This lesson explains the critical role of treasury policy and the procedures that govern treasury activities.

3.1 The Purpose of Treasury Policy
A treasury policy document provides the overriding structure under which a treasury department operates . It is a formal document that sets out the objectives, authority, and controls for all treasury activities. The policy ensures that treasury’s actions are aligned with the organisation’s overall risk appetite and strategic goals . It also provides a clear framework for decision-making and a defence against fraud or unethical activities .

3.2 Key Contents of a Treasury Policy
A comprehensive treasury policy typically includes:

• Objectives and Scope: A clear statement of the treasury function’s purpose and the activities it covers.

• Risk Appetite and Limits: A definition of the organisation’s appetite for financial risk, and specific limits on exposures (e.g., FX, interest rate, counterparty credit).

• Authorisation Levels: Clear delegation of authority for dealing, approving transactions, and signing off on policies.

• Delegated Authority: The process for undertaking treasury deals, including analysis, decision-making, execution, approval, settlement, and accounting .

• Counterparty and Bank Relationships: Criteria for selecting and managing banking counterparties.

• Reporting and Review: Requirements for reporting treasury activity and performance to senior management and the board, and the process for regular policy review.

3.3 The Deal Execution Process
The process for executing a treasury transaction typically follows a structured workflow to ensure robust controls :

1. Analysis and Decision: Identifying a financial risk or funding need and deciding on an appropriate course of action.

2. Execution: A front-office dealer transacts with a counterparty (e.g., a bank) .

3. Approval: The deal is checked against pre-established limits and authorisation rules, often by a middle office function .

4. Settlement: A back-office administrator settles the funds when due .

5. Accounting: The transaction is accurately recorded in the organisation’s financial systems.

3.4 Segregation of Duties
Segregation of duties is a fundamental control in treasury, based on the principle that no single employee should be in a position both to commit and to conceal fraud or errors . This is also known as the “four eyes” principle. The three core functions—front, middle, and back office—should be performed by different individuals with separate reporting lines .