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.

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?