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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
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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
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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
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)
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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

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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
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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
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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
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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
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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 beforehand
Also regular monitoring reports to executive and scrutiny committee
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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
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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
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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
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Financial Markets
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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%)
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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
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What affects Gilt (Bond) yields?
Low
Expectation of Bank Rate
Combination of Bank Rate
expectations and Inflation
Inflation expectations
Governments 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
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Bank of England Forecasts
February 2012
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Interest Rates on 10-year Government Bonds
(%)
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Sovereign Bond Yield (10 Year Benchmark)
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Investment Strategy
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Types of risk
Remember
Security
Liquidity
Yield

Counterparty
Market / interest rate
Liquidity
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Counterparty Risk
Credit ratings Bank and Sovereign
Credit Default Swaps
Equities
Market Rates
Market analysis and information
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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
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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
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Credit Ratings
Credit rating categories
Short term (Fitch, Moodys, S&P)
Long term (Fitch, Moodys, S&P)
Viability (Fitch) / Financial Strength (Moodys)
Support (Fitch)

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Credit Ratings
Investment Grade (Short term, Long term)
Fitch: F3, BBB
Moodys: P-3, Baa
S&P: A-3, BBB
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Credit Ratings
Rating Outlook
Positive
Stable
Negative

Rating Watch
Positive
Negative

Rating change indicators
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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
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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
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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!
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Investment Instruments
DMADF (Debt Management Agency Deposit Facility)

Treasury Bills

Money Market Funds

Government Liquidity Funds

Fixed Term Deposits

Call/Notice Accounts
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Diversification
Spread of risk - not
having all your eggs in
one basket
Interest rate views
Counterparty exposure
and limits
Asset classes
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Debt Management
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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 balances) Y Y
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
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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)
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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?
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Any Questions?