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 organisations:-

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

May lend to another authority
Loans Fund
Power to establish funds
expenditure limits (have regard to
Prudential Code under S.S.I. 2004
No.29)
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
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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

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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
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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

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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
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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 Governments 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
Moodys institutions
Standard & Poors Financial
(S&P) 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 (Moody
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
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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