This lesson details the legal and regulatory framework that governs treasury activities, emphasizing the importance of strong governance and internal controls to ensure compliance and mitigate risk.

4.1 The Regulatory Environment
Treasury must navigate a complex regulatory environment. Key areas of focus include:

  • Financial Reporting: Accurately “recognizing and measuring financial instruments under International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP)” . This includes complex areas like fair value measurement and hedge accounting .

  • Anti-Money Laundering (AML) and KYC: Ensuring compliance with AML and Know Your Customer requirements, including proper documentation and screening of all counterparties.

  • Tax Compliance: Ensuring all treasury transactions comply with local and international tax laws and reporting requirements.

  • Market Abuse and Insider Trading: Strictly adhering to laws prohibiting the use of inside information for trading.

4.2 The Importance of Treasury Policies
A comprehensive treasury policy document is the cornerstone of strong governance. The ACT syllabus explicitly covers the development and implementation of “Treasury policy and procedures” . A good policy outlines:

  • Risk Appetite and Limits: Defines acceptable levels of financial risk (e.g., FX, counterparty credit) and sets clear limits.

  • Authorisation Levels: Delegates clear authority for approving transactions.

  • Investment Policy: Defines acceptable investments, credit quality, and maturity limits.

  • Reporting: Sets requirements for regular reporting of treasury activity and performance to the board.

4.3 Key Internal Controls and the Three Lines of Defense
Internal controls are the systems and processes designed to safeguard assets and ensure reliable reporting. The fundamental control is the segregation of duties between the front, middle, and back offices :

  1. Front Office (Trading Desk): Executes transactions and takes risk .

  2. Middle Office (Risk Control): Monitors risk, ensures compliance with limits, and provides independent oversight .

  3. Back Office (Operations): Handles settlement, confirmation, and accounting .
    This separation ensures that no single individual can initiate, approve, and settle a transaction, reducing the risk of fraud or error. This “checks and balances” system is vital for operational risk management .

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