Topics covered

An Introduction to
Treasury
Management
Presented by

David Chefneux

Legal / regulatory
framework

Treasury Management
Code

Prudential Code
Financial Markets
Investment Strategy
Debt Management

Associate Director,
Sector

Treasury Management as per CIPFA TM

Code of Practice
The management of the organisations:-

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

Local Government Acts

Local Government (Scotland) Act
1975

Local Government in Scotland

Act 2003

Power to borrow

S.35 Capital expenditure limits

Allowable sources

S.36 Imposition of capital

expenditure limits (have regard to
Prudential Code under S.S.I. 2004
No.29)

May lend to another authority

Loans Fund
Power to establish funds

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
3

Finance Circular 5/2010 (1)

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

4

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

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

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
7

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

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
9

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
10

CIPFA Treasury Management Code

Clause 2:
Reporting requirements
Before the start of the year
Mid-year (minimum)
After year end

Annual strategy and

plan
Mid-year review
Annual report

To go to full Council can be scrutinised by committee beforehand

Also regular monitoring reports to executive and scrutiny committee
11

Prudential Code: Objectives

Achieved by:

Affordable capital expenditure plans

External borrowing and liabilities

within prudent and sustainable
levels

TM decisions in accordance with

good practice

Strategic planning
service priorities and
objectives

Asset management

planning whole of life

costs

Option appraisal
individual projects

Practicality is plan

achievable and realistic?

12

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

13

Prudential Indicators within the

Prudential Code
Indicator

Estimate

Actual

Ratio of financing costs to net revenue

stream

Incremental impact of capital expenditure

decisions on the council tax (& housing

Capital Expenditure

Adoption of TM Code and guidance notes

Capital Financing Requirement (CFR)

Net borrowing and the CFR
Authorised limit (Statutory limit)
Operational boundary
Actual external debt

14

Financial Markets

15

What drives the Financial

Markets/Interest rates?
Bank Rate
(0.5%)
Monetary Policy Committee
(MPC)
Inflation Target
(2.0%)
Key UK data /
events
International data /
events

16

What affects Money Market Yields?

Short Term
Rates:
Overnight
1 month
2 months
3 months
4 months
6 months
9 months
12 months

Supply / Demand
High
Expectation of the Bank Rate

Forecast
Low of the future direction of Bank Rate

17

What affects Gilt (Bond) yields?

1
2
3
4
5

year
years
years
years
years

5-10 years
10-20
20-30
30-40
40-50

years
years
years
years

Expectation of Bank Rate

Combination of Bank
Rate expectations and
Inflation
expectations
Inflation
Low

Governments policy and future

funding requirements

Institutional demand (e.g. Pension

Fund liability matching req)

18

Bank of England Forecasts

February 2012

19

Interest Rates on 10-year Government

Bonds (%)

20

20

Sovereign Bond Yield (10 Year

Benchmark)

21

Investment Strategy

22

Types of risk
Remember

Security
Liquidity
Yield
Counterparty
Market / interest rate
Liquidity

23

Counterparty Risk

Credit ratings Bank and Sovereign

Credit Default Swaps
Equities
Market Rates
Market analysis and information

24

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

25

Credit Ratings
Who provides credit
ratings?

Fitch
Moodys
Standard & Poors
(S&P)

Who uses credit ratings

Local authorities
Other non-financial
institutions

Financial institutions
Professional bodies
Central banks

26

Credit Ratings
Credit rating categories

Short term (Fitch, Moodys, S&P)

Long term (Fitch, Moodys, S&P)
Viability (Fitch) / Financial Strength (Moodys)
Support (Fitch)

27

Credit Ratings

Investment Grade (Short term, Long term)

Fitch: F3, BBB
Moodys: P-3, Baa
S&P: A-3, BBB
28

Credit Ratings
Rating change indicators

Rating Outlook

Positive
Stable
Negative
Rating Watch

Positive
Negative
29

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
30

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
31

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!
32

Investment Instruments

DMADF (Debt Management Agency Deposit Facility)

Treasury Bills

Money Market Funds

Government Liquidity Funds

Fixed Term Deposits

Call/Notice Accounts
33

Diversification

Spread of risk - not

having all your eggs in
one basket

Interest rate views

Counterparty
exposure
and limits

Asset classes

34

Debt Management

35

Potential Sources of Funding

On Balance Sheet

Fixed

Variable

PWLB Public Works Loans Board

EIB European Investment Bank

Market

Stock issues

Local bonds

Internal (capital receipts & revenue

balances)

Leasing (finance leases)

Private Finance Initiative (PFI)

Overdraft

Off Balance Sheet

Leasing (operating)
Other Methods of Financing
Government & EC Capital Grants
36

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)

37

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?

38

Any Questions?

39