Cash and debt management – coordination and integration Mats Filipsson, CRO Swedish National Debt Office Chisinau October 11-13, 2017

Outline Introduction Cash/debt management ↔ monetary policy Cash management Debt management Shared areas – integration Conclusions

Intro – Swedish National Debt Office Established 1789 Agency under the Government (MoF) Five responsibilities: Debt management of the central government debt Cash management incl. banking services for the central government Providing state guarantees and loans Deposit insurance and investor protection schemes Bank resolution

Intro – Central Government Debt Left = billion SEK Right = per cent of GDP Forecast Central government debt ≈ 28 % of GDP at end of 2018 Including on-lending and money market assets ≈ 22 per cent of GDP % of GDP Billion SEK 1 USD ≈ 9 SEK

Intro → Clear legal framework The Budget Act → includes debt management Authorization to borrow Objective Purpose for borrowing Responsibilities Procedural rules Debt Management Objective “Minimize the long-term cost of the debt while taking the risk into account. Debt management shall be conducted within the framework of the requirements of monetary policy.” Cash management included

Intro→ Clear roles and responsibilities Riksdagen (Parliament) Legislation Ministry of Finance Debt managment policy (MTDS) SNDO Debt management, Cash management Riksbanken (Central Bank) Monetary policy & payment system

Intro→ Clear roles and responsibilities Year 1, October 1 SNDO propose a DM strategy (MTDS) to MoF Year 1, November 15 MoF decides on strategy for the next coming years The CB have the possibility to comment on the proposal. Year 2 SNDO implements cash and debt management The Guidelines basically The allocation of the debt (Nominal, Indexed, FX) The maturity of the debt (duration) Cover debt and cash management

Background; Debt/cash management ↔ monetary policy The central bank (“Riksbank”) → not agent for auctions or other cash and debt management operations Intraday account in the Riksbank for payments (TSA) , i.e. no overnight cash- balances → cash is invested and borrowed in the interbank market by the SNDO SNDO’s FX transactions made in the market by SNDO (i.e. not through the CB) The SNDO can borrow in foreign currency on behalf of the Riksbank to strengthen the FX reserves

Background; Debt/cash management ↔ monetary policy Result Monetary policy not an operative constraint on cash and debt management → SNDO can operate without considering the Riksbank’s objective or operative strategy Similarly, the Riksbank can achieve its objective without considering the cash and debt management/policy

Cash management – Objectives costs risks Political decisions Taxes, healthcare, education, salaries, interest payments, etc. Government payments Safe Efficient On time

Cash management – In practice Sign agreement, open account, use services Accounts and other services Procurement of bank agreements Daily settlement of TSA Cash managment; invest/borrow in the money market Debt management; funding SNDO Banks Central Government agencies Parliament, Government Control, accounting Payment orders Transfer of payments Reporting payments Transfers to/from TSA Skicka betalnings-uppdrag I Riksgäldens instruktion står det att vi ansvarar för statens betalningsmodell. Betalningsmodellen definierar vi som hela processen som krävs för att en myndighet ska kunna genomföra betalningar och för att vi ska kunna centralisera statens likviditet. Det omfattar både regelverk, ramavtal, systemstöd och kontostruktur. Visa: Vi upphandlar ramavtal från affärsbankerna. Ni avropar tjänster från ramavtalen. Ni skapar betalningsuppdrag och skickar det till banken som förmedlar betalningen. Banken och vi på Riksgälden hanterar likviditeten. Jag ska visa hur det går till snart. Ni kontrollerar och stämmer av att resultatet är det som ni förväntar er. Budget allocation Budget process, budget decision Control

Cash management in practice – Treasury Single Account SNDO top accounts in banks IN OUT IN OUT IN OUT Agencies accounts in banks IN OUT IN OUT IN OUT IN OUT IN OUT IN OUT Förklara: Det här är en förenklad modell av den kontostruktur som era och våra konton utgör. Jag ska förklara genom att ta ett exempel: Så fort ni har pengar på konto utanför den här strukturen så kommer de inte upp på vårt centralkonto. Eftersom vi har en nettoskuld så innebär det att vi har lån på motsvarande här. Med andra ord betalar staten ränta på lån för pengar en myndighet har på konto och med stor sannolikhet får myndigheten en intäktsränta som är lägre än vår upplåningskostnad. Sätter man då på sig statshatten blir det en dålig affär. Förmodligen är det en dålig affär även för myndigheten. Är det pengar som ska ligga på ett räntekonto så ger vi normalt bättre avkastning än bankerna. Det finns vissa pengar som ska ligga utanför efter särskilt beslut det kan vara exempelvis deponerade eller fonderade medel. Valutakonton ligger också utanför, där har vi i dagsläget ingen koncernstruktur. Förklara och ge exempel Inkludera exempel med internstatlig betalning vilket ger 0 på centralkontot Approx. 235 central governments agencies (Operating costs, taxes, transfers, etc.) Bank 1 Bank 2 Bank 3 etc.

Cash flows – management Conditions TSA balance at the end of the day = zero Not allowed to borrow from the central bank Agreement to not make placement in the central bank → Market operations in the money market T-bills (and occasionally CP) Reversed repos Triparty Deposits Riksbank certificate (CB Bills) Accurate forecasts important Monthly forecasts > divided on daily basis Daily balance updated three times a day

Cash management – Instruments Function (short time purposes) Bonds → placements, rarely Covered mortgage bonds Placements T-bills Funding (auctions and on-tap for CM) Commercial papers (substitute to T-bills) Funding Repos Reverse repos Tri party repos Central bank certificates Deposits Funding and placements Cash buffer Do not have

Debt and cash management Macro, assumptions Funding Forecast (Internal, not published) Testdata Published in February, June and October

Debt management – Objective and strategy costs risks Predictability Regular auctions, auction schedule (dates, instruments), amounts in advance Transparency Forecasts of net borrowing requirement and funding plans three times a year; ”Central Government Borrowing – Forecast and Analysis” Website (in English), www.riksgalden.se Investor relations Accessible Primary dealers important distribution and information channels Investor meetings Road shows

Cash/debt management – Instruments Bonds → core funding Nominal bonds Inflation linked bonds Foreign currency bonds T-bills Commercial papers Repos (market commitment) Derivatives (portfolio adjustments)

Shared areas – instruments Cash management Bonds → placements, rarely Covered mortgage bonds T-bills Commercial papers → substitute to T-bills Repos Reverse repos Tri party repos Central bank certificates Deposits Debt management Bonds → core funding Nominal bonds Inflation linked bonds Foreign currency bonds T-bills Commercial papers → substitute to T-bills Repos (market commitment) Derivatives (portfolio adjustments)

Shared areas – Risk management and daily control Cover Control Comment Interest rate risk Cash & debt management Duration Cash flows cause high volatility => duration interval FX risk Allocation Now reducing fx exposure Refinancing risk Debt management Duration target + maturity profile Low debt level and high credit rating supports Liquidity risk Cash Management Cash forecasts, deep & liquid market High credit rating supports Credit risk, placements Limits based on rating, instrument and maturity Lowest accepted rating A-, max. maturity 12 months Credit risk, derivatives Rating and collaterals Thresholds zero

Shared areas – organization Staff ≈175 DM ≈ 65, incl. support functions

SNDO management, HR, IT, Communication…. Shared areas – organization, flow, recourses Cash Management Dep. Managing the payment model Procuring framework agreements for payment services. Providing appropriations and loans. Providing advice and service. 10 staff Economic Analysis Forecasts Analysis Development of ideas and methods 9 staff Debt Management Dep. Debt and cash management operations Short to long tem borrowing plans Strategic analysis 19 staff Management (2) Cash and debt management operations (6) Analysis, forecasts, borrowing plans (7) Business intelligence (4) Back Office Clearing and settlement Payments Debt recording 10 staff Risk identification, assessment, monitoring, control and reporting 8 staff SNDO management, HR, IT, Communication….

Conclusions In practice no clear line between CM – DM Same objective Same risk management Same instruments Same organization Same staff = Nearly full integration CM- DM Integration supports efficiency Portfolio perspective > cost/risk > possible to use the whole yield curve 1day – 30 years Market intelligence Automatic coordination Operational efficiency > share organization, staff, competence system, support functions

Conclusions Prerequisites Clear institutional framework Clear roles and responsibilities Stable financial system Deep and liquid domestic market (1 day – 20 year) Treasury Single Account (TSA) Functioning financial infrastructure And time, patience and brave people

The End

Appendix – Cash management operations, an overview

Appendix – History Late 90’s (after a severe fiscal crisis…) Increased focus on cash and debt management and it’s basic objective → cost and risk Increased operational independence of the Debt Office Focus on efficiency of cash management and debt management Cash management moved to SNDO Decoupling debt management – monetary policy