Risk Hedging in Cash Management on the Single Treasury Account Yekaterina Semyonova– Head, Federal Budget Execution Department, Treasury of Russia Vienna, Austria May 2017

Role of the Russian treasury in cash management Models of public debt management and execution Of active operations Centralized Model – one managing entity Decentralized Model – several managing entities Russian MoF- budget balance support billion Roubles Balancing by sources Russian Federation France (case study) Agence France Trésor public debt active operations … … Russian MoF December January public debt sovereign wealth funds period t - receipts - expend-s - surplus - deficit Coordination of common parameters reporting, cash plan, operational information Russian Treasury Russian Treasury - liquidity management active operations billion Roubles STA balance «notional zero Buffer volume January December - active operations Use of rough and fine-tuning tools - Passive operations 2

key risk hedging tools involved in cash management Managing Entities Objects of Management Risks Hedging Tools Ministry of Finance Public Debt Sovereign wealth funds Lack of resources to cover a federal budget deficit – default risk; Irrecoverable loss of financial assets from sovereign wealth funds A balanced fiscal policy; A balanced debt management policy; Diversification of tools to manage sovereign wealth funds; Development of requirements to counterparties Federal Treasury STA liquidity Cash gap- default on obligations; Default on counterparties’ obligations– loss of placed amounts Setting of requirements to counterparties; Development of strategy and tactics for placement/ raising of funds; Establishment of an account buffer balance; (auction) bid parameter control; Diversification of active and passive (reactive) operations; EFL*; Development of a rapid response liquidity management mechanism in case of a cash gap; Information security of payments * EFL=expenditure financing limit - a tool applied by the Russian MoF based partially on the Federal Treasury information

Requirements to counterparties Placement of federal budget funds in bank deposits Purchase (sale) of securities through REPO agreements Budget credits General License issued by the Bank of Russia Capital at least 25 billion Roubles (FT may change the requirement)) One of the requirements: - To be under direct or indirect control of the Bank of Russia; - Agreement with the Deposit Insurance Agency on a Subordinate Loan and provision of federal bonds No overdue payables on deposits participation in the mandatory deposit insurance system Other requirements General License issued by the Bank of Russia Capital at least1 billion Roubles No overdue payables on deposits and REPO No currently active measure enforced by the Bank of Russia for a failure to meet a mandatory requirement The limit is 1/12 of the budget revenue amount as approved by the Budget Law or Regulation (except for grants, subsidies and inter-budgetary transfers) Maximum credit period is 50 days (the credit repayment due date is November 25th of the current year) No resources placed in bank deposits 4

Development of STA day-by-day cash flow forecasts– knowledge of future liquidity levels 1st Stage: Forecasting of cash flows for a long period (broken down by days) 2nd Stage: Identification of temporarily surplus cash amounts for various periods billion Roubles V 3 V 4 V 2 t+15 t+20 V 1 t+75 notional zero ‘buffer’ volume t+90 t+15 t+50 t+70 t+75 t+90 V 1 = 50 V 2 = 150 V 3 = 200 V 4 = 200 3rd Stage: development of placement program and daily targeting perimeter

outcome: Effective liquidity management – use of every rouble; * placement of funds for t+1-a source of ‘instant’ liquidity 18:00 decision making matrix outcome: Decision endorsement by Commission Signature by the Commission Chairperson 17:30 Identification of the amount to be placed (decision-making) * 17:00 Effective liquidity management – use of every rouble; Control of liquidity changes for t+1 – volatility-resistant approach; Source of ‘instant’ liquidity * Identification of maximum amount of temporarily surplus cash 16:30 * Collection of major applications and generation of information on all federal treasury regional offices 16:00 Federal Treasury local offices Profile unit 1 Profile unit 2 * routine interaction/communications Fine-tuning of liquidity Outcome of daily targeting Before placement program billion Roubles Daily targeting perimeter V6 V2 V3 V 4 V5 V6 V n V1 notional zero ‘buffer’ volume t

Depends on a fine-tuning toolkit Buffer volume on sta– a source to cover urgent payments Periods of ‘moderate’ and ‘large’ receipts ‘buffer’ volume: Depends on a fine-tuning toolkit Correlates with a period of fine-tuning A revisable value Covers expenditures and payments t+1, t+2 A current targeting benchmark – ‘a corridor’ (a collar) of 150-300 billion Roubles billion Roubles Period of ‘moderate’ receipts Период II Period of ‘large’ receipts Key tax receipts (mineral extraction tax, value added tax) notional zero ‘buffer’ volume Algorithm # 1 Algorithm # 2 Targeting options: Algorithm # 1: Vpl= Sf-Exp-P+Rpl-Buf Algorithm # 2: Vpl= Sf-Exp-P+Rpl+85%Rev-Buf Vpl – volume of surplus cash (to be placed) Sf – projected surplus funds for t+1 Exp – expenditures t+1 P – payments (sources, ‘long monies’, other) t+1 Rpl – recovered from placement t+1 Rev – revenues t+1 Buf - ‘buffer’ volume

Minimum amount of funds per one application Control of (auction) selection parameters of applications for deposits and repo deals Minimum placement/ deposit interest rate Cutoff rate* Volume of cash Minimum amount of funds per one application Form of selection of applications Placement period * In extreme cases may be used as a strict cut-off tool for applications from credit institutions (this cut-off method is practically not used)

Diversification of active and passive operations Active liquidity management – asset-liability operations related to STA residuals Active operations– placement of temporary surplus Passive (reactive) operations– raising of funds to cover temporary cash gaps in the STA (outlook) STA liquidity management goals: to ensure coverage of cash gaps to generate income 2017- 2018 Budget Credits to RF Constituents February 2014 Days in foreign currency Deposits from 8 to 29 November 2014 Overnight REPO January 2015 to Municipalities Budget Credits April 2015 Forward REPO January 2016 Reverse РЕПО Short-term loans Demand Deposits Currency SWAP Deposits in Roubles from 5 to 294 April 2008 Your Text For your information: Active operations are possible with budget-in-deficit as well

Procedure for EFC Setting expenditure financing ceilings (EFCs) – long-term liquidity tuning Projections (Key Administrators of Budget Funds) Development of EFC Setting Framework Information on STA Status Procedure for EFC Setting MoF is making a decision on EFC setting No Yes Other options to increase liquidity are available (e.g., expansion of sources: securities, etc.) If STA liquidity is insufficient– EFCs are fortified with a parallel expenditure cuts If liquidity is sufficient on STA – EFCs stay at the level of declared projections Liquidity rough-tuning EFCs setting billion Roubles Development of Long-Term Placement Programs Initial liquidity Notional zero Buffer volume Months January February March April May June July August …… December

liquidity rapid response mechanism Liquidity balancing options: Outcome: Execution of a payment within an intra-day debit balance on the STA Reduction of one-day placement rate Withdrawal of funds from placement Fund raising in the capital market Application of payment due date ? 1 withdrawal of funds or fund-raising shall be assessed and the option with the highest expected yields shall be selected Yes NO 2 Yes NO 3 4 conclusion: balancing is only possible if a wide range of rapid response tools is available 11

fine rough placement of funds from t+5*to t+n deposits from t+5 A wide range of fine tuning liquidity management tools – a guarantee for temporary cash gap coverage rough fine placement of funds from t+5 deposits up to t+5 REPO up to t+5, overnight REPO placement of funds from t+5*to t+n deposits from t+5 REPO from t+5 withdrawal from placement Fund-raising in the capital market to cover temporary cash gaps (nearest future) demand deposits (nearest future) Expenditure Financing Ceilings (EFCs) application of due date (nearest future) STA debit balance mode (being considered) *t+5 - nearest future (current time - t+3)

conclusion 100% Diversification and enhancement of risk hedging tools is a mandatory condition for bringing liquidity down to a ‘notional’ zero Liquidity , total % STA balance Hedging zone Risk zone 0/ «условный» 0 Period

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