Interaction and Coordination PEMPAL Treasury Community of Practice Chişinău October 2017 Mike Williams mikewilliamsmjwnet Todays Agenda The implications of active cash management for todays cash managers ID: 707182
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Cash and Debt Management: Interaction and Coordination
PEMPAL Treasury Community of PracticeChişinău, October 2017
Mike Williamsmike.williams@mj-w.netSlide2
Today’s Agenda
The implications of active cash management for today’s cash managersThe functions of cash managers and debt managersThe importance and benefits of integration or close coordinationCoordination requirements and structuresCapacity buildingSlide3
The Development of more Active Cash Management….
Traditional (Passive) ApproachMonitoring cash balances, maintaining cash buffer to handle volatility and unexpected outflows
If necessary restraining / slowing expenditures or delaying bill payments - cash “rationing” not cash managementModern (Active) Approach
Trying to smooth weekly or daily cash flow by more active borrowing and lending in money marketAllows lower average cash buffer – with benefits to other policiesGives tools to protect expenditure plans from cash flow volatility
Has Implications for Cash Management Objectives….
Ensuring cash is available to facilitate the smooth execution of the budget, but also
Economising on cash within government
Managing efficiently the government’s short-term cash flow
In such as way as also to benefit: d
ebt management; monetary policy; and financial markets Slide4
The Requirements of Modern Cash Management
Monitoring and accessing the government’s cash Development of the TSA, identifying other available assetsMonitoring the cash balanceDeveloping policies for the use of surpluses, and the cash buffer
Cash flow forecastingThe development of a capability to monitor and forecast (at least 3 months ahead) changes in balances in the TSAFinancial market interactionIdentifying options to manage cost-effectively the government’s net cash flow deficits and surplusesPutting in place short-term arrangements (safety nets) for meeting unanticipated cash flow deficits
[In due course] Executing short-term borrowing and lending transactionsSlide5
Financial Market Interaction
Distinguish betweenRough tuningIssuance of Treasury bills (or other bills) in a pattern designed to offset liquidity impact of net daily cash flows, i.e. to smooth the change in MoF’s balance in the TSA
[Where relevant] management of structural surplusesFine tuningMore active policies, drawing on a wider range of instruments or institutional options, to smooth more fully MoF’s balance in TSAFine tuning is challengingBut rough tuning can be approached gradually by all countries
Tbills are both a cash management and debt management instrument (often also a monetary policy instrument)
The pace of reform will vary, depending on
The range of instruments available
The development of the money and bond marketsSlide6
Financial Market Development
Developed money market important both as an objective in itself and through its links to other financial marketsRepo (or similar) contributes to money market activityMakes government securities – the preferred collateral - more attractive to banks for liquidity management
Benefits government debt and cash managementReduces risks and consequences of debt auction failureProviding opportunities to invest
excess cash balancesActive
cash management dependent on –
but can also
support
–development of domestic financial market
Emphasises importance
of:Debt and cash managers working closely together. Interaction between cash management policies and monetary policyUnderstandings between Treasury/MoF about money market development and operations (including e.g. respective use of Tbills and CBBills)Slide7
Monetary policy
INTERBANK MARKET
Clearing / settlement balances
OVERNIGHT MARKET
Overnight funds
Loans / Deposits / Repos
TERM MONEY MARKET
Maturities 2 days to 1 year
TBills, CP, term deposits & Repos
PRIMARY T-BILL MARKET
PRIMARY GOVERNMENT BOND MARKET
BOND MARKET
Securities > 1 year to maturity
FOREIGN EXCHANGE MARKET
MONEY MARKETS
Maturities <1 year
Cash Management
Debt Management
Collateral
Debt and Money Market InteractionSlide8
Some Implications…
A wider range of functions and policy interactions – whoever is responsibleNew stakeholders and information requirementsSlide9
Risks and their Mitigation
Liquidity riskEnsuring liquid funds are available, avoiding overdraftsFunding riskSecuring ability to raise funds at market yields when requiredImproving the ability to cope with uncertainty
Risks attached to estimates of the borrowing requirement - insufficient informationVolatility or lumpiness of underlying cash flowsAs well as:Market risk – associated with management of cash balancesCredit risk – of counterpartiesOperational risk – of transactions, payments and accountsSlide10
Debt Managers’ Objectives and Functions
Objectives“to ensure that the government’s financing needs and its payment obligations are met at the lowest possible cost over the medium to long run, consistent with a prudent degree of risk” [and develop the bond market]Key roles
“to establish and then execute a strategy …in order to raise the required amount of funding, and to achieve its cost and risk objectives”FunctionsDebt management strategy design
Transactions execution, negotiation with creditorsTransactions processing and recordingAlso
Financial reporting
Risk monitoring and compliance:
Stakeholder relationship management
Policy and advisory servicesSlide11
Debt Management: Shared Functions and InteractionsSlide12
Cash and Debt: Making the Choice
Financing government’s gross borrowing requirement choices between instruments: internal or external, short or long-term, bonds or bills, fixed or floating rate, retail or wholesale, etcChoices made in context of debt management strategy and annual borrowing planDepend on market appetite, market volatility, interest rate prospects
Demand: intermediaries’ and investors’ requirements varying with market and their cash flowSupply: government’s financing choices made in the context of the profile of financing flowsPrice: represented by the yield curveIn making these decisions [debt/cash] managers must
Juggle the full range of instruments in deciding issuance
Trading-off the demands of the strategy, the demands of the market, and the government's need for cash, taking account of priceSlide13
Operational Coordination
Other day-to-day coordination requirements include:Linkage of issuance dates with redemption datesMaturity dates chosen to avoid weeks, and especially days, of heavy cash outflow (e.g. salary payments): instead target days of cash inflow (the due date for tax payments)
Debt managers can mitigate the cash management problems that potentially arise when large bonds come to maturityDebt managers can also correct repo market distortions or disruptions As interaction with the market develops, integration of debt and cash management functions becomes especially important.
In time, through active management of the short-term cash position, the combined function will be better placed to weaken the link between the timing of cash flows and bond issuanceAllows pattern of bond sales to be announced in advance
Ensures that the government presents a consistent face to the marketSlide14
Key Areas of CoordinationSlide15
Smoothing Cash Flows: Tbonds
How does the Treasury maintain the cash buffer close to its target (40 in the example)?
Daily cash flow before bond issuance
Cumulative daily cash flow
The impact of smooth gross Tbond issuance (net issuance = deficit)Slide16
Smoothing Cash Flow: Tbills
Smoothing with 1-month & 3-month Tbills
Additional Smoothing with short-term investmentSlide17
Administrative Synergies and Savings Drive Integration
Common skill requirements; and administrative savings in data & operational risk management Slide18
Separate functions require…
Coordinated approach to stakeholdersSingle interface with the market for transactionsCoordinated negotiation of MoUs
/SLAs with central bankShared support servicesEspecially IT, including disaster recovery and BCPCommon operational risk frameworkIdentification, assessment and reportingIncluding role of internal control and internal audit
Systematic exchange of informationCoordination of decision makingStrategic: debt management strategy taking account of short term assets and liabilities
Tactical: issuance taking account of cash requirements
Implications for governance frameworkSlide19
Cash Coordinating Committee
Useful and widely used coordination mechanism for short-term cash management decisionsMeets weeklyIncluding also budget division, debt managers, central bank, tax authorities, possibly large spending ministries
Delegated authority for decisions within agreed parametersMain responsibilities:Review cash flow outturns, and the comparison with forecastsReview cash flow forecasts for the period aheadDecide on the action needed to ensure cash adequacy over the period ahead [making recommendations accordingly]
Supported by Cash Management Unit (CMU)Responsible for forecast preparation, database, error analysis etc
Also preparation of scenarios and what-ifs Slide20
Debt and Cash Management: Coordination
*PDC: main roles: high-level policy and risk framework for debt [& cash] management; preparation/approval debt strategy; mandating execution responsibilities; target setting and performance monitoringCCC may report to Minster or be constituted as a sub-committee of PDCSlide21
Building Capacity
Whether integrated or coordinated, need clarity onGovernance structures: respective roles and responsibilities; decision-making, delegationRelationship with key stakeholdersOthers in MoF, and with central bank
Business PlanImportant mechanism to clarify objectives, identify capability gapsHelps also to build common culture, and enhance individuals’ commitmentActively explore IT synergiesStaff capability and retention
Training is central, linked to business objectives, given difficulty of paying market-related salariesOther measures to encourage job satisfaction – including the T-shirt!
Thank you!