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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


A “low for much longer” interest rate backdrop

3


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


What we consider

5

with a critical subjective overlay


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.


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


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


Appendices

9


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.


3 month OIS vs. LIBOR

11


12 month OIS vs. LIBOR

12


UK Bank CDS

13


Sovereign CDS - Excluding Greece & Ireland

14


Volatility Index

15


Sovereign GDP

16


Sovereign Net Debt as a % of GDP

17

CIPFA Scottish Treasury Management Forum Workshop 2012 18

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All data has been sourced from Bloomberg and other publicly available information.

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