trasury.ppt
- 1. 1 Topics covered • Legal / regulatory framework • Treasury Management Code • Prudential Code • Financial Markets • Investment Strategy • Debt Management Presented by David Chefneux Associate Director, Sector An Introduction to Treasury Management
- 2. 2 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 activities Pursuit of optimum performance consistent with those risk
- 3. 3 Local Government Acts Local Government (Scotland) Act 1975 • Power to borrow • Allowable sources • May lend to another authority • Loans Fund • Power to establish funds Local Government in Scotland Act 2003 • S.35 Capital expenditure limits • S.36 Imposition of capital expenditure limits (have regard to Prudential Code under S.S.I. 2004 No.29) • 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
- 4. • 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 • State objective of each type of investment Finance Circular 5/2010 (1) 4
- 5. 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
- 6. 6 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 • Large cash balances held by local authorities and new investment instruments
- 7. 7 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
- 8. 8 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
- 9. 9 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
- 10. 10 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
- 11. 11 CIPFA Treasury Management Code – Clause 2: Reporting requirements Before the start of the year Annual strategy and plan Mid-year (minimum) Mid-year review After year end Annual report To go to full Council – can be scrutinised by committee beforehand Also regular monitoring reports to executive and scrutiny committee
- 12. 12 Prudential Code: Objectives Achieved by: • Strategic planning – service priorities and objectives • Asset management planning – whole of life costs • Option appraisal – individual projects • Practicality – is plan achievable and realistic? Affordable capital expenditure plans External borrowing and liabilities within prudent and sustainable levels TM decisions in accordance with good practice
- 13. 13 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
- 14. 14 Prudential Indicators – within the Prudential Code Indicator Estimate Actual Adoption of TM Code and guidance notes 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 Capital Financing Requirement (CFR) a a Net borrowing and the CFR a Authorised limit (Statutory limit) a Operational boundary a Actual external debt a
- 16. 16 What drives the Financial Markets/Interest rates? International data / events Key UK data / events Inflation Target (2.0%) Monetary Policy Committee (MPC) Bank Rate (0.5%)
- 17. 17 What affects Money Market Yields? High Low Short Term Rates: Overnight 1 month 2 months 3 months 4 months 6 months 9 months 12 months Supply / Demand Expectation of the Bank Rate Forecast of the future direction of Bank Rate
- 18. 18 What affects Gilt (Bond) yields? Low Expectation of Bank Rate Combination of Bank Rate expectations and Inflation • Inflation expectations • Government’s policy and future funding requirements • Institutional demand (e.g. Pension Fund liability matching req) 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 England Forecasts February 2012
- 20. 20 20 Interest Rates on 10-year Government Bonds (%)
- 21. 21 Sovereign Bond Yield (10 Year Benchmark)
- 23. 23 Types of risk Remember • Security • Liquidity • Yield • Counterparty • Market / interest rate • Liquidity
- 24. 24 Counterparty Risk • Credit ratings – Bank and Sovereign • Credit Default Swaps • Equities • Market Rates • Market analysis and information
- 25. 25 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 counterparty
- 26. 26 Credit Ratings Who provides credit ratings? • Fitch • Moody’s • Standard & Poor’s (S&P) Who uses credit ratings • Local authorities • Other non-financial institutions • Financial institutions • Professional bodies • Central banks
- 27. 27 Credit Ratings Credit rating categories • Short term (Fitch, Moody’s, S&P) • Long term (Fitch, Moody’s, S&P) • Viability (Fitch) / Financial Strength (Moody’s) • Support (Fitch)
- 28. 28 Credit Ratings Investment Grade (Short term, Long term) • Fitch: F3, BBB • Moody’s: P-3, Baa • S&P: A-3, BBB
- 29. 29 Credit Ratings Rating Outlook • Positive • Stable • Negative Rating Watch • Positive • Negative Rating change indicators
- 30. 30 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
- 31. 31 Counterparty Risk Summary Credit ratings are an opinion, no guarantee Assess all information available • Ratings • Rating Outlooks / Watches • CDS • Equities Get a number of quotes • Market rates • Evaluate relative “value” of investment rate
- 32. 32 Risk Management Considerations Security Manage counterparty risk Liquidity Check your liquidity requirements Yield Set realistic target rates and understand the relative risk associated with each investment If in doubt, ask!
- 33. 33 Investment Instruments • DMADF (Debt Management Agency Deposit Facility) • Treasury Bills • Money Market Funds • Government Liquidity Funds • Fixed Term Deposits • Call/Notice Accounts
- 34. 34 Diversification Spread of risk - ‘not having all your eggs in one basket’ Interest rate views Counterparty exposure and limits Asset classes
- 36. 36 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 Overdraft Internal (capital receipts & revenue balances) Y Y Leasing (finance leases) Y Y Private Finance Initiative (PFI) Y Y Off Balance Sheet Leasing (operating) Y Y Other Methods of Financing Government & EC Capital Grants
- 37. 37 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)
- 38. 38 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?