the clock, with the exception of weekends. Since currencies are always traded in pairs, the foreign exchange market does not set a currency’s absolute value but rather determines its relative value by setting the market price of one currency if paid for with another. Ex: US$1 is worth X CAD, or CHF, or JPY, etc.

The foreign exchange market works through financial institutions and operates on several levels. Behind the scenes, banks turn to a smaller number of financial firms known as “dealers“, who are involved in large quantities of foreign exchange trading. Most foreign exchange dealers are banks, so this behind-the-scenes market is sometimes called the “interbank market” (although a few insurance companies and other kinds of financial firms are involved). Trades between foreign exchange dealers can be very large, involving hundreds of millions of dollars. Because of the sovereignty issue when involving two currencies, Forex has little (if any) supervisory entity regulating its actions.

The foreign exchange market assists international trade and investments by enabling currency conversion. For example, it permits a business in the United States to import goods from European Union member states, especially Eurozone members, and pay Euros, even though its income is in United States dollars. It also supports direct speculation and evaluation relative to the value of currencies and the carry trade speculation, based on the differential interest rate between two currencies.

In a typical foreign exchange transaction, a party purchases some quantity of one currency by paying with some quantity of another currency.

The modern foreign exchange market began forming during the 1970s. This followed three decades of government restrictions on foreign exchange transactions under the Bretton Woods system of monetary management, which set out the rules for commercial and financial relations among the world’s major industrial states after World War II. Countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed per the Bretton Woods system.

The foreign exchange market is unique because of the following characteristics:

• Its huge trading volume, representing the largest asset class in the world leading to high liquidity;
• Its geographical dispersion;
• Its continuous operation: 24 hours a day except for weekends, i.e., trading from 22:00 GMT on Sunday (Sydney) until 22:00 GMT Friday (New York);
• The variety of factors that affect exchange rates;
• The low margins of relative profit compared with other markets of fixed income; and
• The use of leverage to enhance profit and loss margins and with respect to account size.

As such, it has been referred to as the market closest to the ideal of perfect competition, notwithstanding currency intervention by central banks.

According to the Bank for International Settlements, the preliminary global results from the 2019 Triennial Central Bank Survey of Foreign Exchange and OTC Derivatives Markets Activity show that trading in foreign exchange markets averaged $6.6 trillion per day in April 2019. This is up from $5.1 trillion in April 2016. Measured by value, foreign exchange swaps were traded more than any other instrument in April 2019, at $3.2 trillion per day, followed by spot trading at $2 trillion.

The $6.6 trillion break-down is as follows:

• $2 trillion in spot transactions
• $1 trillion in outright forwards
• $3.2 trillion in foreign exchange swaps
• $108 billion currency swaps
• $294 billion in options and other products