Testing Times for Treasury Management  Implications for the Public Sector Mike Griffiths Lead Associate  CIPFA Treasury Ma...
Testing Times <ul><li>Accounting changes: the 2007 SoRP </li></ul><ul><li>PWLB changes: differential repayment yields  </l...
What CIPFA has been doing <ul><li>Treasury and Investment Management in Local Government: Guidance Notes for Practitioners...
The 2007 SoRP <ul><li>STRGL, fair value, disclosures </li></ul><ul><li>Focus on objective setting, economic cost and fair ...
Leveraging risk? Interest rate and credit?  <ul><li>Borrowing (£60bn): </li></ul><ul><ul><li>Long duration </li></ul></ul>...
‘ Treasury and Investment Management in Local Government’ (2007) <ul><li>‘ whilst a long-term borrowing/short-term investm...
‘ Treasury and Investment Management in Local Government’ (2007) <ul><li>‘ In borrowing long-term while investing short-te...
Discussion Paper on Risk Management (October 2008)  <ul><li>The treasury risk management agenda: </li></ul><ul><li>At the ...
Discussion Paper on Risk Management (October 2008) <ul><li>The Treasury Management ‘Toolkit’: </li></ul><ul><li>Clearly de...
Treasury Management in Local Authorities – Post Icelandic Banks Collapse (March 2009) <ul><li>Revised TM Code and Guidance...
Treasury Management in Local Authorities – Post Icelandic Banks Collapse (March 2009) <ul><li>Skills and Training </li></u...
It’s not just about Iceland! <ul><li>The need for a balanced response </li></ul><ul><li>Icelandic losses focused attention...
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  1. 1. Testing Times for Treasury Management Implications for the Public Sector Mike Griffiths Lead Associate CIPFA Treasury Management Forum
  2. 2. Testing Times <ul><li>Accounting changes: the 2007 SoRP </li></ul><ul><li>PWLB changes: differential repayment yields </li></ul><ul><li>Financial market changes: yield curve shifts </li></ul><ul><li>Iceland provokes greater scrutiny of treasury management practices </li></ul><ul><li>Established financial market beliefs are questioned </li></ul>
  3. 3. What CIPFA has been doing <ul><li>Treasury and Investment Management in Local Government: Guidance Notes for Practitioners (November 2007) </li></ul><ul><li>CIPFA Treasury Management Panel: Discussion Paper on Risk Management (October 2008) </li></ul><ul><li>CIPFA Treasury Management Panel Bulletin: Treasury Management in Local Authorities – Post Icelandic Banks Collapse (March 2009) </li></ul>
  4. 4. The 2007 SoRP <ul><li>STRGL, fair value, disclosures </li></ul><ul><li>Focus on objective setting, economic cost and fair value, risk controls </li></ul><ul><li>Concentrates attention on implications of grossing-up of interest rate risk inherent in LA approach to borrowing and investment </li></ul><ul><li>Offers potential to identify and manage investment risk more effectively </li></ul>
  5. 5. Leveraging risk? Interest rate and credit? <ul><li>Borrowing (£60bn): </li></ul><ul><ul><li>Long duration </li></ul></ul><ul><ul><li>UK government credit </li></ul></ul><ul><li>Investment (£30bn): </li></ul><ul><ul><li>Short duration </li></ul></ul><ul><ul><li>Bank and building society credit </li></ul></ul><ul><li>If you were starting from scratch is this where you would want to be? </li></ul>
  6. 6. ‘ Treasury and Investment Management in Local Government’ (2007) <ul><li>‘ whilst a long-term borrowing/short-term investment </li></ul><ul><ul><li>strategy may not have been inappropriate at the start </li></ul></ul><ul><ul><li>of a period when interest rates across the yield curve </li></ul></ul><ul><ul><li>were set to rise from a low level, this general stance is </li></ul></ul><ul><ul><li>one that has tended to be held by local authorities </li></ul></ul><ul><ul><li>throughout the market cycle and, by definition, it </li></ul></ul><ul><ul><li>involves the adoption of a huge degree of interest rate </li></ul></ul><ul><ul><li>risk (given that an alternative would be for local </li></ul></ul><ul><ul><li>authorities to immunise an element of interest rate risk </li></ul></ul><ul><ul><li>by repaying debt) </li></ul></ul><ul><li>… this approach also creates a higher degree of credit risk’ </li></ul>
  7. 7. ‘ Treasury and Investment Management in Local Government’ (2007) <ul><li>‘ In borrowing long-term while investing short-term, local authorities may effectively be grossing up to the expression of an £85bn (£90bn now) view that interest rates will be going up. An alternative approach might have been either … to repay debt or otherwise immunise an element of the interest rate risk, which could be brought down to a net £25bn (£30bn now) view … </li></ul><ul><li>It is in recognition of the fact that interest rate views can be wrong that organisations establish neutral, least-risk positions for their portfolios of financial instruments … and use these benchmarks to gauge and temper the risks they are running … </li></ul><ul><li>Defining objectives, and setting the appropriate benchmarks to meet those objectives, should be a discreet and individual process for each authority ’ </li></ul>
  8. 8. Discussion Paper on Risk Management (October 2008) <ul><li>The treasury risk management agenda: </li></ul><ul><li>At the basic level, the management of risk is all about recognising the possibility of different outcomes and trying to make sure that activities are directed towards making an acceptable set of outcomes more likely </li></ul><ul><li>The risk management agenda is about making sure that everything possible is done to make sure that local authorities are equipped to the best of their ability to manage treasury management risk effectively </li></ul><ul><li>Aim to strengthen the culture of risk management awareness in local authorities </li></ul><ul><li>Authorities are encouraged to understand their exposures; understand the treasury products and techniques which are available to them; develop a cohesive strategy based on achieving a set of explicit objectives within a risk-controlled framework; and implement it </li></ul>
  9. 9. Discussion Paper on Risk Management (October 2008) <ul><li>The Treasury Management ‘Toolkit’: </li></ul><ul><li>Clearly defined objectives </li></ul><ul><li>Neutral or benchmark positions </li></ul><ul><li>A recognised approach to sensitivity analysis </li></ul><ul><li>Market-standard techniques to assist decision-making </li></ul><ul><li>Emphasis on monitoring total or net treasury exposures </li></ul><ul><li>Training and skills development, including an accredited qualification </li></ul><ul><li>A practitioners’ manual of treasury principles and techniques </li></ul>
  10. 10. Treasury Management in Local Authorities – Post Icelandic Banks Collapse (March 2009) <ul><li>Revised TM Code and Guidance </li></ul><ul><li>Treasury Management Objectives </li></ul><ul><ul><li>adequately reflect risk </li></ul></ul><ul><ul><li>diversification should be a key component </li></ul></ul><ul><li>Governance Arrangements </li></ul><ul><ul><li>member training and involvement </li></ul></ul><ul><ul><li>role of Director of Finance in treasury management </li></ul></ul><ul><li>Monitoring </li></ul><ul><li>Gross and Net Borrowing </li></ul><ul><ul><li>recognise risks where substantial variation between gross and net debt </li></ul></ul><ul><ul><li>make reasons explicit </li></ul></ul>
  11. 11. Treasury Management in Local Authorities – Post Icelandic Banks Collapse (March 2009) <ul><li>Skills and Training </li></ul><ul><ul><li>adequate resources and understanding of risks </li></ul></ul><ul><ul><li>CIPFA/ACT qualification – June launch </li></ul></ul><ul><ul><li>risk management paper – prospective development of practical guidance and ‘toolkits’ </li></ul></ul><ul><li>Counterparty lists </li></ul><ul><ul><li>credit ratings – use with understanding of limitations </li></ul></ul><ul><ul><li>supplement with other sources of information </li></ul></ul><ul><ul><li>apply tiering and diversification framework </li></ul></ul><ul><li>Use of TM advisers </li></ul><ul><ul><li>responsibility for investments and borrowing remains with authority </li></ul></ul><ul><ul><li>be clear on status of service being received </li></ul></ul><ul><li>Benchmarking </li></ul><ul><ul><li>Not just yield but should reflect risk inherent in TM activities </li></ul></ul>
  12. 12. It’s not just about Iceland! <ul><li>The need for a balanced response </li></ul><ul><li>Icelandic losses focused attention almost exclusively on credit risk </li></ul><ul><li>Audit Commission report ‘Risk and Return’ may exacerbate a focus on credit risk to the detriment of a more balanced approach to the range of risks which need to be managed. </li></ul><ul><li>Do no harm! There are no panaceas for replacing the misplaced role of credit ratings </li></ul><ul><li>But a fundamental understanding of all treasury management risks, how they interact with each other and how far they can be controlled, is a good start </li></ul>

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