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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
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)
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!
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?
