Cash and Debt Management: Interaction and Coordination PEMPAL Treasury Community of Practice Chişinău, October 2017 Mike Williams mike.williams@mj-w.net

Today’s Agenda The implications of active cash management for today’s cash managers The functions of cash managers and debt managers The importance and benefits of integration or close coordination Coordination requirements and structures Capacity building

The Development of more Active Cash Management…. Traditional (Passive) Approach Monitoring cash balances, maintaining cash buffer to handle volatility and unexpected outflows If necessary restraining / slowing expenditures or delaying bill payments - cash “rationing” not cash management Modern (Active) Approach Trying to smooth weekly or daily cash flow by more active borrowing and lending in money market Allows lower average cash buffer – with benefits to other policies Gives 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: debt management; monetary policy; and financial markets

The Requirements of Modern Cash Management Monitoring and accessing the government’s cash Development of the TSA, identifying other available assets Monitoring the cash balance Developing policies for the use of surpluses, and the cash buffer Cash flow forecasting The development of a capability to monitor and forecast (at least 3 months ahead) changes in balances in the TSA Financial market interaction Identifying options to manage cost-effectively the government’s net cash flow deficits and surpluses Putting in place short-term arrangements (safety nets) for meeting unanticipated cash flow deficits [In due course] Executing short-term borrowing and lending transactions

Financial Market Interaction Distinguish between Rough tuning Issuance 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 surpluses Fine tuning More active policies, drawing on a wider range of instruments or institutional options, to smooth more fully MoF’s balance in TSA Fine tuning is challenging But 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 markets

Financial Market Development Developed money market important both as an objective in itself and through its links to other financial markets Repo (or similar) contributes to money market activity Makes government securities – the preferred collateral - more attractive to banks for liquidity management Benefits government debt and cash management Reduces risks and consequences of debt auction failure Providing opportunities to invest  excess cash balances Active 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 policy Understandings between Treasury/MoF about money market development and operations (including e.g. respective use of Tbills and CBBills)

Debt and Money Market Interaction MONEY MARKETS Maturities <1 year Monetary policy INTERBANK MARKET Clearing / settlement balances OVERNIGHT MARKET Overnight funds Loans / Deposits / Repos Cash Management PRIMARY GOVERNMENT BOND MARKET BOND MARKET Securities > 1 year to maturity FOREIGN EXCHANGE MARKET TERM MONEY MARKET Maturities 2 days to 1 year TBills, CP, term deposits & Repos PRIMARY T-BILL MARKET Debt Management Collateral

Some Implications… A wider range of functions and policy interactions – whoever is responsible New stakeholders and information requirements

Risks and their Mitigation Liquidity risk Ensuring liquid funds are available, avoiding overdrafts Funding risk Securing ability to raise funds at market yields when required Improving the ability to cope with uncertainty Risks attached to estimates of the borrowing requirement - insufficient information Volatility or lumpiness of underlying cash flows As well as: Market risk – associated with management of cash balances Credit risk – of counterparties Operational risk – of transactions, payments and accounts

Debt Managers’ Objectives and Functions “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” Functions Debt management strategy design Transactions execution, negotiation with creditors Transactions processing and recording Also Financial reporting Risk monitoring and compliance: Stakeholder relationship management Policy and advisory services

Debt Management: Shared Functions and Interactions

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, etc Choices made in context of debt management strategy and annual borrowing plan Depend on market appetite, market volatility, interest rate prospects Demand: intermediaries’ and investors’ requirements varying with market and their cash flow Supply: government’s financing choices made in the context of the profile of financing flows Price: represented by the yield curve In 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 price

Operational Coordination Other day-to-day coordination requirements include: Linkage of issuance dates with redemption dates Maturity 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 maturity Debt 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 issuance Allows pattern of bond sales to be announced in advance Ensures that the government presents a consistent face to the market

Key Areas of Coordination Preparation of the Debt Management Strategy Ensure sufficient stock of Tbills Building a cash buffer, Money market development Preparation of Annual Financing Plan Reflecting in-year profile of cash flows Timing of redemptions The Monthly / Quarterly Issuance Plan Retaining some flexibility to respond to events (eg in the issue of Tbills) Short-term Responses to Market Volatility Tbills and Tbonds can work together to meet the borrowing requirement and smooth cash flows Interaction with Central Bank Operational understanding important to both debt and cash managers Bank may also be fiscal agent Other cash management requirements Monitoring TSA Investing surpluses

Smoothing Cash Flows: Tbonds Daily cash flow before bond issuance Cumulative daily cash flow The impact of smooth gross Tbond issuance (net issuance = deficit) How does the Treasury maintain the cash buffer close to its target (40 in the example)?

Smoothing Cash Flow: Tbills Smoothing with 1-month & 3-month Tbills Additional Smoothing with short-term investment

Administrative Synergies and Savings Drive Integration Common skill requirements; and administrative savings in data & operational risk management

Separate functions require… Coordinated approach to stakeholders Single interface with the market for transactions Coordinated negotiation of MoUs/SLAs with central bank Shared support services Especially IT, including disaster recovery and BCP Common operational risk framework Identification, assessment and reporting Including role of internal control and internal audit Systematic exchange of information Coordination of decision making Strategic: debt management strategy taking account of short term assets and liabilities Tactical: issuance taking account of cash requirements Implications for governance framework

Cash Coordinating Committee Useful and widely used coordination mechanism for short-term cash management decisions Meets weekly Including also budget division, debt managers, central bank, tax authorities, possibly large spending ministries Delegated authority for decisions within agreed parameters Main responsibilities: Review cash flow outturns, and the comparison with forecasts Review cash flow forecasts for the period ahead Decide 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

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 monitoring CCC may report to Minster or be constituted as a sub-committee of PDC

Building Capacity Thank you! Whether integrated or coordinated, need clarity on Governance structures: respective roles and responsibilities; decision- making, delegation Relationship with key stakeholders Others in MoF, and with central bank Business Plan Important mechanism to clarify objectives, identify capability gaps Helps also to build common culture, and enhance individuals’ commitment Actively explore IT synergies Staff capability and retention Training is central, linked to business objectives, given difficulty of paying market-related salaries Other measures to encourage job satisfaction – including the T-shirt! Thank you!