Treasury Management Framework and Governance
Treasury is the unit that raises funding, manages liquidity, market risk and the investment portfolio on a mandate granted by the board. The exam tests whether you know who authorises what, how the three treasury functions are separated, and how policy is converted into a daily limit discipline that survives audit and regulatory review.
Policy architecture
Treasury policy is board-approved and states objectives, permitted instruments, eligible counterparties and ratings, limits (counterparty, tenor, stop-loss, maturity gap), valuation rules and reporting lines. ALCO converts policy into balance sheet targets and reviews liquidity, interest rate risk and capital. Beneath the policy sit a treasury manual, dealing mandates for each dealer, and a delegated authority matrix showing who may quote, execute, approve and release payments.
Segregation of duties
Front office deals. Middle office independently measures, values and monitors limits and prepares risk reporting. Back office confirms, settles, reconciles and books. The three report through different chains so that no individual can create a position and conceal its loss. Deals are captured the same day and revalued against independent market data; any undocumented trade is treated as a control failure, not a paperwork delay.
Worked example
Tier-1 capital is PKR 40bn and policy caps aggregate exposure to any single interbank counterparty at 8% of Tier-1, i.e. PKR 3.2bn. Treasury holds a PKR 2.0bn term placement and a PKR 1.5bn overnight line, and a further PKR 0.4bn placement is pending settlement today. Because policy measures limits on settlement-date exposure, exposure is PKR 3.9bn - PKR 0.7bn over the cap. The dealer must not roll the overnight line, must record the breach, and must escalate to the head of treasury and the risk committee the same day.
Traps that cost marks
Measuring limits on trade date only; letting a dealer confirm or settle their own deals; treating ALCO as a reporting forum that never rejects a proposal; leaving policy unreviewed for years; assuming a limit breach is cured simply by an intention to reduce the position tomorrow.