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CIPFA Scottish Treasury Management Forum Workshop
Risk Management Panel Session
Mark Horsfield
23rd February 2012
CIPFA Scottish Treasury Management Forum Workshop 2012
Factors to consider in building a lending list
2
CIPFA Scottish Treasury Management Forum Workshop 2012
A “low for much longer” interest rate backdrop
3
CIPFA Scottish Treasury Management Forum Workshop 2012
Scrutiny has increased and changed
4
Training
Minimum acceptable credit quality
Investment Regulations require assessment of treasury risks
Benchmarking – risk(s) versus return
Scrutiny of strategy and activity – increased frequency
Wider range of instruments
CIPFA Scottish Treasury Management Forum Workshop 2012
What we consider
5
with a critical subjective overlay
CIPFA Scottish Treasury Management Forum Workshop 2012
What are we concerned about?
6
A loosening of criteria to accommodate process driven solutions -
“..... not rely solely on the current credit ratings of counterparties but also includes
the following overlays:
Credit watches and credit outlooks from credit rating agencies
Credit Default Swaps spreads to give early warning of likely changes in credit
ratings
Sovereign ratings to select counterparties from only the most creditworthy
countries”
Rejection of lowest common denominator approach to ratings in order to “not give
undue preponderance to just one agency’s ratings.” But what if that agency’s
view is right?
An emerging CIPFA led focus on investment concentration.
CIPFA Scottish Treasury Management Forum Workshop 2012
What are we reassured about?
7
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
1 2 3 4 5 6
Avera
ge R
ate
of In
vest
ments
Average Credit Risk Score - Time Weighted Average
Arlingclose Client Benchmarking - Time Weighted Basis, 30.09.11
Benchmarking Example Council
Lower Risk Higher Risk
CIPFA Scottish Treasury Management Forum Workshop 2012
What are we reassured about?
8
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
1 2 3 4 5 6
Avera
ge R
ate
of In
vest
ments
Average Credit Risk Score - Time Weighted Average
Arlingclose Client Benchmarking - Time Weighted Basis, 30.12.11
Benchmarking Example Council
Lower Risk Higher Risk
CIPFA Scottish Treasury Management Forum Workshop 2012
Appendices
9
CIPFA Scottish Treasury Management Forum Workshop 2012
Overnight Interest Rate Swap (OIS) & SONIA
10
OIS = Overnight Interest Swap
A transaction between banks on a NOTIONAL sum, not the physical.
Settlement at the end of the Swap is for marginal difference around a given
interest rate, not full interest.
Marginal credit risk.
SONIA – Sterling Overnight Interest Average
An index of the average overnight rate that is used as the reference rate for
OIS.
CIPFA Scottish Treasury Management Forum Workshop 2012
3 month OIS vs. LIBOR
11
CIPFA Scottish Treasury Management Forum Workshop 2012
12 month OIS vs. LIBOR
12
CIPFA Scottish Treasury Management Forum Workshop 2012
UK Bank CDS
13
CIPFA Scottish Treasury Management Forum Workshop 2012
Sovereign CDS - Excluding Greece & Ireland
14
CIPFA Scottish Treasury Management Forum Workshop 2012
Volatility Index
15
CIPFA Scottish Treasury Management Forum Workshop 2012
Sovereign GDP
16
CIPFA Scottish Treasury Management Forum Workshop 2012
Sovereign Net Debt as a % of GDP
17
CIPFA Scottish Treasury Management Forum Workshop 2012 18
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The contents of this document are based upon sources of information believed to be reliable, however, save to the extent required by applicable law or regulations, no guarantee, warranty or representation (express or implied) is given as to its accuracy or completeness and, Arlingclose Limited, its directors officers and employees do not accept any liability or responsibility in respect of the information or any recommendations expressed herein which, moreover, are subject to change without notice. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way.
All data has been sourced from Bloomberg and other publicly available information.
Arlingclose Limited provides independent advice.