Role of treasury and technology in money market development

Technology plays an important role in developing a sound and efficient money market. This is because cash visibility and control have become more important than ever. Risk management too is becoming an increasing part of the corporate treasurer's job. As its sophistication grows, treasury technology has become the focal point in banking operations. It is now indispensable for treasury professionals to better manage cash, accounts, FX and transaction flows.
In an environment where every company executive is tasked to 'do more with less', the role of technology is crucial in facilitating both operational and strategic enhancements to the business. In Bangladesh, the role of treasury has expanded in recent times. With technology advancement, treasury professionals are playing a vital role in developing the money market. The market has just passed its nascent stage, thanks to pragmatic and techno-friendly policies of the central bank. Since the markets are interlinked, the efficiency in money market is crucial to the development of capital market and bond market. This is an important agenda of the Bangladesh Bank. And the ultimate solution is technology in treasury.
Historically, treasurers have been responsible for managing cash and market risks. They are to ensure that the company has access to sufficient sources of funding as well as dealing with complex compliance issues. Dealing room is an integral part of the treasury where efficient smart dealers operate buy/sell operations to ensure higher returns of its assets and cut the cost of funds. Now we are seeing more treasury technology deployment in hosted private cloud environment. This helps remove the weight of IT maintenance from the treasurer's shoulders and allows more focus on liquidity management. In this race, Bangladesh's money market is lagging far behind in comparison with that of our neighbouring countries.
In 1992, two foreign banks the Standard Chartered Bank and the American Express Bank installed sophisticated dealing room in their treasury offices and decorated those with Reuters Dealing platform. Following this, local banks started focussing the dealing room. In 1997, these foreign banks earned nearly 40 per cent of their total profits from money market operations through their small dealing rooms when local treasuries had no dealing rooms. The fund managers took part in pricing with a huge amount of surplus funds with a telephone. This encouraged the nationalised commercial banks (NCBs) at first. Later a significant number of private banks added dealing rooms to their treasury offices. Today, almost all banks have sophisticated dealing rooms. Most of them are equipped with most innovative software tools and multi-linked online platforms to manage currencies efficiently.
CENTRAL BANK'S PRO-ACTIVE ROLE: The Bangladesh Bank (BB) has been playing a vital role in encouraging banks to adopt technology tools in dealing rooms. This is a part of its plan to make the Bank a completely digital central bank. Bangladesh Bank governor Dr. Atiur Rahman in 2008 formulated a 5-year strategic plan for the financial sector to be based on advanced technological applications to deliver services with utmost efficiency. By this time, the BB has introduced e-commerce, e-banking, automated clearing house and mobile banking. This was a historic move towards achieving higher productivity across all economic sectors including agriculture and SME through use of ICTs. A fast, secure and modern payment system has been built through the introduction of automated clearing house and fund transfer network. The national payment switch has been installed to popularise the use of e-banking and e-commerce. Online CIB service has been launched to facilitate faster decision-making in the process of loan sanctioning by the banks. Installation of the Bangladesh Automated Clearing House (BACH) is another remarkable event in the history of the financial sector in Bangladesh.
Despite this development, Bangladesh's inter-bank money market is lagging behind compared to developments in other areas. The market is yet to be sound, efficient and transparent as a large number of treasuries are not using advanced technology tools in their dealing operations. For dealing foreign and local currencies, dealers of most banks still depend on OTC trading system with telephone, e-mail etc, which is not conducive to the development of an efficient money market.
As treasury and technology are interrelated, the roles of dealing rooms in market development are indispensable. All trading and transactions should be quick, transparent and easy but automated to increase efficiency in the market. These are the pre-conditions for the development of sound, efficient and vibrant markets for money, forex and bond.
TECHNOLOGY AND EFFICIENCY: Financial markets are complex organisations with their own economic and institutional structures. They play a critical role in determining how prices are established. The buy-and-sell-side professionals demand the best execution across multiple asset classes. This means access to fragmented pools of liquidity, predictive analytics and the ability to assess strategy performance, historically and in real-time.
For example, when money is put into the stock market, it is done with the aim of generating a return on the capital invested. Many investors try not only to make a profitable return, but also to outperform, or beat the market. However, market efficiency, championed in the efficient market hypothesis (EMH) formulated by Eugene Fama in 1970, suggests that at any given time, prices fully reflect all available information on a particular stock and/or market. Thus, according to the EMH, no investor has an advantage in predicting a return on a stock price because no one has access to information not already available to everyone else.
In the real world, markets cannot be absolutely efficient or wholly inefficient. It might be reasonable to see markets as essentially a mixture of both, wherein daily decisions and events cannot always be reflected immediately into a market. If all participants are to believe that the market is efficient, no one would seek extraordinary profits, which is the force that keeps the wheels of the market moving.
In the age of information technology (IT), however, markets all over the world are gaining greater efficiency. The IT allows a more effective, faster means to disseminate information. Electronic trading allows prices to adjust more quickly to news entering the market. However, while the pace at which we receive information and make transactions quicken, the IT also restricts the time it takes to verify the information used to make a trade. Thus, IT may inadvertently result in less efficiency if the quality of the information we use no longer allows us to make profit-generating decisions. To develop a sound money market, efficiency of the market is necessary and proper utilisation of technology in treasury management.
Efficiency in one affects other markets. That is why efficiency in money market is crucial to develop capital and bond markets in Bangladesh, which is an important agenda of the Bangladesh Bank. And this efficiency depends on the attitudes of dealers, performance of technology and above all the role of treasury.
But in Bangladesh's money market, technology is yet to play its due roles. In case of foreign exchange market, traders follow OTC trading. Most transactions are made manually with telephone as most banks do not use Reuters dealing tool. In bond market, the volume of trade through online platform still remains at low level. The situation in the call money market is totally different as there is no dealing platform to borrow/lend call money, which is many time larger than the foreign exchange market in terms of volume and participants. This hinders the growth of efficiency in the money market of Bangladesh.
FOCUS ON BOND MARKET: A proper domestic bond market can speed up financial development of a country like Bangladesh. So the government's concern is to develop a vibrant and attractive bond market through 15 primary dealers (PDs). But it has failed to get desired response from potential investors. The BB partly blamed the financial institutions engaged as PDs for the poor response. The government is blamed for its policy which discourages the investors to push up the market. Treasury professionals say high savings rate, low interest rate of government securities and lack of necessary policy supports are the main obstacles to the growth of a bond market in Bangladesh. This has been aggravated due to OTC trading culture and poor participation in online trading.  
The Bangladesh Bank introduced the TWS on December 17 last year. But, a low volume of securities has so far been transacted during the last one year through the TWS. Treasury executives say the clients are reluctant to invest in the treasury bills and treasury bonds. So the volume of trade is lower. Most interesting is that most transactions were made through telephone. Dealers just put their deal data in the system.  Besides, corporate business houses are not much aware about the benefits of investment in secondary bond market.
FOCUS ON CALL MONEY MARKET: The inter-bank call money market remained as a very insignificant part of the financial market in Bangladesh until the beginning of the eighties. This is because of a narrow base and less diversified financial system. By this time, the market has been expanded significantly in comparison with foreign exchange markets. Now, the daily volume of inter-bank call money market ranges between Tk 50 billion and Tk 70 billion, which is much higher than the volume of transactions in inter-bank forex market. More than 80 banks and FIs are very active in the inter-bank call money market every day keeping the space to develop it further.
Lack of fund flow information, delay in clearing house settlement and misuse of surplus funds push up the call money rate from time to time to its abnormal high level. These increase the cost of borrowing and also push it down to its lowest level to increase the interest expense. In 1997, the call money rate shot up to its high at 37 per cent. It jumped to 50 per cent in 2003 and 80 per cent in 2004 when the market experienced a huge amount of surplus liquidity ranging between Tk 90 billion to Tk 100 billion. In 2010, investment was decreased by 11.61 per cent while, borrowings increased by 30.96 per cent compared with 2009. This excess of borrowing growth over that of lending in the banking sector shows the misuse of excess liquidity by banks.
In call money market, a dealer uses a telephone as a dealing tool to manage or invest funds from the market of more than 100 dealers of more than 80 banks and FIs. The process of negotiating by phone or electronic message is bilateral trading. Others are not privy to the trade. The rate is fixed on the basis of remour. A dealer can not settle deals at better rates and therefore the existing call money rate does not necessarily reflect the market pulse, which gives wrong signals to the policy makers and money dealers. To develop a sound and efficient money market, call money rate should be market-driven, competitive and consistent with policy rates. And the combined role of treasury and technology is essential. An efficient trading platform can help the treasury to trade call money at competitive market rate as it brings all funds in a single location. Market participants and policy makers should sit together to improve efficiency in the call money market by introducing e-trading practice.
As a guardian of the financial sector, the Bangladesh Bank monitors the market operations to keep policy actions and market operations on the right way. Therefore, it can promote the banks and FIs to use technology in call money operations and support private entrepreneurs in line with its private-public partnership policy.
A JOURNEY WITH DHAKAMONEY: To make the call money market more efficient, transparent and dynamic, a Bangladeshi IT service provider named as Bazaar Information and Development (BIDL) started a journey in 2008 to introduce a digital trading system in inter-bank call money market with the active support of the Bangladesh Foreign Exchange Dealers' Association (BAFEDA), the Primary Dealers Bangladesh Limited (PDBL) and the Bangladesh Bank through its service Dhakabiz.com. After three years of extensive research and development, the BIDL has developed an electronic trading system DhakaMoney on the basis of suggestions and ideas of money dealers. The PDBL Technical Committee, after several live tests programmes, recommended the platform as a 'useful and easy' tool but stressed the need to link the system to all market participants to make dealing effective. And finally the PDBL Board of Directors on December 14, 2011 decided to extend their cooperation to use the platform 'if the active call money participants are agreeable to deal through the platform'.
Meanwhile, the BIDL has gone through a series of developments to upgrade the platform and the process is continuing. After a demo programme, the PDBL initiated a mock dealing programme of DhakaMoney from March 1, 2013 while 45 banks and FIs took part in mock dealing. On April 8, 2013, the Bangladesh Bank organised a grand demonstration of the platform at its premises, where 62 money dealers attended. Following positive response from the market players, the Bangladesh Bank joined the platform on July 30, 2013 to monitor call money operations on real time deal basis and ensure competitive market rates.
UPDATE OF THE JOURNEY:  The BIDL, as per its roadmap plan, has started a three-month trial programme (Sept 1-Nov 30, 2013) to encourage market players to bring all market players into the single platform and to encourage dealers to make real deals in real time. It has also announced that an upgraded robust version of the software will replace the existing one during the programme, which will meet all requirements of treasury. But the number of participants in the trial programme is not showing an encouraging trend and has remained much lower compared to that of the mock dealing programme. Because, a number of money dealers are showing  shyness to make their deals through the platform without the decision of their managements. Some dealers say they fear that their participation will be violation of the rule as the Bangladesh Bank in its foreign exchange regulation rules has restricted them from keeping market information confidential. And the most important reason is that dealers do not find a sufficient number of market players in the platform for best deals.
To introduce e-trading platform like DhakaMoney, therefore, a consensus decision of all banks and FIs to make their deals through e-trading platform is necessary. The BB should encourage banks and FIs to make their deals through the platform made in Bangladesh for the first time by formulating necessary policy supports. This journey will be successful if the central bank uses DhakaMoney as a tool to monitor volatile call money market and ensure competitive rates as per its policy. However, the role of treasury offices of all banks and FIs is now very crucial. Only they can make this local initiative a success and introduce e-trading platform of their own.
 The writer is the Managing
Director of the BIDL.
 dhakamoney@yahoo.com