24
Australian Office of Financial Management The Future of the Commonwealth Government Securities Market
Australian Office of Financial
Management
The Future of the Commonwealth
Government Securities Market
Australian Office of Financial
Management
Two Broad Themes
fiscal context for the Commonwealth’s debt management operations
establishment of the AOFM
Australian Office of Financial
Management
Commonwealth Headline Cash Balance*
-10
-5
0
5
10
15
20
25
30
35
1995-96Actual
1996-97Actual
1997-98Actual
1998-99Budget
Estimate
1999-00Budget
Estimate
2000-01Budget
Projection
2001-02Budget
Projection
2002-03Budget
Projection
$ billion
* Following recent changes in the Australian National Accounts Standards, the underlying and headline cash balance estimates in the chart from 1998-99 onwards include payments by the Commonwealth in respect of accumulated PTE superannuation liabilities.
Australian Office of Financial
Management
Commonwealth Net Call on the Market
-35
-30
-25
-20
-15
-10
-5
0
5
10
1995-96Actual
1996-97Actual
1997-98Actual
1998-99Budget
Estimate
1999-00Budget
Estimate
2000-01Budget
Projection
2001-02Budget
Projection
2002-03Budget
Projection
$ billion
Australian Office of Financial
Management
Commonwealth General Government Debt
-5
0
5
10
15
20
1995-96Actual
1996-97Actual
1997-98Actual
1998-99Budget
Estimate
1999-00Budget
Estimate
2000-01Budget
Projection
2001-02Budget
Projection
2002-03Budget
Projection
Per cent of GDP
Outcomes Estimates Projections
Australian Office of Financial
Management
Fiscal Context
Australia in the vanguard of OECD countries in addressing a new set of debt management policy issues
– benefits of maintaining sovereign curve
Australian Office of Financial
Management
Fiscal Context
Government position set out in Budget
– a managed reduction in CGS
– not to the full extent of projected reduction in net debt
Australian Office of Financial
Management
Fiscal Context
maintaining the curve offers a number of benefits, including:
– supports a range of domestic derivative and related markets
– consistent with further development of Australia as a centre for global financial services
Australian Office of Financial
Management
Operational and Strategic Challenges
a number of major operational and risk management challenges ahead
balance between gross new debt issue, selected debt repurchase, yield curve consolidation
– efficient execution within a rigorous risk framework very demanding of systems and resources
Australian Office of Financial
Management
AOFM
Australian Office of Financial Management established from 1 July 1999
management of these challenges an important consideration
– but establishment of AOFM properly seen in a much longer-term, broader-based context
Australian Office of Financial
Management
AOFM
rising tide of financial sector deregulation, technological innovation and globalisation of markets over past 10-15 years
– fundamentally changed financial markets environment
– balance of risks, challenges and opportunities facing all debt managers
Australian Office of Financial
Management
AOFM
across the OECD, clear trend through the 90s towards increasing efficiency in public sector service delivery
– power, transport, telecommunications
Australian Office of Financial
Management
AOFM
Australia among the leaders in the OECD in pursuing a complementary focus on reform of public sector financial management
– Charter of Budget Honesty
– Accrual budgeting, reporting and accounting
Australian Office of Financial
Management
AOFM
Commonwealth ahead of the OECD sovereign curve in recognising the need to conduct debt management with an explicit financial risk management framework
– market risk of the debt portfolio a particular management focus
– introduced new management challenges in terms of credit and operational risk
Australian Office of Financial
Management
AOFM
risk management focus provides a framework for making such choices about risk
– these additional risks taken on consciously and explicitly in pursuit of an optimal risk-return trade-off
– very demanding of systems and resources
– implications for institutional arrangements?
Australian Office of Financial
Management
AOFM
four-tiered management hierarchy for any borrower with a risk management orientation to debt management– philosophical approach– operating framework– measurement and reporting framework– organisational structure
clear need for internal consistency among the four elements of the hierarchy
Australian Office of Financial
Management
AOFM
establishment of the AOFM not merely a ‘band-aid’ response to the prospective operational challenges of maintaining the liquidity and efficiency of the Commonwealth curve
Australian Office of Financial
Management
AOFM
much more about providing operational capability, systems and resources
address inconsistencies between the philosophical commitment to financial risk management and the other three elements of the hierarchy
– which have undermined the capacity to deliver the full benefits of a risk framework
Australian Office of Financial
Management
AOFM
as with any corporate treasury function, sovereign debt management is a business exposed to a variety of financial risks
– fiduciary responsibility to taxpayers
but critical distinctions between sovereign and a corporate as well
Australian Office of Financial
Management
AOFM
the sovereign, in its policy setting role, has the capacity to directly influence key financial market prices
sheer weight of the sovereign as the largest issuer in the domestic market
Australian Office of Financial
Management
AOFM
sovereign curve provides the risk free pricing benchmark
sovereign securities a primary hedging vehicle for the markets
Australian Office of Financial
Management
AOFM
over-arching philosophical position of the AOFM
Australian Office of Financial
Management
AOFM
eschew the potential short-term gains
pursue the longer-term benefits of market confidence, liquidity and cost savings that accrue to responsible, transparent debt management, good communication and genuine citizenship
Australian Office of Financial
Management
AOFM
Details of the role and operations of the AOFM over the period ahead
