1. 1 Topics covered Legal / regulatory framework Treasury Management Code Prudential Code Financial Markets Investment Strategy Debt Management Presented by David Chefneux Associate Director, Sector An Introduction to Treasury Management

2. 2 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 activities Pursuit of optimum performance consistent with those risk

3. 3 Local Government Acts Local Government (Scotland) Act 1975 Power to borrow Allowable sources May lend to another authority Loans Fund Power to establish funds Local Government in Scotland Act 2003 S.35 Capital expenditure limits S.36 Imposition of capital 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

4. 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 Finance Circular 5/2010 (1) 4

5. 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

6. 6 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 and new investment instruments

7. 7 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

8. 8 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

9. 9 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

10. 10 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

11. 11 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 beforehand Also regular monitoring reports to executive and scrutiny committee

12. 12 Prudential Code: Objectives Achieved by: Strategic planning – service priorities and objectives Asset management planning – whole of life costs Option appraisal – individual projects Practicality – is plan achievable and realistic? Affordable capital expenditure plans External borrowing and liabilities within prudent and sustainable levels TM decisions in accordance with good practice

13. 13 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

14. 14 Prudential Indicators – within the Prudential Code IndicatorEstimateActual Adoption of TM Code and guidance notes 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 Financial Markets

16. 16 What drives the Financial Markets/Interest rates? International data / events Key UK data / events Inflation Target (2.0%) Monetary Policy Committee (MPC) Bank Rate (0.5%)

17. 17 What affects Money Market Yields? High Low Short Term Rates: Overnight 1 month 2 months 3 months 4 months 6 months 9 months 12 months Supply / Demand Expectation of the Bank Rate Forecast of the future direction of Bank Rate

18. 18 What affects Gilt (Bond) yields? Low Expectation of Bank Rate Combination of Bank Rate expectations and Inflation Inflation expectations Government’s policy and future funding requirements Institutional demand (e.g. Pension Fund liability matching req) 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 England Forecasts February 2012

20. 20 Interest Rates on 10-year Government Bonds (%)

21. 21 Sovereign Bond Yield (10 Year Benchmark)

22. 22 Investment Strategy

23. 23 Types of risk Remember Security Liquidity Yield Counterparty Market / interest rate Liquidity

24. 24 Counterparty Risk Credit ratings – Bank and Sovereign Credit Default Swaps Equities Market Rates Market analysis and information

25. 25 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

26. 26 Credit Ratings Who provides credit ratings? Fitch Moody’s Standard & Poor’s (S&P) Who uses credit ratings Local authorities Other non-financial institutions Financial institutions Professional bodies Central banks

27. 27 Credit Ratings Credit rating categories Short term (Fitch, Moody’s, S&P) Long term (Fitch, Moody’s, S&P) Viability (Fitch) / Financial Strength (Moody’s) Support (Fitch)

28. 28 Credit Ratings Investment Grade (Short term, Long term) Fitch: F3, BBB Moody’s: P-3, Baa S&P: A-3, BBB

29. 29 Credit Ratings Rating Outlook Positive Stable Negative Rating Watch Positive Negative Rating change indicators

30. 30 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

31. 31 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

32. 32 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!

33. 33 Investment Instruments DMADF (Debt Management Agency Deposit Facility) Treasury Bills Money Market Funds Government Liquidity Funds Fixed Term Deposits Call/Notice Accounts

34. 34 Diversification Spread of risk - ‘not having all your eggs in one basket’ Interest rate views Counterparty exposure and limits Asset classes

35. 35 Debt Management

36. 36 Potential Sources of Funding On Balance SheetFixedVariable PWLB Public Works Loans BoardYY EIB European Investment BankYY MarketYY Stock issuesYY Local bondsYY Overdraft Internal (capital receipts & revenue balances) YY Leasing (finance leases)YY Private Finance Initiative (PFI)YY Off Balance Sheet Leasing (operating)YY Other Methods of Financing Government & EC Capital Grants

37. 37 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)

38. 38 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?

39. 39 Any Questions?