Functions of a Treasury Middle Office – TMO

What are the functions of a TMO – (Treasury Middle Office) Desk at a bank ?

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Many are still confused about the actual role of a TMO in a bank. Risk Experts suggest that the role of a middle office unit is to identify, measure and manage all Treasury Specific Financial Risks on a day to day basis. This wish list most commonly includes both Market Risk and Transactional Risks emanating from the Front Office.

My opinion is that TMO should manage all kinds of risks which are treasury specific. This should also  include both credit approvals and counter-party risk management of transactions. Normally at Retail Banks the bulk of the credit work is done by Credit Back and Middle Offices, which tends to make matters a bit difficult for the TMO to handle on its own, especially during a crisis period.

Its like they have no say over whats coming in and whats going out!!

Hence most of the times, the TMO  – (Treasury Middle Office) is not consulted when a new facility or counter-party is added to the Investment and / or placement portfolio.

They hardly have any say over Internal FX deals executed between the  Treasury and the retail branches.

Nevertheless the confusion gets worse when a separate Market Risk Desk exist alongside a TMO and also when on the contrary the latter has to operate in absence of the former entirely on its own.

I remember my days as a Young Middle Office Enthusiast. I use to prepare reports all day like a hawk that watches its prey! but again most of the work that was assigned to us by the Group Risk Management Head was Market and Liquidity Risk oriented. Amazing !!!

I always said to myself, that is Middle Office only an unit where you do price risk analysis ? is it? nothing else ???

No, is the answer I got  from certain well read sources and individuals in this field .

Hence I would like to summarize the list of  Treasury Middle Office quintessential do’s and dont’s in the order given below :

What TMO should do:

  1. Manage all Treasury Limits
  2. Prepare Transactional Risk Reports
  3. Prepare Revaluation Reports
  4. Prepare Daily Deal Summary Reports
  5. Prepare Optimal Deal Rate and /or Pricing Reports
  6. Prepare Risk and Treasury Investment Model Validation Reports
  7. Prepare Counter-party Risk Management Reports
  8. Prepare Asset Liquidity Risk and Impact Cost Reports
  9. Prepare Market Risk Reports only if the Market Risk Desk doesn’t exists!!!
  10. Prepare TMO  – Manual Compliance and Internal Controls Reports
  11. Prepare Asset – Liability On and Off Balance Sheet GAP Simulation Reports
  12. Prepare Arbitrage Opportunity Reports
  13. In cases of Financial Derivatives, should prepare Exposure, Basis Risk and Greek Measure reports etc. (The purpose should be to highlight all accounting and not just market risk aspects of treasury related transactions)
  14. Prepare Treasury Limits Approval, Renewal and EOL – Excess over Limits Reports (And have the final say on it instead of allowing the credit or the market risk desk to thrust their cruel arbitrary opinion on the front office!!! )
  15. Should have the final say on Brokerage Business Lines assigned by the Front Office!!!
  16. Should check the audit trail of all transactions in conjunction with the back office
  17. Should have a say on drafting of all FTP – Fund Transfer Pricing Policies and other related procedural matters.

What TMO shouldn’t do and / or permit:

  1. Prepare Useless Parallel reports!! this is a big NO NO! Most of the times both Market Risk Desk and TMO are calculating VaR – Value at Risk! what a waste of time eh ??!!
  2. Don’t PROVOKE the Front Office Dealers without providing a solid reason. Intervention  and interference should be accompanied by facts.Hence avoid frequent visits to the Dealing Room unless you are required to do so!!
  3. Don’t indulge in verbal/physical fights with the dealers! These guys wont become your insider friends unless and until you don’t take them on board. Make sure you send your memos and daily policy violation emails to the Head of the Department.
  4. Don’t try to dominate the dealer in an excessive way if all is going well! be FIRM but also polite most of the times as you have to educate and not just regulate.
  5. Never develop overarching personal friendships with the trading room blokes! that’s one rule I follow in life. Your relationship should be truly professional .
  6. Don’t ignore Long or short dated derivative transactions!! that’s where the dirt begins…and ends.
  7. Don’t allow the dealer to accept a risk if they cant hedge it!
  8. Don’t allow any violation of the written and approved Risk Acceptance Criteria !
  9. Don’t keep the Internal Audit and Compliance Desks AT A DISTANCE! They are your best Friends and worst enemies . Hence co-ordinate well.
  10. Don’t forget to report exceptions to the BRMC – Board Risk Committee. What they can do nobody else can do that for you! A Middle Office guy knows what I am saying…..haha 😉
  11. Never Ever tolerate Unauthorized transactions or limit violations!!! NEVER NEVER NEVER. so don’t permit this at all! ..

Many other issues ..are left , we can go on and on. Its a never ending story.

Hope you enjoy this blog and give your appropriate feedback.

that helps a lot !!

Regards.

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About sahriskmanager

I have worked as a Head of Risk and a risk culture builder at both Asset Management and Commercial Banking Institutions within and outside of Pakistan. Over the years I have developed exhaustive understanding of risks that exist in both Sharia and Conventional Finance related Investments and Financing/Lending Products. I have invaluable experiences to share with respect to setting up and restructuring of Financial Risk Management Departments at Islamic Banks and Asset Management Firms . This includes developing policy and procedure manuals, recruiting of staff, imparting Risk Trainings and preparing the entire SDI (System, Design & Installation) work-flow frameworks for the department itself. What I shall post on these blog pages are my personal experiences, global risk management issues and academic interests which I would like to share with academicians, students and practitioners of FRM - Financial Risk Management all over the world.
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