Introduction to treasury management
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This document provides an introduction to treasury management for local authorities in Scotland. It covers the relevant legal and regulatory frameworks, including the Treasury Management Code, Prudential Code, and various acts of parliament and regulations. It discusses key topics in treasury management like investment strategy, permitted investment types, risk management, and credit ratings. The goal is to ensure local authorities comply with requirements while pursuing optimal investment performance and controlling risks.
Introduction to treasury management
- 1. 1 Topi cs covered • Legal / r egul at or y f r amewor k • Tr easur y Management Code • Pr udent i al Code • Fi nanci al Mar ket s • I nvest ment St r at egy • Debt Management Present ed by: - Aqeel Ahmed An I nt r oduct i on t o Tr easur y Management
- 2. 2 Tr easur y Management – as per CI PFA TM Code of Pr act i ce management of t he organi sat i on’ s: - nvest ment s Cash f l ows anki ng Money mar ket and capi t al mar ket t r ansact i ons ect i ve cont r ol of r i sks associ at ed wi t h t hose act i vi t i es sui t of opt i mum per f or mance consi st ent wi t h t hose r i sk
- 3. 3 Local Gover nment Act s Local Government ( Scot l and) Act 1975 • Power t o bor r ow • Al l owabl e sour ces • May l end t o anot her aut hor i t y • Loans Fund • Power t o est abl i sh f unds Local Government i n Scot l and Act 2003 • S. 35 Capi t al expendi t ur e l i mi t s • S. 36 I mposi t i on of capi t al expendi t ur e l i mi t s ( have r egar d t o Pr udent i al Code under S. S. I . 2004 No. 29) • S. 40 Power t o i nvest money i n accor dance wi t h r egul at i ons by mi ni st er s Local Government Invest ment s ( Scot l and) Regul at i ons 2010 • Aut hor i t i es may onl y i nvest wi t h t he consent of Scot t i sh mi ni st er s • Must have r egar d t o TM Code & Pr udent i al Code
- 4. • Consent of Scot t i sh Mi ni st er s f or l ocal aut hor i t i es t o i nvest money • Must compl y wi t h condi t i ons set out i n t hi s ci r cul ar • I nvest ment pr oper t i es i ncl uded i n LA por t f ol i o of i nvest ment s • Any l oan t o t hi r d par t y i s an i nvest ment – except l oans t o anot her aut hor i t y f or mi ng par t of t he Common Good under s. 40 2003 Act • Have r egar d t o TM Code of Pr act i ce and Pr udent i al Code • Onl y make i nvest ment s def i ned as per mi t t ed i nvest ment s • I dent i f y whi ch i nvest ment s per mi t t ed i n t he comi ng f i nanci al year • Li mi t s f or amount t hat may be i nvest ed i n each t ype of per mi t t ed i nvest ment Fi nance Ci r cul ar 5/ 2010 ( 1) 4
- 5. Fi nance Ci r cul ar 5/ 2010 ( 2) • I dent i f y r i sks f or each t ype of i nvest ment • Annual I nvest ment St r at egy f or each year –appr oved by f ul l boar d or Counci l bef or e t he st ar t of each f i nanci al year • Recommend I nvest ment st r at egy par t of wi der TM st r at egy • Max val ue and per i od f or i nvest ment s • Must not bor r ow mor e i n advance of needs t o make a pr of i t • Pol i cy f or bor r owi ng i n advance of need and j ust i f i cat i on f or any t aken • Annual I nvest ment Repor t wi t hi n 6 mont hs of end of year 5
- 6. 6 CI PFA Tr easur y Management Code Why? •Hi gh pr of i l e l osses of i nvest ment s wi t h banks t hat def aul t ed i n 1990s •Br eakdown of conf i dence bet ween Ci t y f i nanci al i nst i t ut i ons and l ocal aut hor i t i es •I nappr opr i at e i ncr ease i n r i sk exposur e •Mai nt ai n hi gh and consi st ent st andar ds i n l ooki ng af t er publ i c f unds and debt
- 7. 7 CI PFA Tr easur y Management Code – t hr ee key pr i nci pl es 1. For mal and compr ehensi ve obj ect i ves, pol i ci es, pr act i ces, st r at egi es, & r epor t i ng ar r angement s f or ef f ect i ve management and cont r ol of TM act i vi t i es 2. Cont r ol of r i sk: secur i t y, l i qui di t y, yi el d 3. Val ue f or money wi t hi n cont ext of ef f ect i ve r i sk management
- 8. 8 CI PFA Tr easur y Management Code – Cl ause 1 Tr easur y Management Pr act i ces • Wor ki ng document s f or of f i cer s • How pol i ci es and obj ect i ves i n t he Tr easur y Management Pol i cy St at ement wi l l be achi eved • How i t wi l l manage and cont r ol t hose act i vi t i es • Do not have t o be f or mal l y appr oved by Counci l but subj ect t o scr ut i ny
- 9. 9 CI PFA Tr easur y Management Code – Tr easur y Management Pr act i ces TMP1 - Tr easur y r i sk management TMP2 - Per f or mance measur ement TMP3 - Deci si on maki ng and anal ysi s TMP4 – Appr oved i nst r ument s, met hods and t echni ques TMP5 – Or gani sat i on, cl ar i t y and segr egat i on of r esponsi bi l i t i es and deal i ng ar r angement s
- 10. 10 CI PFA Tr easur y Management Code – Tr easur y Management Pr act i ces TMP6 – Repor t i ng r equi r ement s and management i nf or mat i on ar r angement s TMP7 – Budget i ng, account i ng and audi t ar r angement s TMP8 – Cash and cash f l ow management TMP9 – Money l aunder i ng TMP10 – Tr ai ni ng & qual i f i cat i ons TMP11 – Use of ext er nal ser vi ce pr ovi der s TMP12 – Cor por at e gover nance
- 11. 11 CI PFA Tr easur y Management Code – Cl ause 2: Repor t i ng r equi r ement s Bef ore t he st art of t he year Annual st rat egy and pl an Mi d- year ( mi ni mum) Mi d- year revi ew Af t er year end Annual report t o f ul l Counci l – can be scr ut i ni sed by commi t t ee bef or ehand r egul ar moni t or i ng r epor t s t o execut i ve and scr ut i ny commi t t ee
- 12. 12 Pr udent i al Code: Obj ect i ves Achi eved by: • St rat egi c pl anni ng – ser vi ce pr i or i t i es and obj ect i ves • Asset management pl anni ng – whol e of l i f e cost s • Opt i on apprai sal – i ndi vi dual pr oj ect s • Pract i cal i t y – i s pl an achi evabl e and r eal i st i c? f f ordabl e capi t al expendi t ur e pl ans Ext er nal bor r owi ng and l i abi l i t i es wi t hi n prudent and sust ai nabl e l evel s TM deci si ons i n accor dance wi t h good pract i ce
- 13. 13 Pr udent i al Code: I ndi cat or s • To be set bef or e st ar t of year • Revi ewed at end of year • Revi sed as r equi r ed – f ol l owi ng cor r ect pr ocess • Set f or t he comi ng year and f ol l owi ng 2 year s • Appr oved by same pr ocess as budget
- 14. 14 Pr udent i al I ndi cat or s – wi t hi n t he Pr udent i al Code Indi cat or Est i mat e Act ual Adopt i on of TM Code and gui dance not es Ratio of financing costs to net revenue stream Incremental impact of capital expenditure decisions on the council tax (& housing Capital Expenditure Capital Financing Requirement (CFR) Net borrowing and the CFR Authorised limit (Statutory limit) Operational boundary Actual external debt
- 15. 15 Fi nanci al Mar ket s
- 16. 16 What dr i ves t he Fi nanci al Mar ket s/ I nt er est r at es? I nt er nat i onal dat a / event s Key UK dat a / event s I nf l at i on Tar get ( 2. 0%) Monet ar y Pol i cy Commi t t ee ( MPC) Bank Rat e ( 0. 5%)
- 17. 17 What af f ect s Money Mar ket Yi el ds? Hi gh Low Short Term Rat es: Over ni ght 1 mont h 2 mont hs 3 mont hs 4 mont hs 6 mont hs 9 mont hs 12 mont hs Suppl y / Demand Expect at i on of t he Bank Rat e For ecast of t he f ut ur e di r ect i on of Bank Rat e
- 18. 18 What af f ect s Gi l t ( Bond) yi el ds? Low Expect at i on of Bank Rat e Combi nat i on of Bank Rat e expect at i ons and I nf l at i on • I nf l at i on expect at i ons • Gover nment ’ s pol i cy and f ut ur e f undi ng r equi r ement s • I nst i t ut i onal demand ( e. g. Pensi on Fund l i abi l i t y mat chi ng r eq) 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
- 19. 19 Bank of Engl and For ecast s February 2012
- 20. 20 20 I nt er est Rat es on 10- year Gover nment Bonds ( %)
- 21. 21 Sover ei gn Bond Yi el d ( 10 Year Benchmar k)
- 22. 22 I nvest ment St r at egy
- 23. 23 Types of r i sk Remember • Secur i t y • Li qui di t y • Yi el d • Count er par t y • Mar ket / i nt er est r at e • Li qui di t y
- 24. 24 Count er par t y Ri sk • Cr edi t r at i ngs – Bank and Sover ei gn • Cr edi t Def aul t Swaps • Equi t i es • Mar ket Rat es • Mar ket anal ysi s and i nf or mat i on
- 25. 25 Cr edi t Rat i ngs What i s a credi t rat i ng? • I ndependent assessment of an or gani sat i on • Li kel i hood of get t i ng money back • St at ement of opi ni on • Ri sk associ at ed wi t h i nvest ment s i n a count er par t y
- 26. 26 Cr edi t Rat i ngs Who provi des credi t rat i ngs? • Fi t ch • Moody’ s • St andar d & Poor ’ s ( S&P) Who uses credi t rat i ngs • Local aut hor i t i es • Ot her non- f i nanci al i nst i t ut i ons • Fi nanci al i nst i t ut i ons • Pr of essi onal bodi es • Cent r al banks
- 27. 27 Cr edi t Rat i ngs Credi t rat i ng cat egori es • Shor t t er m ( Fi t ch, Moody’ s, S&P) • Long t er m ( Fi t ch, Moody’ s, S&P) • Vi abi l i t y ( Fi t ch) / Fi nanci al St r engt h ( Moody’ s) • Suppor t ( Fi t ch)
- 28. 28 Cr edi t Rat i ngs I nvest ment Gr ade ( Shor t t er m, Long t er m) • Fi t ch: F3, BBB • Moody’ s: P- 3, Baa • S&P: A- 3, BBB
- 29. 29 Cr edi t Rat i ngs Rat i ng Out l ook • Posi t i ve • St abl e • Negat i ve Rat i ng Wat ch • Posi t i ve • Negat i ve Rat i ng change i ndi cat ors
- 30. 30 Cr edi t Def aul t Swaps ( CDS) Descri pt i on • Mar ket i ndi cat or of r i sk associ at ed wi t h a count er par t y How can t hey be used? • Par t of Annual I nvest ment St r at egy • Day- t o- day deci si on maki ng Consi derat i ons • Specul at i on • Tr ends
- 31. 31 Count er par t y Ri sk Summar y Cr edi t r at i ngs ar e an opi ni on, no guar ant ee Assess al l i nf or mat i on avai l abl e • Rat i ngs • Rat i ng Out l ooks / Wat ches • CDS • Equi t i es Get a number of quot es • Mar ket r at es • Eval uat e r el at i ve “ val ue” of i nvest ment r at e
- 32. 32 Ri sk Management Consi der at i ons Securi t y Manage count er par t y r i sk Li qui di t y Check your l i qui di t y r equi r ement s Yi el d Set r eal i st i c t ar get r at es and under st and t he r el at i ve r i sk associ at ed wi t h each i nvest ment If in doubt, ask!
- 33. 33 I nvest ment I nst r ument s • DMADF ( Debt Management Agency Deposi t Faci l i t y) • Tr easur y Bi l l s • Money Mar ket Funds • Gover nment Li qui di t y Funds • Fi xed Ter m Deposi t s • Cal l / Not i ce Account s
- 34. 34 Di ver si f i cat i on Spr ead of r i sk - ‘ not havi ng al l your eggs i n one basket ’ I nt er est r at e vi ews Count er par t y exposur e and l i mi t s Asset cl asses
- 36. 36 Pot ent i al Sour ces of Fundi ng On Bal ance Sheet Fi xed Vari abl e PWLB Publ i c Wor ks Loans Boar d Y Y EI B Eur opean I nvest ment Bank Y Y Mar ket Y Y St ock i ssues Y Y Local bonds Y Y Over dr af t I nt er nal ( capi t al r ecei pt s & r evenue bal ances) Y Y Leasi ng ( f i nance l eases) Y Y Pr i vat e Fi nance I ni t i at i ve ( PFI ) Y Y Of f Bal ance Sheet Leasi ng ( oper at i ng) Y Y Ot her Met hods of Fi nanci ng Gover nment & EC Capi t al Gr ant s
- 37. 37 Bor r owi ng f r om 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)
- 38. 38 Ext er nal bor r owi ng – ot her consi der at i ons• Does t he Aut hor i t y have any ot her debt por t f ol i o obj ect i ves? • Ar e t her e ur gent shor t t er m budget ar y pr essur es t o f i nd savi ngs? • I s t he aver age r at e of i nt er est on t he exi st i ng debt por t f ol i o vi ewed as bei ng t oo hi gh? I s i t out of l i ne wi t h peer aut hor i t i es? • I s t he exi st i ng mat ur i t y pr of i l e of t he debt skewed i n a way t hat needs r emedi al act i on?