Topics covered

• Legal / regulatory
An Introduction framework

to Treasury • Treasury
Code
Management

Management • Prudential Code

• Financial Markets
• Investment Strategy
Presented by
• Debt Management
David Chefneux
Associate Director,
Sector

1
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 acti
Pursuit of optimum performance consistent with those

2
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
• May lend to another authority Prudential Code under S.S.I. 2004
No.29)
• Loans Fund
• S.40 Power to invest money in
• Power to establish funds 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
4
permitted investment
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 6
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

7
effective risk management
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

8
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 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 b

Also regular monitoring reports to executive and scrutiny

11
Prudential Code: Objectives
Achieved by:

• Strategic planning –
Affordable capital expenditure plans
service priorities
and objectives
External borrowing and • Asset management
liabilities within prudent and planning – whole of
sustainable levels life costs

• Option appraisal –
TM decisions in accordance individual projects
with • Practicality – is plan
good practice achievable and
realistic?
12
Prudential Code: Indicators

• To be set before start of year

• Reviewed at end of year

• Revisedas required – following

correct process

• Setfor the coming year and

following 2 years

• Approved by same process as budget

13
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 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
Supply / Demand
1 month High
2 months

Expectation of the Bank Rate

3 months

4 months
6 months Forecast
Low of the future direction of B
9 months
12 months
17
What affects Gilt (Bond) yields?

1 year
2 years
3 years Expectation of Bank Rate
4 years
5 years
Combination of Bank
5-10 years Rate expectations
and Inflation
10-20 years • Inflation expectations
Low
20-30 years • Government’s policy and
future funding requirements
30-40 years
40-50 years • 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 counter

25
Credit Ratings
Who provides credit Who uses credit ratings
ratings?
• Local authorities
• Fitch
• Othernon-financial
• Moody’s institutions
• Standard & Poor’s • Financial
(S&P) institutions
• Professional bodies
• Central banks

26
Credit Ratings

Credit rating categories

• Short term (Fitch, Moody’s, S&P)
• Long term (Fitch, Moody’s, S&P)
• Viability (Fitch) / Financial Strength (Moody’
• Support (Fitch)

27
Credit Ratings

Investment Grade (Short term, Long term)

• Fitch: F3, BBB
• Moody’s: 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
• Marketindicator of risk
associated with a
counterparty
How can they be used?
• Partof 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

Manage
Security counterparty risk
Check your liquidity
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 Interest rate
your eggs in one views
basket’

Counterparty
exposure Asset classes
and limits

34
Debt Management

35
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
Y Y
balances)
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

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?

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