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

35. 35
Debt Management

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?

39. 39
Any Questions?