1. mike.williams@mj-w.net 11 The Debt Management Unit: Organisation and Roles Based on client presentation, 2012 mike.williams@mj-w.net

2. 22 Internal Governance: Principles Setting risk management policies & procedures, consistent with objectives and best market practice Establishing arrangements for: –Internal policy making, delegation and communication –Operational risk monitoring & control –Audit Addressing resource needs and building capacity –Business Planning –Staff requirements, training, IT Building professionalism, commitment and a strong culture

3. mike.williams@mj-w.net 33 Internal Specialisation Separate front, middle and back-office –Allows specialisation –Avoids duplication –Contributes to risk management Distinguish between key responsibilities –Senior management –Front office: primary issuance and execution, internal and external, secondary market transactions (debt and cash) –Middle office: policy and portfolio strategy development and accountability reporting –Middle office: risk management: policies, processes and controls –Back-office: transaction recording, reconciliation, confirmation and settlement; debt servicing; debt data –Internal audit and compliance – reporting to Head of Office

4. mike.williams@mj-w.net 44 Internal Organisation Key role of Middle Office All debt management functions must be governed by the same policies. –Implies primacy to agreed DMS –MO (endorsed by Public Debt Committee, PDC), gives guidance (rules) to all front offices on their contribution to the financing requirement, and terms and conditions of borrowing. MO usually also accounts to PDC (and beyond) on achievement of the strategy – and coordinates all external communications –Front offices need to “report” to MO on their performance in relation to the guidance. In developed countries MO may also set risk parameters within which the front offices operate in day to day operations

5. mike.williams@mj-w.net 55 Working Horizontally Management team acts collectively to meet a DMO’s objectives Make effective use of the skills and resources within DMO –Many issues must take into account views of more than one team –Means working across teams or directorates, and being able to allocate staff to handle issues that straddle different parts of the office Everyone should understand what DMO as a whole is trying to achieve; and how their work contributes to objectives –Internal communication is important –Objectives and targets cascaded to all individuals at all levels Must be good awareness of the risks associated with DMO’s functions –Split of responsibilities between front, middle and back office –Operational risk management framework –Risk awareness

6. mike.williams@mj-w.net 66 Examples of Horizontal Policies

7. mike.williams@mj-w.net 77 Front, Middle and Back Office – Roles Next 5 slides set out responsibilities of different offices In some respects best practice is clear cut, in particular policy role of middle office and need to separate transaction execution from payment responsibilities But at detailed level, there is sometimes room for choice, depending on skills available. Moreover, in a small office some specific analytical skills in practice have to be shared. Follow up of disbursements for project loans is a difficult case. –Ideally it is done by project unit or line ministry – they know what is happening at the project level. –They trigger disbursement either directly with creditor, also informing DMU who checks with creditor; or asking DMU to contact creditor. –If not DMU may have to do it – front office (who know the project) might take role of project unit and trigger disbursement –But it is for back office to check cash has arrived, enter into database, reconcile with creditor and make servicing payments in due course.

8. mike.williams@mj-w.net 88 Front Office - 1 Market analysis, and monitoring Pre-Transaction Analysis –Choice of security (i.e. maturity, type, coupon, etc.) to issue –Bond exchanges and other portfolio restructuring operations –Managed sales –Cash management Cash Flow Forecasting [shared with Middle Office] –Aggregate forecasts, especially short-term adjustments –Scenarios, what-ifs etc Market Transaction execution –Management of domestic auctions –Management of syndicated issuance –[Bond exchanges and other portfolio restructuring operations] –Sale post-mortems Note: all transactions consistent with Debt Management Strategy (DMS) and Financing Plan, monitored by Middle Office

9. mike.williams@mj-w.net 99 Front Office - 2 Management of loan and credit portfolio –Loan negotiation –Guarantee negotiation (where linked with external loan; for other guarantees may share with MO – depending on analytical skills) –Project monitoring, triggering disbursement [ideally done by relevant project unit; may be done by back office who should anyway be responsible for reconciliation with creditor] –On-lending, negotiation on terms (with MO) Market development issues –Market development strategy –Issuance policy –Instrument design –Market structure Relationship with Market –Intelligence gathering –Two way relationship

10. mike.williams@mj-w.net 10 Middle Office - 1 Medium-Term Debt Strategy and Financing Plan –Strategic analysis; preparation of DMS –Development of financing plan –Guidance to front offices; setting risk parameters Policy and Guidance on Guarantees, other contingent liabilities Secretary to Public Debt Committee Macroeconomic monitoring –Liaison Fiscal Policy / Budget Dept [also macroeconomists] –Monitoring borrowing requirement Cash flow forecasting (shared with FO) Reporting –Collecting performance data, inc from front offices –Reporting to Public Debt Committee, ministers –Co-ordination, initiation & presentation of all external publications. (Includes control of website content and its release)

11. mike.williams@mj-w.net 11 Middle Office - 2 Strategic relationship with rating agencies Manage relationship with agents –“Contracts” for Services – central bank (eg as fiscal agent, settlement agent, banker) or other suppliers –[Note: may equally be done by or shared with Back Office] Operational risk –Establishing the framework; reporting to management –“Consultancy” across office –Compliance & control Documentation –Prospectuses –Agreements/contracts with counterparties –Loan, on-lending agreements –Necessary Parliamentary processes

12. mike.williams@mj-w.net 12 Back Office [also IT – which may be part of Back Office or separate] Debt transactions and debt database –Recording all debt transactions including loans & credits & guarantees –Reconciliations & confirmations with lenders, counterparties, agents & bankers –[Contractual relationship with agents (with MO)] –Payment instructions and debt servicing payments Debt statistics –Supply of data to external users, IFIs, rating agencies etc [should be routed through middle office] –Internal reporting Management of government loans (on-lending, budget loans) –Confirming collectibles –Triggering follow-up (with MO and beyond) IT –Operational maintenance IT systems [may be external to DMU] –Develop and implement IT strategy; identify system requirements –Develop and maintain DMU website [content is for MO]

13. mike.williams@mj-w.net 13 Internal Control Policy Control –Senior management Main business planning decisions; risk monitoring –Operational Committees –Supported by regular reports to management and to MoF Risk Management –Credit and Risk committee – establish policies and limits –Expertise in middle office Analytical capability Advice Monitoring and reporting –Internal audit & compliance functions, supported by Audit Committee –Separation of operational and processing areas

14. mike.williams@mj-w.net 14 Operational Risk –“The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events” [ Basel Committee “Principles for the Management and Supervision of Operational Risk” (Feb 2003)] –Most frequent (probably) Errors (in recording data, making payments) Systems failure Business disruption (fire alarms, electricity failures) Operational risk expertise in Middle Office –Risk assessment and prioritisation –Developing a common and consistent control framework –Providing advice and co-ordinating reports Processes and controls documented Embedded monitoring, “exception logs”, management “certification Regular senior management review of risk profile

15. mike.williams@mj-w.net 15 Debt Management Committee External and Internal Governance Structure - Typical International Arrangement Head of Debt Office Senior Management Committee Operational Committees Ministers Senior Officials in MoF Parliament/Congress Advisory Committee Risk Policy and /or Audit Committees External Audit Central Bank, others Internal Audit DMO Boundary