Cash and Debt Management: - PowerPoint Presentation

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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!