Rother District Council
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Rother District Council Agenda Item: 6.3
Report to - Cabinet Date - 16 February 2009 Report of the - Director of Resources Subject - Treasury Strategy Statement and Annual Investment Strategy
Recommendation to COUNCIL: That
1) the Treasury Strategy Statement and Investment Strategy for 2009/10 be approved, as submitted; and
2) the Treasury Management Policy Statement at Appendix E be approved.
AND
It be RESOLVED that
3) the authorised deposit takers detailed in Appendix D be approved; and
4) the Director of Resources be given delegated authority to add new deposit takers or suspend existing deposit takers in agreement with the Council’s treasury management advisors.
Head of Service: Robin Vennard Lead Cabinet Members: Councillors Maynard and Patten
Introduction
1. The Local Government Act 2003 and supporting regulations requires the Council to ‘have regard to’ the Prudential Code and to set Prudential Indicators for the next three years to ensure that the Council’s capital investment plans are affordable, prudent and sustainable.
2. The Act therefore requires the Council to set out its treasury strategy for borrowing and to prepare an Annual Investment Strategy (as required by Investment Guidance issued subsequent to the Act) (included as paragraph 9); this sets out the Council’s policies for managing its investments and for giving priority to the security and liquidity of those investments.
3. The suggested strategy for 2009/10 in respect of the following aspects of the treasury management function is based upon the treasury officers’ views on interest rates, supplemented with leading market forecasts provided by the Council’s treasury advisor. The strategy covers:
treasury limits in force which will limit the treasury risk and activities of the Council; Prudential Indicators; the current treasury position; the borrowing requirement; cb090216 - TSS & AIS 1 prospects for interest rates; the borrowing strategy; debt rescheduling; the investment strategy; and any extraordinary treasury issues.
4. It is a statutory requirement under Section 33 of the Local Government Finance Act 1992, for the Council to produce a balanced budget. In particular, Section 32 requires a local authority to calculate its budget requirement for each financial year to include the revenue costs that flow from capital financing decisions. This, therefore, means that increases in capital expenditure must be limited to a level whereby increases in charges to revenue from any increases in running costs from new capital projects are limited to a level which is affordable within the projected income of the Council for the foreseeable future.
Treasury Limits for 2009/10 to 2011/12
5. It is a statutory duty under S.3 of the Local Government Act 2003 and supporting regulations, for the Council to determine and keep under review how much it can afford to borrow. The amount so determined is termed the “Affordable Borrowing Limit”. In England and Wales the Authorised Limit represents the legislative limit specified in section 3 of the Local Government Act 2003.
6. The Council must have regard to the Prudential Code when setting the Authorised Limit, which essentially requires it to ensure that total capital investment remains within sustainable limits and, in particular, that the impact upon its future council tax is ‘acceptable’.
7. Whilst termed an “Affordable Borrowing Limit”, the capital plans to be considered for inclusion incorporate financing by both external borrowing and other forms of liability, such as credit arrangements. The Authorised Limit is to be set, on a rolling basis, for the forthcoming financial year and two successive financial years.
Prudential Indicators for 2009/10 – 2011/12
8. The Prudential Indicators shown in Appendix A are relevant for the purposes of setting an integrated treasury management strategy. The Council’s capital resources are expected to decline over the next five years so there will be a need to borrow funds in the future to meet its capital expenditure aspirations. The indicators demonstrate that by using capital resources the loss of investment income will impact on the Council Tax with rises from £3.01 in 2009/10 to £3.29 in 2011/12 unless compensating savings are found. The Council is also required to indicate if it has adopted the CIPFA Code of Practice on Treasury Management. This was adopted in February 2002 by the full Council.
cb090216 - TSS & AIS 2 Current Treasury Management Portfolio
9. The Council’s projected year end position comprises: £000 External Debt - Fixed Rate Funding 31
External Investments - Fund Manager 11,200 External Investments – Other 8,855 Total Estimated Investments at 31 March 2010 20,055
Prospects for Interest Rates
10. The Council has appointed Sector Treasury Services as treasury adviser to the Council and part of their service is to assist the Council to formulate a view on interest rates. Appendix B draws together a number of current City forecasts for short term (Bank Rate) and longer fixed interest rates. The following table gives the Sector central view.
Sector interest rate forecast – 6th December 2008
11. Sector’s current interest rate view is that Bank Rate:
will fall from current levels because of the intensifying global recession Starting 2009 at 2.00%, Bank Rate is forecast to fall to 0.5% in Q1 2009 It is then expected to remain there until starting to rise gently up from Q2 2010 till it reaches 4.0% in Q1 2012. There is downside risk to these forecasts if the recession proves to be deeper and more prolonged than currently expected.
Borrowing Strategy
12. In view of the Council’s current position in relation to external borrowing it is anticipated that there will be no capital borrowings during 2009/10. However, it may be necessary to borrow funds during the next five years in order to finance the programme particularly as certain Corporate Plan priority projects come to fruition. The timing of such decisions will be dependant upon advice cb090216 - TSS & AIS 3 from Sector Treasury Services in order to maximise the benefit to the Council. Any borrowing will be achieved within limits suggested in Appendix A (Prudential Indicators) of this report.
13. Should borrowing be required, Sector forecast borrowing costs as follows:
The 50 year PWLB rate is expected to remain around current levels of about 3.80 - 3.90% until Q2 2010 when it is forecast to rise to 4.00%. The rate then edges up gradually to reach 5.00% at the end of the forecast period.
The 25 year PWLB rate is expected to drop to 3.95% in Q1 2009 and stay around there until starting to rise in Q1 2010 and then to eventually reach 5.05% at the end of the forecast period.
The 10 year PWLB rate is expected to drop to 2.55% in Q3 2009 but then to start rising again in Q2 2010 to eventually reach 4.85% at the end of the forecast period.
The 5 year PWLB rate is expected to fall to a floor of 2.15% during Q3 2009. The rate then starts rising in Q2 2010 to eventually reach 4.60% at the end of the forecast period.
This forecast indicates, therefore, that there is a range of options available for borrowing strategy for 2009/10. Variable rate borrowing is expected to be cheaper than long term borrowing and will therefore be attractive throughout the financial year compared to simply taking long term fixed rate borrowing. Under 10 year PWLB rates are expected to be substantially lower than longer term PWLB rates so this will open up a range of choices for new borrowing in order to spread debt maturities away from a concentration in long dated debt. Rates are expected to be slightly lower at the middle to end of the year than earlier on so it may be advantageous to borrow later in the year.
To minimise debt interest costs, the main strategy is therefore as follows:
to focus on the very cheapest PWLB borrowing, the under 10 year rates will provide significantly cheaper rates than longer term borrowing. Under 5 year rates are also expected to be significantly lower than 5-10 year rates. Rates are expected to be slightly lower at the middle to end of the year than earlier on so it may be advantageous to borrow later in the year.
There is expected to be little difference between 25 year and 50 year rates. However, despite the minimally more expensive new borrowing rates expected in the 25 – 30 year period later in the year, these could be seen as being much more attractive than 50 year borrowing as the spread between the PWLB new borrowing and early repayment rates is considerably less. This then maximises the potential for debt rescheduling at a later time by minimising the spread between these two rates.
This strategy would also mean that after some years of focusing on borrowing at or near the 50 year period, local authorities would be able to undertake borrowing in a markedly different period and so achieve a better spread in their debt maturity profile.
cb090216 - TSS & AIS 4 When long term PWLB rates fall back to the central forecast rate of about 3.95%, borrowing should be made at any time in the financial year. A suitable trigger point for considering new fixed rate long term borrowing, therefore, would be 3.95%. The central forecast rate will be reviewed in the light of movements in the slope of the yield curve, spreads between PWLB new borrowing and early payment rates, and any further changes that the PWLB may introduce to their lending policy and operations.
Consideration will also be given to borrowing fixed rate market loans at 25 – 50 basis points below the PWLB target rate if they become available again.
Annual Investment Strategy
17. Cabinet approved the current Investment Strategy in February 2008. In relation to this strategy it is the policy to take account of the Department for Communities and Local Government’s (DCLG) Guidance on Local Government Investments (“the Guidance”) issued in March 2004 and CIPFA’s Treasury Management Code of Practice. The Council’s investment priorities are the:
Security of capital Liquidity of its investments.
18. The Council will also aim to achieve the optimum return on its investments commensurate with proper levels of security and liquidity. The borrowing of monies purely to invest or on-lend and make a return is unlawful and this Council will not engage in such activity. The Annual Investment Strategy is detailed at Appendix C which includes the type of Investment instruments for use in the financial year.
19. Appendix D details the approved deposit takers and their investment limit including how much at anyone time can be longer than one year. Given the current economic climate it is proposed that delegated authority be given to the Director of Resources to add new or suspend existing deposit takers as long as they meet the minimum credit rating requirements and are supported by the Council’s treasury advisors.
20. Appendix E provides details of the Council’s updated Treasury Management Policy Statement which details the treasury management practices in place. This shows how in a practical way the treasury management function of the Council operates, the safeguards that are in place and the reporting requirements at officer and Member level. The policy statement will need approving by full Council.
Malcolm Johnston Director of Resources
Risk Assessment Statement Failure to produce a Treasury Strategy Statement would mean that the Council would not be complying with the Prudential Code and CIPFA Treasury Management Practices, and may be at risk of setting capital expenditure targets that would not be affordable for the Council. Failure to set an investment strategy in accordance with the new Prudential Code, could lead to the Council investing inappropriately leading to a major loss of resources. cb090216 - TSS & AIS 5 Appendix A
(1) Capital Spend as per Capital Programme 2007/08 2008/09 2009/10 20010/11 20011/12 Actual Estimate Estimate Estimate Estimate
Capital Expenditure 6,789,349 8,159,426 1,792,192 1,432,530 1,158,080
Ratio of financing costs to net revenue stream -15% -11% -5% -4% -4%
Capital financing requirement -9,042,000 -9,042,000 -9,042,000 -9,042,000 -9,042,000
Incremental impact of capital programme on Council Tax £0.75 £3.01 £3.07 £3.17 £3.29
(2) Treasury Management Indicators
Authorised limit for external debt Borrowing 0 13,000,000 13,000,000 13,000,000 13,000,000 Other long term liabilities 0 0 0 0 0
Total 0 13,000,000 13,000,000 13,000,000 13,000,000
Operational boundary for external debt Borrowing 0 9,500,000 9,500,000 9,500,000 9,500,000 Other long term liabilities 0 0 0 0 0
Total 0 9,500,000 9,500,000 9,500,000 9,500,000
Upper limit for fixed interest rate exposure Net interest re fixed rate borrowing/investments 100% 100% 100% 100%
Upper limit for variable rate exposure Net interest re variable rate borrowing/investments 100% 100% 100% 100%
Upper limit for total principal sums invested for over 364 days 5,000,000 5,000,000 5,000,000 5,000,000
Maturity structure of new fixed rate borrowing during 2009/10
There is no intention to take out any new borrowing during 2009/10, therefore no limits for this indicator have been set
cb090216 - TSS & AIS 6 Appendix B Interest Rate Forecast
The Council has appointed Sector Treasury Services as treasury adviser to the Council and part of their service is to assist the Council to formulate a view on interest rates. Appendix B draws together a number of current City forecasts for short term (Bank Rate) and longer fixed interest rates. The following table gives the Sector central view.
Sector interest rate forecast – 6th December 2008
Sector’s current interest rate view is that Bank Rate: -
will fall from current levels because of the intensifying global recession Starting 2009 at 2.00%, Bank Rate is forecast to fall to 0.5% in Q1 2009 It is then expected to remain there until starting to rise gently up from Q2 2010 till it reaches 4.0% in Q1 2012. There is downside risk to these forecasts if the recession proves to be deeper and more prolonged than currently expected.
ECONOMIC BACKGROUND
Introduction
. The sub prime crisis of early 2008 was supplanted by the banking crisis of autumn 2008. The world banking system came near to collapse and governments around the world were forced to recapitalise and rescue their major banks. The resulting dearth of lending from banks anxious to preserve capital led to economic forecasts being sharply reduced and recession priced into markets. This in turn led to sharp falls in oil and other commodity prices with the result that inflation, which in the UK was running at over 5%, became yesterday’s story and recession fears drove interest rate sentiment and policy. A co-ordinated global interest rate cut of 50bp took place on 8 th October 2008. Forecasts in the UK were for further sharp cuts in interest rates as recession hove into view.
cb090216 - TSS & AIS 7 International
. Early in 2008 the US economy was being badly affected by the housing market slump. Interest rates were at 2% and inflation was being dragged higher by the inexorable rise in commodity prices. The ECB was very concerned about rising inflation and less about the state of the economy. . The second quarter of 2008 was torn between inflation worries on the one hand, with oil rising towards $150 per barrel, and the deteriorating economic outlook on the other. . In the second and third quarters of the year the financial crisis erupted and escalated as the world became aware of the extent of the sub-prime fiasco and the impact it was having on institutions that had invested in these issues. . In September Fannie Mae/Freddie Mac (the mortgage banks) and AIG, the insurance giant, had to be bailed out by the US Federal Government. . Then in mid September, Lehman Bros., the investment bank, was allowed to fail. This triggered a domino effect with other banks and financial institutions having to be rescued or supported by governments around the world. . After the collapse into receivership of the Icelandic banks in early October, other countries then started to feel the strain and a number had to approach the IMF for support. . Eventually even the Asian ‘Tiger’ economies were affected, including India and China, and it became clear that the crisis had become a global one and no country was insulated from it. . The financial crisis had therefore precipitated an economic crisis and there was a co-ordinated global interest rate cut with the Fed, ECB and MPC all cutting rates by 50bp on 8th October. The Fed subsequently cut rates again by 50bp to 1% on 29th October and again on 16 December to a band of 0.0% to 0.25% in an attempt to stave off the oncoming recession. Inflation was yesterday’s problem. . On 4th November the USA elected Barack Obama as President with little immediate financial impact. . The ECB reduced rates again on 6th November by 50bp and by its biggest ever cut of 75bp on 4 December to reach 2.5%.
UK . GDP: growth was already slowing in 2008 from 2007 before the full impact of the credit crunch was felt. Earlier in 2008 GDP was 2.3% whereas in the autumn the figure fell back to -0.3% and was then expected to continue to be negative going into 2009. . Wage inflation remained relatively subdued as the Government kept a firm lid on public sector pay. Private sector wage growth was kept in check by the slowing economy. . Growth slowed across the economy and unemployment rose throughout the year with forecasts of 2 million unemployed by the end of the financial year and continuing to increase thereafter through 2010. . Notwithstanding the pressures on household finances consumer spending still continued at a reasonable clip although the trend was slowing as the year progressed. . Bank lending came to a virtual standstill in the autumn as the credit crunch tightened its grip and various banks internationally had to be rescued, or supported, by their governments. . The Government and Bank of England supplied massive amounts of liquidity to the banking market in an attempt to reignite longer interbank lending. . The Government took action in September to either supply finance itself to recapitalise some of the major clearing banks or to require the others to cb090216 - TSS & AIS 8 strengthen their capital ratios by their own capital raising efforts. This was so that these banks would be seen to have sufficient reserves to last through the coming recession with its inevitable increase in bad loans etc. . The housing market also came to a virtual standstill as lenders demanded larger deposits and higher fees. House sales and prices both dropped sharply. . Government finances deteriorated as income from taxation dropped as the economy slowed and the cost of the bailout of the banks was added to the deficit. . U.K. equity prices declined sharply in the 3rd and 4th quarters as the impending recession was priced into the markets. Prices hit five year lows and volatility was extremely high. . The story of 2008 has been the credit crunch, the banking crisis and the change in economic outlook from slow growth to outright recession. After the initial concerns about the impact of the credit crunch in the earlier part of 2008 it appeared as though the storm had been weathered. The MPC had been very concerned about CPI inflation, which had been rising sharply on the back of higher commodity and food prices. Bank Rate reached a peak of 5.75% in July 2007 after which cuts of 0.25% occurred in December 2007 and February and April 2008 before the major cuts in the autumn. The economic data had been indicating a slowing economy for some while but it was not sufficiently weak to force the MPC into another cut. It was the strength of the banking crisis, pre- empted by the collapse of Lehmans in New York that eventually drove the MPC to cut interest rates by 50bp on October 8th in concert with the Federal Reserve, the ECB and other central banks. It was then appreciated that the economic downturn would be much more severe than previously thought and interest rates were subsequently slashed by 150bps on 6 November, 100bps on 4 December and 50 bps on 8 January 2009. . The LIBOR spread over Bank Rate has also been a feature, and a concern, of 2008/9. Because of the credit fears and the reluctance of lenders to place cash for long periods 3 month LIBOR (this is the London Inter Bank Offer Rate – the rate at which banks will lend to one another) has been substantially higher than Bank Rate. This has meant that the MPC’s power over monetary policy has been eroded by the widening of this spread between LIBOR and Bank Rate and it has therefore had a limited ability to bring relief to hard pressed borrowers through lower interest rates. However, the power of the Government over the semi nationalised clearing banks had considerable impact in enforcing pro rata reductions to the 150 bps Bank Rate cut in November on some borrowing rates. . The Government has abandoned its ‘golden rule’. The pre Budget Report on 14 November revealed the Government’s plans for a huge increase in Government borrowing over coming years as a result of falling tax revenues and also due to tax cuts and increases in Government expenditure in the short term designed to help stimulate economic growth to counter the recession.
cb090216 - TSS & AIS 9 Appendix C Rother District Council Annual Investment Strategy 2009/10
1. The Council will maintain its investments in accordance with the DCLG Guidance on Local Government Investments (“the Guidance”), issued in March 2004, and CIPFA’s Treasury Management in Public Services: Code of Practice and Cross Sectoral Guidance Notes (“CIPFA TM Code”).
2. This Annual Investment Strategy states which investments the Council may use for the prudent management of its treasury balances during the financial year under the heads of Specified Investments and Non-Specified Investments. These are listed in Appendix Ci. Counterparty (e.g. Borrowers) limits are set and authorised by Cabinet. As new types of investment become available, these will be added to the specified and non specified investments with the guidance of the Council’s Treasury advisors.
3. This Strategy also sets out:
a) The procedures for determining the use of each asset class (advantages and associated risk), particularly if the investment falls under the category of “non-specified investments”;
b) The maximum periods for which funds may be prudently committed in each asset class;
c) The maximum to be invested in each asset class;
d) Whether the investment instrument is to be used by the Council’s in-house officers and/or by the Council’s appointed external fund managers; and, if non-specified investments are to be used in-house, whether prior professional advice is to be sought from the Council’s treasury advisors; and
e) The minimum amount to be held in short-term investments (i.e. one which the Council may require to be repaid or redeemed within 12 months of making the Investment).
Investment Objectives
4. All investments will be in sterling. The general policy objective for this Council is the prudent investment of its treasury balances. The Council’s investment priorities are
a) the security of capital; and
b) liquidity of its investments.
The council will aim to achieve the optimum return on its investments commensurate with the proper levels of security and liquidity.
5. The DCLG maintains that the borrowing of monies purely to invest or on-lend and make a return is unlawful and this Council will not engage in such activity. cb090216 - TSS & AIS 10 Security of Capital: The use of Credit Ratings
6. The Council relies on credit ratings published by Fitch Ratings to establish the credit quality of counterparties (issuers and issues) and investment schemes. The Council has also determined the minimum long-term, short-term and other credit ratings it deems to be “high” for each category of investment.
Monitoring of credit ratings:
All credit ratings will be monitored monthly. The Council has access to Fitch credit ratings and is alerted to changes through its use of the Sector website.
If a counterparty’s or investment scheme’s rating is downgraded with the result that it no longer meets the Council’s minimum criteria, the further use of that counterparty/investment scheme as a new investment will be withdrawn immediately. The Council will also immediately inform its external fund manager(s) of the withdrawal of the same.
If a counterparty is upgraded so that it fulfils the Council’s criteria, its inclusion will be considered and put to Cabinet for approval.
The Council will establish with its fund manager(s) their credit criteria and the frequency of their monitoring of credit ratings so as to be satisfied as to their stringency and regularity.
Investment balances / Liquidity of investments
7. Based on its cash flow forecasts, the Council anticipates its fund balances in financial year 2009/10 to range between £20m and £25m.
8. During the year there will be expenditure that will impact on the level of fund balances that it has available including:
During the financial year, £1.15mhas been earmarked from usable capital receipts to meet the Capital Programme commitments, and an additional £5.37m is earmarked for 2008/09. However it should be noted that there may be some slippage to the timing of this spend.
Net receipts from capital disposals during the financial year are expected to be £xxxxxxxx. The Council will only use actual receipts received to fund the capital programme, and not rely on expected or forecast receipts.
9. The minimum percentage of its overall investments that the Council will hold in short-term investments is 75%.
10. Giving due consideration to the Council’s level of balances over the next 3 years, the need for liquidity, its spending commitments and provisioning for contingencies, the Council has determined that 25% (approximately £5m) of its overall fund balances can be prudently committed to longer term investments (i.e. those with a maturity exceeding a year).
Investments defined as capital expenditure
11. The acquisition of share capital or loan capital in any body corporate is defined as capital expenditure under Section 16(2) of the Local Government Act 2003. Such investments will have to be funded out of capital or revenue resources and cb090216 - TSS & AIS 11 will be classified as ‘non-specified investments’.
12. A loan or grant by this Council to another body for capital expenditure by that body is also deemed by regulation to be capital expenditure by this Council. It is therefore important for this Council to clearly identify if the loan was made for policy reasons (e.g. to the Registered Social Landlord for the construction/improvement of dwellings) or if it is an investment for treasury management purposes. The latter will be governed by the framework set by the Council for ‘specified’ and ‘non-specified’ investments.
13. This Council will not use or allow its external fund managers to use any investment that will be deemed as capital expenditure.
Provisions for Credit-related losses
14. If any of the Council’s investments appeared at risk of loss due to default (i.e. a credit-related loss, and not one resulting from a fall in price due to movements in interest rates) the Council will make revenue provision of an appropriate amount.
Investment Strategy to be followed in-house
15. The Council currently does not have any longer-term investments that span more than one year. Based on Sector interest rate forecasts, the Council may wish to lock in better rates for longer-term investments in conjunction with its Treasury Advisors, Sector, whilst taking into account the minimum amount to be maintained in short-term investments. Advice will be taken from Sector as to when to invest longer than one year. For its cash flow generated balances, the Council will seek to utilise its business reserve accounts and short-dated deposits (over night to three months) in order to benefit from the compounding of interest.
External Cash Fund Management
16. The Council’s appointed fund manager, Investec, manages the funds on a discretionary basis. The fund management agreements between the Council and the managers formally document the instruments they can use within pre- agreed limits.
End of year Investment Report
17. At the end of the financial year, the Council will prepare a report on its investment activity as part of its Annual Treasury Report.
cb090216 - TSS & AIS 12 LOCAL GOVERNMENT INVESTMENTS (England) – SPECIFIED INVESTMENTS
All “Specified Investments” listed below must be sterling-denominated.
Investment Share/ Loan Repayable/ Security / Capital Circumstance of use Maximum Capital? Redeemable Minimum Credit Expenditure? within 12 Rating ** period months? Debt Management Agency Deposit No Yes Govt-backed NO In-house 1 year * Facility* (DMADF) * this facility is at present available for investments up to 6 months
Term deposits with the UK government or No Yes High security NO In-house and by external fund 1 year with UK local authorities (i.e. local authorities although LAs not managers as defined under Section 23 of the 2003 Act) credit rated. with maturities up to 1 year
Term deposits with credit-rated deposit No Yes Yes-varied** NO In-house and by external fund 1 year takers (banks and building societies), Short-term F1, managers including callable deposits, with maturities up to 1 year Certificates of Deposit issued by credit- No Yes Yes-varied** NO to be used by fund managers; to 1 year rated deposit takers (banks and building Short-term F1, be used in-house after societies) : up to 1 year. consultation/ advice from Sector Custodial arrangement required prior to and purchase Gilts : with maturities up to 1 year No Yes Govt-backed NO (1) Buy and hold to maturity : to 1 year be used in-house after consultation/ advice from Sector Custodial arrangement required prior to (2) for trading : by external cash purchase fund manager(s) only subject to the guidelines and parameters agreed with them
cb090216 - TSS & AIS 13 Investment Share/ Loan Repayable/ Security / Capital Circumstance of use Maximum period Capital? Redeemable ‘High’ Credit Rating Expenditure? within 12 criteria months? Reverse Gilt Repos : maturities up to 1 year No Yes Govt-backed NO to be used by external fund 1 year [A transaction where gilts are bought with a managers only subject to the commitment (as part of the same transaction) guidelines and parameters to sell equivalent gilts on a specified date, or agreed with them at call, at a specified price.]
Custodial arrangement required prior to purchase
Money Market Funds No Yes Yes-varied** NO In-house and by external fund the period of (i.e. a collective investment scheme as AAA managers subject to the investment may not defined in SI 2004 No 534) guidelines and parameters be determined at These funds do not have any maturity date agreed with them the outset but would be subject to cash flow and liquidity requirements Forward deals with credit rated banks and No Yes Yes-varied** NO In-house and fund managers 1 year in aggregate building societies < 1 year (i.e. negotiated Short-term F1, deal period plus period of deposit) Commercial paper** No Yes Yes-varied NO to be used by external fund 9 months [short-term obligations (generally with a Short-term F1, or managers only subject to the maximum life of 9 months) which are issued equivalent guidelines and parameters by banks, corporations and other issuers] agreed with them
Custodial arrangement required prior to purchase Gilt Funds and other Bond Funds No Yes Yes – No, to be used by external fund (dependent on set-up structure) minimum rating : (ensure it is managers only subject to the *** These are open-end mutual funds Fitch : AA- not a body guidelines and parameters investing predominantly in UK govt gilts and Moody’s : Aa3 corporate by agreed with them corporate bonds. These funds do not have S&P : AA- virtue of its *Important : In the selection of any maturity date. The fund would hold highly set up a fund the manager will ensure liquid instruments and the Council’s structure) that the fund is not a body investment in these funds can be sold at any corporate by virtue of its set time. up structure
cb090216 - TSS & AIS 14 Investment Share/ Loan Repayable/ Security / Capital Circumstance of use Maximum period Capital? Redeemable ‘High’ Credit Rating Expenditure? within 12 criteria months? Treasury bills No Yes Govt-backed NO In-house and external fund 1 year [Government debt security with a maturity managers subject to the less than one year and issued through a guidelines and parameters competitive bidding process at a discount to agreed with them par value]
Custodial arrangement required prior to purchase
Bonds issued by a financial institution that is No Yes Govt-backed No (1) Buy and hold to maturity : to 1 year guaranteed by the United Kingdom be used in-house after Government (as defined in SI 2004 No 534) consultation/ advice from Sector with maturities under 12 months (2) for trading : by external cash fund manager(s) only subject to Custodial arrangement required prior to purchase the guidelines and parameters agreed with them
Bonds issued by multilateral development No AAA No (1) Buy and hold to maturity : to 1 year banks (as defined in SI 2004 No 534) with Yes be used in-house after maturities under 12 months consultation/ advice from Sector (2) for trading : by external cash fund manager(s) only subject to Custodial arrangement required prior to the guidelines and parameters purchase agreed with them
**Subject to each council’s determination of ‘high credit rating’. Sector has given suggestions; however each Council should define and set its own criteria.
***Open ended funds continually create new units (or shares) to accommodate new monies as they flow into the funds and trade at net asset value. (NAV)
cb090216 - TSS & AIS 15 LOCAL GOVERNMENT INVESTMENT (England) NON-SPECIFIED INVESTMENTS
Investment (A) Why use it? Share/ Repayable/ Security / Capital Circumstance of Max % of Maximum (B) Associated risks? Loan Redeemable Minimum credit Expen- use overall maturity of Capital? within 12 rating ** diture? investments investment months? Term deposits with (A) (i) Certainty of rate of return over No No YES-varied NO in-house and fund In Suggested credit rated deposit period invested. (ii) No movement in long-term AA- managers accordance limit : takers (banks and capital value of deposit despite changes in with 5 years building societies) with interest rate environment. schedule of maturities greater than 1 deposit year (B) (i) Illiquid : as a general rule, cannot takers and be traded or repaid prior to maturity. fund (ii) Return will be lower if interest rates manager’s rise after making the investment. contract (iii) Credit risk : potential for greater deterioration in credit quality over longer period Certificates of Deposit (A) (i) Although in theory tradable, are No Yes YES-varied** NO to be used by fund In Suggested with credit rated deposit relatively illiquid. long-term AA-, managers; to be accordance limit : takers (banks and used in-house after with 5 years building societies) with (B) (i) ‘Market or interest rate risk’ : Yield consultation/ advice schedule of maturities greater than 1 subject to movement during life of CD from Sector and deposit year which could negatively impact on price of takers and Custodial arrangement the CD. fund required prior to manager’s purchase contract
Callable deposits with (A) (i) Enhanced income ~ Potentially No No YES-varied** NO to be used by fund In Suggested credit rated deposit higher return than using a term deposit long-term AA-, managers; to be accordance limit : takers (banks and with similar maturity. used in-house after with 5 years in building societies) with consultation/ advice schedule of aggregate maturities greater than 1 (B) (i) Illiquid – only borrower has the right from Sector and deposit year to pay back deposit; the lender does not takers and have a similar call. (ii) period over which fund investment will actually be held is not manager’s known at the outset. (iii) Interest rate risk : contract borrower will not pay back deposit if interest rates rise after deposit is made.
cb090216 - TSS & AIS 16 Investment (A) Why use it? Share/ Repayable/ Security / Capital Circumstance of Max % of Maximum (B) Associated risks? Loan Redeemable Minimum Credit Expen- use overall maturity of Capital? within 12 Rating? diture? investments investment months? UK government gilts (A) (i) Excellent credit quality. (ii)Very No Yes Govt backed NO (1) Buy and hold to In Suggested with maturities in excess Liquid. maturity : to be accordance of 1 year (iii) If held to maturity, known yield (rate of used in-house after with fund maturity return) per annum ~ aids forward consultation/ advice manager’s Custodial arrangement planning. (iv) If traded, potential for from Sector contract limit : required prior to capital gain through appreciation in value (2) for trading : by purchase (i.e. sold before maturity) (v) No currency external cash fund risk manager(s) only 10 years subject to the including but (B) (i) ‘Market or interest rate risk’ : Yield guidelines and also subject to movement during life of parameters agreed including the sovereign bond which could negatively with them 10 year impact on price of the bond i.e. potential benchmark for capital loss. gilt
Sovereign issues ex UK (A) (i) Excellent credit quality. (ii) Liquid. No Yes AAA NO (1) Buy and hold to In Suggested govt gilts : any maturity (iii) If held to maturity, known yield (rate of maturity : to be accordance limit : return) per annum ~ aids forward used in-house after with fund 10 years Custodial arrangement planning. (iv) If traded, potential for consultation/ advice manager’s required prior to capital gain through appreciation in value from Sector contract purchase (i.e. sold before maturity) (v) No currency (2) for trading : by risk external cash fund manager(s) only (B) (i) ‘Market or interest rate risk’ : Yield subject to the subject to movement during life of guidelines and sovereign bond which could negatively parameters agreed impact on price of the bond i.e. potential with them for capital loss.
Forward deposits with (A) (i) Known rate of return over period the No No YES-varied NO To be used by fund In Suggested credit rated banks and monies are invested ~ aids forward managers; to be accordance limit : building societies for planning. long-term AA-, used in-house after with 5 years in periods > 1 year (i.e. consultation/ advice schedule of aggregate negotiated deal period (B) (i) Credit risk is over the whole period, from Sector. deposit plus period of deposit) not just when monies are actually takers and invested. fund (ii) Cannot renege on making the manager’s investment if credit rating falls or interest contract rates rise in the interim period.
cb090216 - TSS & AIS 17 Investment (A) Why use it? Share/ Repayable/ Security / Capital Circumstance of Max % of Maximum (B) Associated risks? Loan Redeemable Minimum credit Expen- use overall maturity of Capital? within 12 rating ** diture? investments investment months? Deposits with unrated Credit standing of parent will determine No Yes, but only if Not rated in their own NO In-house In limit : deposit takers with ultimate extent of credit risk maturity is 1 right, but parent must accordance 1 year unconditional financial year or less be rated. with guarantee from HMG or rating for parent : schedule of credit-rated parent long-term AA-, deposit institution : any maturity takers
Bonds issued by a (A) (i) Excellent credit quality. (ii) relatively Yes Yes AAA / government NO (1) Buy and hold to In 10 years financial institution that liquid. (although not as liquid as gilts) guaranteed maturity : to be accordance is guaranteed by the (iii) If held to maturity, known yield (rate of used in-house after with fund United Kingdom return) per annum, which would be higher consultation/ advice manager’s Government (as defined than that on comparable gilt ~ aids from Sector contract in SI 2004 No 534) forward planning, enhanced return (2) for trading : by with maturities in excess compared to gilts. external cash fund of 1year (iv) If traded, potential for capital gain manager(s) only, Custodial arrangement through appreciation in value (i.e. sold subject to the required prior to before maturity) guidelines and purchase parameters agreed (B) (i) ‘Market or interest rate risk’ : Yield with them subject to movement during life of bond which could negatively impact on price of the bond i.e. potential for capital loss. (ii) Spread versus gilts could widen
cb090216 - TSS & AIS 18 Investment (A) Why use it? Share/ Repayable/ Security / Capital Circumstance of Max % of Maximum (B) Associated risks? Loan Redeemable Minimum credit Expen- use overall maturity of Capital? within 12 rating ** diture? investments investment months? Bonds issued by (A) (i) Excellent credit quality. (ii) relatively Yes Yes AAA or government NO (1) Buy and hold to 10 years multilateral liquid. (although not as liquid as gilts) guaranteed maturity : to be development banks (iii) If held to maturity, known yield (rate of used in-house after (as defined in SI 2004 No return) per annum, which would be higher consultation/ advice 534) than that on comparable gilt ~ aids from Sector with maturities in excess forward planning, enhanced return (2) for trading : by of 1 year compared to gilts. external cash fund (iv) If traded, potential for capital gain manager(s) only, Custodial arrangement through appreciation in value (i.e. sold subject to the required prior to before maturity) guidelines and purchase parameters agreed (B) (i) ‘Market or interest rate risk’ : Yield with them subject to movement during life of bond which could negatively impact on price of the bond i.e. potential for capital loss. (ii) Spread versus gilts could widen
**Subject to each council’s determination of ‘high credit rating’.
* The prohibition on the use of derivatives : This prohibition effectively relies on the judgement of the House of Lords in the case of Hazell v The Council of the London Borough of Hammersmith and Fulham and Others in 1991. Their Lordships held that local authorities have no power to enter into interest rate swaps and similar instruments.
Sector believes that as this ruling still stands and will not be rescinded by the introduction of the Local Government Act 2003, local authorities will not have the power to use derivative instruments.
cb090216 - TSS & AIS 19 Appendix D Current Rating RDC of which Institution Name (20.01.2009) Overall Investec RDC Total £m can be Country Recommended Deposit Deposit deposited long L/Term S/Term Deposit Limit (£m) Limit (£m) (£m) For in-house investments term (£m)
Barclays Bank Plc GBR AA F1+ 2.5 2.5
Bank of Ireland IRL A F1+ 18.5 2.5 16 8
HSBC Bank Plc GBR AA F1+ 2.5 2.5
Lloyds TSB Bank Plc GBR AA- F1+ 3.5 2.5 1 HBOS plc GBR AA- F1+ 13.5 1.5 12 6
National Westminster Bank Plc GBR AA- F1+ unlimited Royal Bank of Scotland Plc (The) GBR AA- F1+ 2.5 2.5 ABN AMRO Bank N.V. NLD AA- F1+ 2.5 2.5
Abbey Plc GBR AA- F1+ 14.5 2.5 12 6 Alliance & Leicester GBR AA- F1+ 16 16 8 Banco Santander ESP AA F1+ 2.5 2.5 0 0
Nationwide Building Society GBR AA- F1+ 8.5 2.5 6 6
Britannia Building Society GBR A- F2 6 6 6
cb090216 - TSS & AIS 20 ANZ National Bank Ltd AUS AA- F1+ 2.5 2.5
Commonwealth Bank of Australia AUS AA F1+ 2.5 2.5
National Australia Bank AUS AA F1+ 2.5 2.5 Clydesdale Bank Plc GBR AA- F1+ 1 1
Westpac Banking Corporation AUS AA- F1+ 2.5 2.5
Fortis Bank N.V. NLD BBB F3 2.5 2.5
KBC Bank BEL A+ F1 2.5 2.5
Bank of Montreal CAN AA- F1+ 2.5 2.5
Canadian Imperial Bank of Commerce CAN AA- F1+ 2.5 2.5
Royal Bank of Canada CAN AA F1+ 2.5 2.5
Toronto-Dominion Bank (The) CAN AA- F1+ 2.5 2.5
Danske Bank DNK AA- F1+ 2.5 2.5
Nordea Bank Finland Plc FIN AA- F1+ 2.5 2.5
cb090216 - TSS & AIS 21
BNP Paribas FRA AA F1+ 2.5 2.5
Societe Generale (SG) FRA AA- F1+ 2.5 2.5
Credit Agricole (Calyon) FRA AA- F1+ 2.5 2.5
Bayerische Hypo- und Vereinsbank DEU A F1 2.5 2.5
Bayerische Landesbank Girozentrale DEU A+ F1+ 2.5 2.5
Deutsche Bank AG DEU AA- F1+ 2.5 2.5
Dresdner Bank AG DEU A F1 2.5 2.5
Landesbank Baden-Wuerttemberg DEU A+ F1+ 2.5 2.5
Norddeutsche Landesbank Girozentrale DEU A F1 2.5 2.5
West LB AG DEU A- F1 2.5 2.5
Landesbank Hessen-Thueringen Girozentrale DEU A+ F1+ 2.5 2.5
HSH Nordbank AG DEU A F1 2.5 2.5
cb090216 - TSS & AIS 22
Allied Irish Banks Plc IRL A F1+ 2.5 2.5
Dexia Banque Internationale a Luxembourg LUX AA- F1+ 2.5 2.5
Internationale Nederlanden Bank (ING) NLD AA F1+ 2.5 2.5
Rabobank International NLD AA+ F1+ 2.5 2.5
Banco Bilbao Vizcaya Argentaria (BBVA) ESP AA- F1+ 2.5 2.5
Svenska Handelsbanken SWE AA- F1+ 2.5 1.5 1
Credit Suisse (CSFB) CHE AA- F1+ 2.5 2.5
UBS AG CHE A+ F1+ 2.5 2.5
Bank of America N.A. USA A+ F1+ 2.5 2.5
Bank of New York Mellon (The) USA AA- F1+ 2.5 2.5
Citibank N.A. USA A+ F1+ 2.5 2.5
Morgan Guaranty Trust Co of New York JPMorgan Chase Bank N.A. USA AA- F1+ 2.5 2.5 cb090216 - TSS & AIS 23
State Street Bank and Trust Company USA AA- F1+ 2.5 2.5
Intesa Sanpaolo SpA ITA AA- F1+ 2.5 2.5
UniCredito Italiano ITA A+ F1 2.5 2.5
Local Authorities 1 1
Fitch credit ratings express risk in relative rank order, which is to say they are measures of credit risk and are not predictive of a specific frequency of default or loss. They are divided into long term ratings (more than one year), AAA being the highest and short term (less than one year), F1+ being the highest.
cb090216 - TSS & AIS 24 cb090216 - TSS & AIS 25 Appendix E Rother District Council Treasury Management Policy Statement
Treasury Management Practices
The Code identifies twelve areas where statements of treasury management practices (TMPs) should be developed to implement the full requirements of the Code.
TMP 1 Risk management
TMP 2 Best value and performance measurement
TMP 3 Decision-making and analysis
TMP 4 Approved instruments, methods and techniques
TMP 5 Organisation, clarity and segregation of responsibilities, and dealing arrangements
TMP 6 Reporting requirements and management information arrangements
TMP 7 Budgeting, accounting and audit arrangements
TMP 8 Cash and cash flow management
TMP 9 Money laundering
TMP 10 Staff training and qualifications
TMP 11 Use of external service providers
TMP 12 Corporate governance
The Council’s Treasury Management Practices (TMP) is set out in Annex 1 to this document. This provides additional detail on how some of the TMPs are undertaken. Cross references are included as appropriate in the TMPs. TMP1 Risk Management
General Statement
The Director of Resources will design, implement and monitor all arrangements for the identification, management and control of treasury management risk, will report at least annually on the adequacy/suitability thereof, and will report, as a matter of urgency, the circumstances of any actual or likely difficulty in achieving the organisation’s objectives in this respect, all in accordance with the procedures set out in TMP6 Reporting requirements and management information arrangements. In respect of each of the following risks, the arrangements which seek to ensure compliance with these objectives are set out in the schedule to this document.
(1) Liquidity Risk Management
The Council will ensure it has adequate though not excessive cash resources, borrowing arrangements, overdraft or standby facilities to enable it at all times to have the level of funds available to it which are necessary for the achievement of its business/service objectives.
(2) Interest Rate Risk Management
The Council will manage its exposure to fluctuations in interest rates with a view to containing its interest costs, or securing its interest revenues, in accordance with the amounts provided in its budgetary arrangements as amended in accordance with TMP6 Reporting requirements and management information arrangements.
(3) Exchange Rate Risk Management
(Not relevant for this Authority).
(4) Inflation Risk Management
The effects of varying levels of inflation, insofar as they can be identified as impacting directly on its treasury management activities, will be controlled by the organisation as an integral part of its strategy for managing its overall exposure to inflation.
It will achieve these objectives by the prudent use of its approved financing and investment instruments, methods and techniques, primarily to create stability and certainty of costs and revenues, but at the same time retaining a sufficient degree of flexibility to take advantage of unexpected, potentially advantageous changes in the level or structure of interest rates, exchange rates or inflation. The above are subject at all times to the consideration and, if required, approval of any policy or budgetary implications. (5) Credit and Counterparty Risk Management
The Council regards a prime objective of its treasury management activities to be the security of the principal sums it invests. Accordingly, it will ensure that its counterparty list and limits reflect a prudent attitude towards organisations with whom funds may be deposited. It also recognises the need to have and, will therefore maintain, a formal counterparty policy in respect of those organisations from which it may borrow, or with whom it may enter into other financing arrangements. This is set out in the Treasury Management Practices (TMP).
(6) Refinancing Risk Management
The Council will ensure that any refinancing arrangements are negotiated, structured and documented, and the maturity profile of the monies so raised are managed, with a view to obtaining offer terms for renewal or refinancing, if required, which are competitive and as favourable to the organisation as can reasonably be achieved in the light of market conditions prevailing at the time.
It will actively manage its relationships with its counterparties in these transactions in such a manner as to secure this objective, and will avoid over-reliance on any one source of funding if this might jeopardise achievement of the above.
(7) Legal and Regulatory Risk Management
The Council will ensure that all of its treasury management activities comply with its statutory powers and regulatory requirements. It will demonstrate such compliance, if required to do so, to all parties with whom it deals in such activities. In framing its credit and counterparty policy, it will ensure that there is evidence of counterparties' powers, authority and compliance in respect of the transactions they may effect with the organisation, particularly with regard to duty of care and fees charged.
This Council recognises that future legislative or regulatory changes may impact on its treasury management activities and, so far as it is reasonably able to do so, will seek to minimise the risk of these impacting adversely on the organisation.
(8) Fraud, Error and Corruption, and Contingency Management
The Council will ensure that it has identified the circumstances which may expose it to the risk of loss through fraud, error, corruption or other eventualities in its treasury management dealings. Accordingly, it will employ suitable systems and procedures, and will maintain effective contingency management arrangements, to these ends. (9) Market Risk Management
The Council will seek to ensure that its stated treasury management policies and objectives will not be compromised by adverse market fluctuations in the value of the principal sums it invests, and will accordingly seek to protect itself from the effects of such fluctuations.
TMP2 Best Value and Performance Measurement
The Council is committed to the pursuit of best value in its treasury management activities and to the use of performance methodology in support of that aim, within the framework set out in its treasury management policy statement.
TMP3 Decision-Making and Analysis
The Council will maintain full records of its treasury management decisions and of the processes and practices applied in reaching those decisions, both for the purposes of learning from the past, and for demonstrating that reasonable steps were taken to ensure that all issues relevant to those decisions were taken into account at the time.
TMP4 Approved Instruments, Methods and Techniques
The Council will undertake its treasury management activities by employing only those instruments, methods and techniques detailed in the TMP (paragraph 6) and within the limits and parameters defined in TMP1 Risk management.
TMP5 Organisation, Clarity and Segregation of Responsibilities, and Dealing Arrangements
The Council considers it essential, for the purposes of the effective control and monitoring of its treasury management activities, for the reduction of the risk of fraud or error, and for the pursuit of optimum performance, that these activities are structured and managed in a fully integrated manner, and that there is at all times a clarity of treasury management responsibilities.
The principle on which this will be based is a clear distinction as far as is feasible between those charged with setting treasury management policies and those charged with implementing and controlling these policies, particularly with regard to the execution and transmission of funds, the recording and administering of treasury management decisions and the audit and review of the treasury management function.
The Director of Resources will ensure that there are:
• clear written statements of the responsibilities for each post engaged in treasury management, and the arrangements for absence cover (TMP: paragraph 11) • proper documentation for all deals and transactions, and that procedures exist for the effective transmission of funds (TMP: Appendix 1)
• The delegations to the Director of Resources in respect of treasury management are set out within the terms of the Council’s Constitution. The Director of Resources will fulfil all such responsibilities in accordance with these delegations and the CIPFA “Standard of Professional Practice on Treasury Management.” Also see TMP: paragraph 3.
TMP6 Reporting Requirements and Management Information Arrangements
The Council will ensure that regular reports are prepared and considered on the implementation of its treasury management policies; on the effects of decisions taken and transactions executed in pursuit of those policies; on the implications of changes, particularly budgetary, resulting from regulatory, economic, market or other factors affecting its treasury management activities; and on the performance of the treasury management function.
As a minimum: the Council will receive:
• an annual report on the strategy and plan to be pursued in the coming year
• an annual report on the performance of the treasury management function, on the effects of the decisions taken and the transactions executed in the past year, and on any circumstances of non-compliance with the organisation’s treasury management policy statement and TMPs
Members will receive:
• reports through the Rother Bulletin on treasury management transactions (see also TMP: paragraph 10)
TMP7 Budgeting, Accounting and Audit Arrangements
The Director of Resources will prepare and the Council will approve and if necessary from time to time will amend, an annual budget for treasury management, which will bring together all of the costs involved in running the treasury management function, together with associated income.
The Council will account for its treasury management activities, for decisions made and transactions executed, in accordance with appropriate accounting practices and standards, and with statutory and regulatory requirements in force for the time being. The Council will ensure that its auditors, and those charged with regulatory review, have access to all information and papers supporting the activities of the treasury management function as are necessary for the proper fulfilment of their roles, and that such information and papers demonstrate compliance with external and internal policies and approved practices. See also TMP: paragraph 2.
TMP8 Cash and Cash Flow Management
Unless statutory or regulatory requirements demand otherwise, all monies in the hands of this organisation will be under the control of the responsible officer, and will be aggregated for cash flow and investment management purposes. Cash flow projections will be prepared on a regular and timely basis, and the Director of Resources will ensure that these are adequate for the purposes of monitoring compliance with TMP1[1] liquidity risk management.
TMP9 Money Laundering
9.1 Procedures for Establishing Identity/Authenticity of Lenders.
The Council will not accept loans from individuals, if it decides to borrow. If so, all loans will be obtained from the Public Works Loan Board, other local authorities, or from authorised institutions under the Financial Services and Markets Act 2000. This register can be accessed through the FSA web site on www.fsa.gov.uk.
When repaying loans, the procedures in 9.2 below will be followed to check the bank details of the recipient.
9.2 Methodologies for Identifying Deposit Takers
In the course of its treasury activities, the Council will only lend money to, or invest with, those counterparties that are on its approved lending list. All transactions will be carried out by CHAPS for making deposits or repaying loans.
The Director of Resources and the Head of Finance are conversant with the requirements of the Proceeds of Crime Act 2002 and will ensure relevant staff are appropriately informed so they are alert for suspicious transactions.
The Council has appointed the Director of Resources to be the responsible officer to whom any suspicions that transactions involving the Council may include a party who is involved in criminal activity. Suspicious transactions will be investigated, as far as the Council is in a position to do so, or it is appropriate for the Council to do so and, if doubts remain, these transactions will then be reported to the National Criminal Investigation Service. TMP10 Staff Training and Qualifications
The Council recognises the importance of ensuring that all staff involved in the treasury management function are fully equipped to undertake the duties and responsibilities allocated to them. It will therefore seek to appoint individuals who are both capable and experienced and will provide training for staff to enable them to acquire and maintain an appropriate level of expertise, knowledge and skills. Staff will also be supported through the appointment of external treasury advisors. The Director of Resources will recommend and implement the necessary arrangements.
TMP11 Use of External Service Providers
The Council recognises the potential value of employing external providers of treasury management services, in order to acquire access to specialist skills and resources. When it employs such service providers, it will ensure it does so for reasons which will have been submitted to a full evaluation of the costs and benefits. It will also ensure that the terms of their appointment and the methods by which their value will be assessed are properly agreed and documented, and subjected to regular review.” The TMP (paragraph 8) sets out the principal external service providers.
TMP12 Corporate Governance
The Council is committed to the pursuit of proper corporate governance throughout its businesses and services, and to establishing the principles and practices by which this can be achieved. Accordingly, the treasury management function and its activities will be undertaken with openness and transparency, honesty, integrity and accountability.
The Council has adopted and has implemented the key recommendations of the Code. This, together with the other arrangements detailed in the schedule to this document, is considered vital to the achievement of proper corporate governance in treasury management, and the Director of Resources will monitor and, if and when necessary, report upon the effectiveness of these arrangements.
Annex 1
Treasury Management Practices – additional information
Contents Page
1. Introduction 2
2. Approved Activities of the Treasury Management Operation 2
3. The Delegation, Organisation and Control of Treasury Management 3
4. Treasury Management Strategy 5
5. Approved Methods of Raising Finance 6
6. Policy on Investment Instruments 7
7. Policy on Interest Rate Exposure 9
8. External Assistance 9
9. General Rules 9
10. Reporting Procedures 12
11. Individual Responsibilities 12
Appendix 1 Notice of Financial Transactions Undertaken by Broker etc 15 Treasury Management Practices – additional information
1. Introduction
1.1 This is the Treasury Management Practices (TMP). It should fully document all Treasury Management systems so that all who are involved are clear on the procedures and on any limits that apply to their activities. It is reviewed annually.
1.2 Staff should use this document as a practical guide to their daily activities and all their activities must take place in strict accordance with its rules.
1.3 As the Council is currently debt-free the document makes no reference to borrowing other than short term borrowing. The TMP would need to be fully revised if any long term borrowing were to be undertaken.
2. Approved Activities of the Treasury Management Operation
2.1 The following techniques are to be applied in the operation of the Council's Treasury Management function:
(a) Working capital is to be aggregated. All balances on the various accounts, including General Fund, Collection Fund, reserves, provisions and any other money held by the Council, will be brought together. This will ensure that all available balances are managed centrally, thus enabling the determination and operation of cash management and funding policies.
(b) Payments of amounts due from the Council can be by cheque, BACS, CHAPS, bank transfer and cash. All such payments are to be recorded against the correct account.
(c) All income is to be recorded against the correct account.
(d) Surplus funds are to be invested in instruments determined by the Council in accordance with the DCLG's Guidance for Local Government Investments in England with Approved Organisations (see Section 7). These instruments include business reserve accounts; term deposits and certificates of deposit with banks and building societies, term deposits with local authorities and the Debt Management Office's Deposit Facility; Money Market Funds; gilts, bonds issued by multilateral development banks; collective investments schemes (pooled funds) meeting the criteria under SI 2004 No 534 and subsequent amendments.
(e) Cash deficits are to be financed via approved borrowing instruments from approved sources of finance (see Section 6).
(f) Cash flow forecasting and management. (g) Management of clearing bank arrangements.
3. The Delegation, Organisation and Control of Treasury Management
3.1 The Treasury Management function has been delegated to the Director of Resources. However, clear guidelines are required to specify the exact division of responsibility for all aspects of the function between different officers in Finance and between the Director of Resources and the Council. The respective duties and responsibilities are as follows:
Council
3.2 (a) To approve the Treasury Management Strategy, to review it at least once every year or in the event of a major change requiring a review of policy, and to approve any subsequent variations.
(b) To agree the Council's Affordable Borrowing Limit which is a statutory limit determined under Section 3(1) of the Local Government Act 2003. (This limit is required by statute regardless of the fact that the Council is debt free).
Cabinet
(a) To receive an Annual Report on Treasury Management as soon as possible after the end of each financial year, but no later than 30 September. This report will contain a comprehensive review of the preceding year's Treasury Management activities.
(b) To receive a report every quarterly on the level of Treasury Management activity, including a summary of performance.
(c) To receive the Prudential Indicators as part of the budget setting process and the Annual Strategy Report, prepared in advance of each financial year. This report will identify the strategy proposed for the year in accordance with the policies set out in the Policy Statement.
Director of Resources
3.3 (a) To prepare for Cabinet approval the draft Policy Statement and any subsequent variations, and to ensure that, once approved, the Statement is regularly reviewed.
(b) To identify proposed funding and short term policies for the ensuing period with reference to the Policy Statement.
(c) To identify proposed lending and investment policies for the ensuing period with reference to the Policy Statement. (d) To advise on the acceptability of treasury instruments.
(e) To prepare the Prudential Indicators, Annual Strategy Report and Annual Report on Treasury Management.
(f) To ensure that the organisation of Treasury Management activities is adequate to meet current requirements.
(g) To assess and appoint fund managers.
(h) To ensure that staff involved in Treasury Management activities have adequate training.
(i) To produce a Treasury Management systems document and monitor compliance (see paragraph 4.1).
(j) To review the Treasury Management function at least twice a year.
(k) To comply with the CIPFA Prudential Code, the CIPFA Code of Practice for Treasury Management in Public Services and the CIPFA Standard of Professional Practice on Treasury Management.
(l) To review the performance of the Council's investments against the Council's investment objectives (security of capital, liquidity, optimum performance, in the order of priority), the prevailing interest rate environment and the effect of cash flow requirements on the Council's investment.
(m) To ensure that adequate disaster planning is undertaken.
(n) To put in place anti-money laundering policies, procedures and reporting arrangements appropriate to the Council's activities.
Internal Audit
3.4 (a) To review compliance with approved policies and procedures, and to confer with the Monitoring Officer if there is evidence of any non-compliance.
(b) To audit the Treasury Management function.
Monitoring Officer (as per the Local Government and Housing Act 1989)
3.5 (a) To ensure that the Policy Statement complies with the law.
(b) To satisfy himself that any proposal to vary the Policy Statement complies with the law. 4. Treasury Management and Investment Strategy
4.1 In advance of each financial year the Annual Strategy Report shall be prepared. This will detail economic and interest rate forecasts and the Council's likely borrowing requirements, its Annual Investment Strategy and the treasury-related Prudential Indicators for the forthcoming year. This information will give rise to specific strategies to be adopted.
4.2 General Policies that will be adhered to are as follows:
(a) On a month by month basis, an estimate of the likely capital and revenue cash flow will be prepared, with specific attention to precept dates and repayments of loans.
(b) A daily calculation of the cash flow position will be carried out, together with a r eview at the end of the day of the cash position.
(c) Any adequate surplus funds will be invested in accordance with the criteria set out in Section 6. Adequate funds shall be held on a short term (less than one year) basis with repayment date(s) to coincide in the first instance with either a precept date or repayment of loan date.
(d) Surplus funds which are inadequate to invest are to be transferred to the Council's interest earning account with the bank.
(e) The Council has arranged with the bank an overdraft facility of £750,000 on the consolidated balances of all accounts. However, the daily balance on the current accounts shall be kept as close to NIL as possible.
(f) Short term borrowings (less than one year) from approved organisations (see Section 6), are to be used only for financing short term deficits.
(g) Long term borrowing from approved organisations, (see Section 5), for financing of the capital programme and repayments of loans are to be arranged in accordance with the Annual Strategy, the Council's Affordable Borrowing Limit and Prudential Indicators. If a maturity loan is taken, careful consideration is to be given to the maturity date, to ensure that no future year has an unduly high number of maturity loans to repay.
5. Approved Methods of Raising Finance
Long Term Borrowing (one year or over)
5.1 Before any long term borrowing is undertaken an assessment of the Council's requirement must be made. This will include: (a) A calculation of the funds needed to meet capital expenditure.
(b) Options Appraisal to determine the funding decision, as required by the Prudential Code.
(c) Ensuring that the level of long term borrowing is consistent with the Treasury Management Strategy and the Prudential Indicators.
(d) Assessment of the PWLB interest rates and current market rate to ascertain the cheapest source of finance.
(e) The selection, dependant upon the level of the interest rate, of the most appropriate period for borrowing (as a general rule, when interest rates are low, borrow long term, when interest rates are high, borrow short term), bearing in mind the maturity profile of existing Council debt.
5.2 The following list specifies the borrowing instruments that can be used:
Long Term Borrrowing
Fixed Rate Variable Rate PWLB Y Y Market Long Term Y Y Local Bonds Y Y Leasing - Y Internal Balances Y Y
Short Term Borrowing (Less than one year)
5.3 Before any borrowing is undertaken an assessment of the requirement will be made, along the same lines as that used for long term borrowing.
5.4 The following list specifies the borrowing instruments that can be used.
Fixed Rate Variable Rate Market Short Term Y Y Overdraft - Y Internal Balances Y Y
No instrument other than those listed above may be used.
5.5 Should any new financial instrument become available the following criteria will be applied before Council approval is sought for its use: (a) Can the Council legally use such instruments?
(b) The mechanics of the new instrument will be clearly established and the objectives of its use examined.
(c) The risks associated with the new instrument will be assessed.
(d) The costs of the new instrument will be calculated and compared with the available alternatives.
5.6 When the Council has the option to repay an outstanding loan the benefits will be calculated and the alternatives evaluated, taking into account any discounts or premiums on early termination.
6. Policy on Investment Instruments
6.1 In accordance with the DCLG's Guidance for Local Government Investments in England and The Local Authorities (Capital Finance and Accounting) (Amendment) Regulations SI 534 No 2004, the Council will determine through its Annual Treasury and Investment Strategy report the 'Specified' and 'Non-Specified' investments it will use for its surplus funds. This covers both investments placed in- house and those of the Council’s appointed fund managers.
7. Policy on Interest Rate Exposure
7.1 The CIPFA Prudential Code requires the Council to fix each year maximum borrowing limits and the maximum proportion of interest on borrowing which is subject to variable interest rate. This will be calculated each year in conjunction with the Annual Strategy Statement.
7.2 Borrowings with variable interest rates should be considered when rates exceed 10% and shall be limited to no more than 10% of the portfolio.
8. External Assistance
8.1 Advisers
The Council has appointed Sector to advise it on:
• Balance Sheet analysis and review
• creditworthiness
• advice on the Council's compliance with the Prudential Code for capital accounting and calculation of the required indicators
• general Treasury Management matters
9. General Rules
9.1 Determination of In-House Lending
(a) On a month-by-month basis, an estimate of the likely capital and revenue cash flow will be prepared, with specific attention to precept dates and repayments of loans.
(b) A daily calculation of the cash flow position will be carried out, together with a review of the previous day's position.
(c) Any adequate surplus funds will be invested in accordance with the criteria set out in the Investment Strategy.
(d) Adequate funds shall be held on a short term basis so that repayment dates coincide with precept dates and other significant payment dates.
(e) Surplus funds which are inadequate to invest are to be transferred to the Council's interest earning account with the bank.
(f) The Council has arranged with the bank an overdraft facility of £750,000 on the current account. However, the daily balance on the current account shall be kept as close to nil as possible.
(g) The level of funds managed by the Council's Fund Managers should be reviewed on a monthly basis to determine if any change is required.
(h) The period of investment will be influenced by expected changes in interest rates. Forecasts are provided by the Council’s treasury advisors.
9.2 In house dealing procedures
These are as follows:
a) In conjunction with the cash flow forecast, each day the cash position of the Council is determined from the various sources of information including the Council’s bankers, creditors, debtors and any notifications from major funding sources such as Government Departments. If there are surplus funds to invest, rates with each of the Council’s approved deposit takers are checked and recorded. The best deal will be chosen on rate and return requirements. (b) Documentation - working notes must be taken of any deals done with deposit takers. Once a deal has been arranged full documentation must be made. For fixed term deposits written confirmation of the terms of the deal will be received from the counter-party and this must be checked against the official record. The return of the money must also be noted on the deal record, including a check of interest paid.
(c) Withdrawals from current accounts are made by facsimile. These are made on a sheet which detail the amount to be withdrawn in words and figures, the transaction date, the account to which the money is to be credited, and two authorising signatures. Proof of fax transmission is retained and the deposit account is checked for safe receipt of funds.
9.3 Transmission of Monies
The Council normally electronically transfers funds, using facilities provided by its bank, unless specific reasons, such as failure of the electronic bank facilities, prevent this being possible. The procedure for transferring monies from the Council's Bank to the counter- party is as follows:
(a) The details of the transaction are entered on the PC screen by the Input Officers from the deal record which the officer signs. The Input Officers are Principal Accountant (post R20) Senior Accountant (post R26), trainee Accountant (post R37) and Financial Services Officer (post R28). The Authorising Officers are Director of Resources (Post R1), Head of Finance (post R10), Head of Human Resources (post R75 ) and Principal Accountant (post R30) . Any change to Input or Authorising Officers must be agreed by the Director of Finance.
(b) The transactions are authorised by two Authorising Officers who sign the deal record. Authorising Officers are the Director of Resources, the Head of Finance, Principal Accountant and Head of Human Resources. Any one transaction cannot be input and authorised by the same officer. Any change to the Authorised Officer must be agreed by the Director of Resources.
(c) Input and authorisation of transactions requires the officer to input his/her password. Each user must input his/her password to validate their entry.
9.4 Review of Dealing and Transmission
The Head of Finance:
(a) Reviews the Investment Register, which records all loans made including details of interest due and repayment, on a quarterly basis. A copy will be signed and retained.
(b) Checks, and signs off, the deal records for all loans repaid: this is done in conjunction with the review of the Investment Register. 9.5 Money Market Funds, Collective Investment Schemes (Pooled Funds), Purchase of Gilts or Bonds Issued by Multilateral Development Banks
Any transfers of funds to or from the above must be on the basis of a written instruction by an Authorised Person. Such persons will be authorised by the Chief Executive and will normally be the Director of Resources, and the Head of Finance.
10. Reporting Procedures
In addition to the reports detailed above:
10.1 On a monthly basis, the Director of Resources will receive a valuation from the Council’s external fund managers of externally invested funds.
10.2 On a quarterly basis, the Director of Resources, Head of Finance and relevant staff will meet to review Treasury Management operations and, in particular, to consider the approach to lending, ie whether to lend 'long' or 'short'. A schedule for the meetings will be agreed for the forthcoming financial year at the last meeting of the year.
11. Individual Responsibilities
11.1 Director of Resources (or, in his absence, the Head of Finance)
(a) Take steps to provide adequate internal checks and division of duties. It is especially important that dealing staff should not be responsible for the control and maintenance of the Cash Book.
(b) Ensure that there is a clear written statement of the responsibilities delegated to each post engaged in Treasury Management. Because of the particular demands of Treasury Management, the Statement should also clearly specify the arrangements for absence cover. This is incorporated in the TMP and compliance monitored.
(c) Ensure all persons engaged in Treasury Management receive appropriate training.
(d) Ensure that the treasury activities of the local authority follow the appropriate processes set out and that adherence to them can be verified.
(e) Monitor Prudential Indicators and Treasury Management activities as part of the postholder's personal duties. Such monitoring should include performance measurement utilising appropriate measures. (f) Undertake reviews of the Treasury Management function at least twice a year which will examine costs, performance, earlier decisions and trends.
(g) Take account of the cash flow budget as part of the budgetary process and consider the need to report thereon.
(h) Prepare a budget for the treasury function which will be included as part of the published budget.
(i) Bring together all costs incurred in running the treasury function together with associated income into a single treasury budget centre.
(j) Comply with the Institute's Standard of Professional Practice on Treasury Management.
(k) Be responsible for the reporting procedure set out in paragraph 4 and personally draft the Policy Statement.
(l) Authorise the transfer of funds to or from externally managed investments. (In his absence, the Head of Finance).
(m) Approve Input Officers and Authorising Officers for the Natwest Bankline system.
11.2 Head of Finance (or, in his absence, the Director of Resources)
(a) Ensure compliance with reporting procedures and the Policy Statement and Annual Strategy.
(b) Supervise and monitor the work of the Input Officers and review the weekly statement of investments.
(c) Maintain the TMP, updating as necessary.
(d) Assess, monitor and review staff training requirements in relation to Treasury Management.
(e) Assist as required with the production of Committee reports.
(f) Ensure that there is adequate division of duties between the Input Officers in relation to Cash Book duties.
(g) Authorise transfers to (but not transfers from) externally managed investments.
(h) Agree confirmation of deals undertaken by brokers. (i) Draft the Prudential Indicators, Annual Strategy, including the Annual Investment Strategy and the Annual Report.
(j) Be familiar with the Prudential Indicators and the CIPFA Code of Practice.
(k) Review monthly system log from Bankline.
(l) Review Investment Register quarterly.
(m) Check all completed deal records on a monthly basis.
11.3 Input Officers will assume responsibility for:
(a) Report quarterly on lending, including returns against budget and target to the Director of Resources, and the Head of Finance.
(b) Assist as required with the production of Committee reports, in particular the cyclical reports for the Rother Bulletin.
(c) Assess daily cash requirements, and discuss them with the Head of Finance as necessary.
(d) Arrange daily borrowing and lending requirements. Any borrowing is only to be on a short term basis and with the approval of the Director of Finance or the Head of Finance.
(e) Liaise with external brokers and lenders, recording and timing all agreements and advice. Complete 'Notice of Financial Transaction' (Appendix 1) and present it to the Head of Finance with appropriate back-up for signing once repayment has been made.
(f) Be familiar with the Council's Policy Statement, the CIPFA Code of Practice and the TMP.