An Introduction to Treasury Management •

Topics covered
An Introduction
to Treasury
Management
Presented by
• Legal
/ regulatory
framework
• Treasury
Management
Code
• Prudential Code
• Financial Markets
• Investment Strategy
• Debt Management
David Chefneux
Associate Director,
Sector
1
Treasury Management – as per CIPFA TM
Code of Practice
The management of the organisation’s:-
•
•
•
•
Investments
Cash flows
Banking
Money market and capital market transactions
Effective control of risks associated with those acti
Pursuit of optimum performance consistent with those
2
Local Government Acts
Local Government (Scotland) Act 1975
Local Government in Scotland Act 2003
• Power to borrow
• S.35 Capital expenditure limits
• Allowable sources
• S.36 Imposition of capital
expenditure limits (have regard to
Prudential Code under S.S.I. 2004
No.29)
• May lend to another authority
• Loans Fund
• Power to establish funds
• S.40 Power to invest money in
accordance with regulations by
ministers
Local Government Investments (Scotland) Regulations 2010
• Authorities may only invest with the consent of Scottish
ministers
• Must have regard to TM Code & Prudential Code
3
Finance Circular 5/2010 (1)
•
Consent of Scottish Ministers for local authorities to
invest money
•
Must comply with conditions set out in this circular
•
Investment properties included in LA portfolio of
investments
•
Any loan to third party is an investment – except loans
to another authority forming part of the Common Good
under s.40 2003 Act
•
Have regard to TM Code of Practice and Prudential Code
•
Only make investments defined as permitted investments
•
Identify which investments permitted in the coming
financial year
•
Limits for amount that may be invested in each type of
permitted investment
4
Finance Circular 5/2010 (2)
•
Identify risks for each type of investment
•
Annual Investment Strategy for each year –approved by
full board or Council before the start of each financial
year
•
Recommend Investment strategy part of wider TM strategy
•
Max value and period for investments
•
Must not borrow more in advance of needs to make a profit
•
Policy for borrowing in advance of need and justification
for any taken
•
Annual Investment Report within 6 months of end of year
5
CIPFA Treasury
Management Code
Why?
•
High profile losses of investments
with banks
that defaulted in 1990s
•
Breakdown of confidence between City
financial
institutions and local authorities
•
Inappropriate increase in risk
exposure
•
Maintain high and consistent
standards in looking
after public funds and debt
6
CIPFA Treasury
Management Code
– three key principles
1. Formal and comprehensive
objectives, policies, practices,
strategies, & reporting
arrangements for effective
management and control of TM
activities
2. Control of risk: security,
liquidity, yield
3. Value for money within context of
effective risk management
7
CIPFA Treasury Management Code –
Clause 1
Treasury Management Practices
• Working
documents for officers
• How
policies and objectives in the
Treasury Management Policy Statement
will be achieved
• How
it will manage and control those
activities
• Do
not have to be formally approved by
Council but subject to scrutiny
8
CIPFA Treasury Management Code
– Treasury Management Practices
TMP1 - Treasury risk management
TMP2 - Performance measurement
TMP3 - Decision making and analysis
TMP4 – Approved instruments, methods and
techniques
TMP5 – Organisation, clarity and
segregation of
responsibilities and dealing
arrangements
9
CIPFA Treasury Management Code
– Treasury Management Practices
TMP6 – Reporting requirements and management
information arrangements
TMP7 – Budgeting, accounting and audit
arrangements
TMP8 – Cash and cash flow management
TMP9 – Money laundering
TMP10 – Training & qualifications
TMP11 – Use of external service providers
TMP12 – Corporate governance
10
CIPFA Treasury Management Code –
Clause 2:
Reporting requirements
ore the start of the year
Mid-year (minimum)
After year end
Annual strategy and
plan
Mid-year review
Annual report
To go to full Council – can be scrutinised by committee b
Also regular monitoring reports to executive and scrutiny
11
Prudential Code: Objectives
Achieved by:
• Strategic planning
Affordable capital expenditure plans
– service
priorities and
objectives
External borrowing and
liabilities within prudent
and sustainable levels
TM decisions in accordance
with
good practice
• Asset management
planning – whole of
life costs
• Option appraisal –
individual projects
• Practicality – is
plan achievable and
realistic?
12
Prudential Code: Indicators
• To
be set before start of year
• Reviewed
at end of year
• Revised
as required – following
correct process
• Set
for the coming year and
following 2 years
• Approved
by same process as budget
13
Prudential Indicators – within the
Prudential Code
Indicator
Estimate
Actual
Ratio of financing costs to net revenue stream
a
a
Incremental impact of capital expenditure decisions
on the council tax (& housing
a
Capital Expenditure
a
a
Adoption of TM Code and guidance
notes
Capital Financing Requirement (CFR)
Net borrowing and the CFR
Authorised limit (Statutory limit)
Operational boundary
Actual external debt
a
a
a
a
a
a
14
Financial Markets
15
What drives the Financial
Markets/Interest rates?
Bank Rate
(0.5%)
Monetary Policy Committee
(MPC)
Inflation Target
(2.0%)
Key UK data /
events
International data
/ events
16
What affects Money Market
Yields?
Short Term
Rates:
Overnight
1 month
2 months
3 months
4 months
6 months
9 months
12 months
Supply / Demand
High
Expectation of the Bank Rate
Forecast
of the future direction of B
Low
17
What affects Gilt (Bond) yields?
1 year
2 years
3 years
4 years
5 years
5-10 years
10-20 years
20-30 years
30-40 years
40-50 years
Expectation of Bank Rate
Combination of Bank
Rate expectations
and Inflation
• Inflation expectations
Low
• Government’s policy and
future funding requirements
• Institutional demand (e.g.
Pension Fund liability
matching req)
18
Bank of England Forecasts
February 2012
19
Interest Rates on 10-year
Government Bonds (%)
20
20
Sovereign Bond Yield (10 Year
Benchmark)
21
Investment Strategy
22
Types of risk
Remember
• Security
• Liquidity
• Yield
• Counterparty
• Market / interest
• Liquidity
rate
23
Counterparty Risk
• Credit ratings – Bank and Sovereign
• Credit Default Swaps
• Equities
• Market Rates
• Market analysis and information
24
Credit Ratings
What is a credit rating?
• Independent assessment of an organisation
• Likelihood of getting money back
• Statement of opinion
• Risk associated with investments in a counter
25
Credit Ratings
Who provides credit
ratings?
• Fitch
• Moody’s
• Standard
(S&P)
Who uses credit
ratings
• Local
• Other
authorities
non-financial
institutions
& Poor’s
• Financial
institutions
• Professional bodies
• Central banks
26
Credit Ratings
Credit rating categories
• Short term (Fitch, Moody’s, S&P)
• Long term (Fitch, Moody’s, S&P)
• Viability (Fitch) / Financial Strength
• Support (Fitch)
(Moody’
27
Credit Ratings
Investment Grade (Short term, Long term)
• Fitch: F3, BBB
• Moody’s: P-3, Baa
• S&P: A-3, BBB
28
Credit Ratings
Rating change
indicators
Rating Outlook
• Positive
• Stable
• Negative
Rating Watch
• Positive
• Negative
29
Credit Default Swaps (CDS)
Description
• Market
indicator of risk
associated with a
counterparty
How can they be used?
• Part
of Annual Investment
Strategy
• Day-to-day
decision making
Considerations
• Speculation
• Trends
30
Counterparty Risk Summary
Credit ratings are an opinion, no guarantee
Assess all information available
• Ratings
• Rating Outlooks
• CDS
• Equities
/ Watches
Get a number of quotes
• Market rates
• Evaluate relative
“value” of investment rate
31
Risk Management Considerations
Security
Liquidity
Yield
Manage
counterparty risk
Check your liquidity
requirements
Set realistic target
rates and understand the
relative risk associated
with each investment
If in doubt, ask!
32
Investment Instruments
•
DMADF (Debt Management Agency Deposit
Facility)
•
Treasury Bills
•
Money Market Funds
•
Government Liquidity Funds
•
Fixed Term Deposits
•
Call/Notice Accounts
33
Diversification
Spread of risk ‘not having all
your eggs in one
basket’
Interest rate
views
Counterparty
exposure
and limits
Asset classes
34
Debt Management
35
Potential Sources of Funding
On Balance Sheet
Fixed
Variable
PWLB Public Works Loans Board
Y
Y
EIB European Investment Bank
Y
Y
Market
Y
Y
Stock issues
Y
Y
Local bonds
Y
Y
Internal (capital receipts & revenue
balances)
Y
Y
Leasing (finance leases)
Y
Y
Private Finance Initiative (PFI)
Y
Y
Y
Y
Overdraft
Off Balance Sheet
Leasing (operating)
Other Methods of Financing
Government & EC Capital Grants
36
Borrowing from PWLB
PWLB rates are set twice daily
They lend up to:
•
10 years variable rate (Maturity & EIP only)
for 1, 3 or 6 month rollovers
•
50 years fixed rate
Minimum period of a new loan is 1 year
(Maturity debt) and 2 years for Annuity and EIP debt
Fixed rates are based on a margin above Gilt yields (per
Section 5 of the National Loans Act 1968)
37
External borrowing – other
considerations
• Does the Authority have any other
debt portfolio objectives?
•
Are there urgent short term
budgetary pressures to find
savings?
•
Is the average rate of interest on
the existing debt portfolio viewed
as being too high? Is it out of
line with peer authorities?
•
Is the existing maturity profile
of the debt skewed in a way that
needs remedial action?
38
Any Questions?
39