Dynamic Treasury Risk Management

1
Dynamic Treasury Risk Management

• Moving on from Iceland

Glen Manning
2
Focusing on interest rate risk in Local Authority
portfolios

• Iceland should be taken as a wake up call to
  all treasury and risk management professionals -
  The unexpected can happen.
• Iceland should also remind us that LAs take on
  many other forms of risk, besides credit risk in
  investment portfolios
• UK LAs have entered into some of the most
  sophisticated derivative instruments traded in
  the Sterling interest rate derivative market
• LOBOs embedded long dated Swaptions
• Structured Deposits Callable Deposits, Inverse
  Floaters, Range Accrual Notes
• Taking on risk in itself is not bad, so long as
• It is understood
• You are being paid the right price for the risk

3
Towards the development of a long term,
strategic, interest rate benchmark

• Risk and return benefits need to be assessed
  against a LAs long term, strategic benchmark
• A 50yr fixed rate borrowing might be cheap, but
  what about the risk ? Is it appropriate ?
• To establish the benchmark debt and investment
  portfolio, a LA will need to consider its long
  term financial objectives
• Long term stability in Council Tax, stability of
  cash flows through the Revenue Account
• The benchmark portfolio will guide financial
  decision making
• Debt the optimal duration, and the mix between
  fixed rate and floating rate debt
• Investments Liquidity requirement, the interest
  rate and credit duration, fixed rate vs floating
  rate
• Investments and borrowing can be compared against
  the benchmark. Risky instruments can be properly
  assessed
• This instrument deviates from the benchmark, but
  I get compensated for the risk of deviation