Gain to Treasury 4

If each trading desk went independently to the money-market the effective rate of
interest received would be 9.33%, but by netting before going to the market the bank
can achieve10%. The treasury desk takes the difference as profit.
One could argue that since the bank as a whole deposits at 10%, Trading LineB
should only be charged 10% rather than 11%, but with rational traders this would
merely lead to an unstable game of cat and mouse to be continually on the minority
side, which is best avoided. While other trading desks should be encouraged to use
the in-house treasury rather than outside banks, there is danger if this is a fixed
rule that treasury will widen its spreads to make extra profit at the expense of the
other trading desks. It is therefore usual to leave trading desks the right to go outside.
The threat is usually sufficient to make treasury’s rates reasonable and so the right
is never exercised.
Some trading houses have no internal cash accounts, but use other data for
calculating funding costs. This makes it virtually impossible to perform accurate and
transparent calculations of the amount that each business line should be charged/
credited, and as such is a significant risk. As we saw above, segregated cash accounts
are also needed for calculating FX exposure and the effect on profit of FX rate
movements.
If a trading desk knows, or at least expects, that it will have a long or short cash
position for some time, then it will usually be able to obtain a better rate for a
term loan/deposit rather than continually rolling over the overnight position. Such
positions will usually also be taken with the in-house treasury desk.
While bond-trading and money-market desks tend to be very aware of the effect on
values and profits of the different ways of calculating and paying interest, and the
movement in market rates, such sophistication does not often extend to systems
used for internal cash accounts. Thus accrual accounting is common in these
systems.
This can cause mismatch problems. Say a trading desk buys an instrument which
is effectively an annuity, and values it by discounting the expected future cash flows.
The trading desk takes out a term loan from the treasury desk to make the purchase.
If nothing else happens other than that interest rates fall, then the value calculated
for the instrument will rise, but the value of the term loan from treasury will not. In
order to get accurate profit numbers it is necessary to value all instruments in all
books using market rates, including internal term loans and deposits. Once again,
systems need to reflect the policies adapted.