The Service Level Agreement between the Treasury and the Central Bank PEMPAL Treasury Community of Practice Chişinău, October 2017 Mike Williams mike.williams@mj-w.net

The Context In Moscow emphasised the need for Mechanisms to ensure consistency at high level between monetary policy, fiscal and debt management Operational coordination and cooperation between the CB and those responsible for the management of debt and cash Importance of structuring at different levels, including the role of Memorandums of Understanding (MoUs) and Service Level Agreement (SLAs) to bring clarity, and avoid misunderstanding Different country experiences Most had MoUs or SLAs covering at least some activities between the CB and MoF/Treasury But widespread concern that the relationship tended to be dominated by the CB Specific request for guidance/template for a SLA

Today’s Agenda Focus on the SLA between Treasury/MoF and CB that covers the “treasury services” supplied by the institutions to each other Services that are relevant to: Government cash management Government debt management Monetary policy operations Taking account of the: The policy context The MoU/SLA boundary The range of services involved The structure of a SLA Note: there is no “one suits all” option or single template The aim is to provide material on which countries – and in particular the Treasury function within the MoF – could draw in preparing a SLA, taking account of their own needs and circumstances

The Policy Framework 1. Facilitating Macroeconomic Policy Coherence 4. Services Primarily focus on 3 & 4 – but speak briefly about 1 & 2 2. Managing Government’s Balance Sheet 3. Financial Market Operations, implementation and coordination The focus is on 4.Services; but there is some interaction with 3.Operations

Policy Coordination: Mechanisms & Structures Legislation, Decrees, Regulations where needed Terms of reference of committees and working groups Memorandums of Understanding or Protocols on operations Structures – at different levels Minister/Governor Formal committee structures, e.g. Public Debt Committee for high level policy coherence Cash Coordination Committee for daily or weekly operations Technical working groups Day to day operational interaction

The MoU covering Operations No clear dividing line between an MoU and SLA Some countries put high level policy and operational issues in the same document (e.g. Iceland) The policy may be in an MoU, but the details of how it is operated in the SLA: e.g. Interest on the TSA Information and data exchanges Use of overdraft There may be one or more MoU(s) and one or more SLA(s)

The MoU: Some Examples The joint program for the development of the money market Including policies and operations for bill issuance and the respective roles of CBbills and Tbills How the CB reports its and the market’s views about the debt and cash management program and operations Might be covered by the PDC The respective roles in handling any unusual market operations Special monetary operations, inc QE Special repo operations Choice of primary dealers or auction counterparties Shared or independent The payment of interest on government balances at the CB Has to be agreed at the policy level, even if details in SLA Information exchanges – respective responsibilities Mechanism of communication and issues covered (e.g. the prospective auction schedule, cash flow forecasts, banking information) Determinants of e.g. the timing of respective auctions Also associated market announcements, inc prior warning [Where the treasury is able to borrow from the CB], understandings of the limits (sums, maturities, ability to roll over etc.) of such borrowing

The Role of the SLA What the SLA does Why it does it The SLA: Identifies the services that will be supplied Specifies the requirements, how they will be provided and to what standard The basis of remuneration How any performance shortfalls or conflicts will be handled. The analogy is the private sector contract for services supplied But a fully-fledged contract between two parts of central government will not be appropriate They have shared objectives and a reservoir of mutual trust [we hope] The purpose of the SLA: to manage expectations on both sides; to avoid there being any misunderstanding about respective roles and responsibilities to help allocate resources (via charges) in a way that is robust to future personnel changes The SLA should identify who does what when something goes wrong There may be one or more than one SLA It may provide for schedules that are changed more frequently

The Services Covered The CB as the Government’s Banker Assume the TSA is located at the CB May be other Treasury accounts at CB Requirements also depend on: CB’s role in relation to payments: centralised or decentralised; use of EFT, sophistication of GIFMIS etc Whether there are regional branch networks of MoF and CB CB may supply other debt and cash management services Fiscal agent Settlement agent More substantial for countries actively managing cash or using the repo market Registrar and/or paying agent for government bonds Treasury may also supply services Cash flow forecasts Other data [Special monetary operations – unusual, highly specific; not covered below]

Specific Services: Banking The structure of bank accounts, and the interaction between them. Includes, linking, sweeping or mirroring., and notional sub-accounts. How balances of sub-accounts are aggregated to calculate the balance in the TSA Other specified Treasury accounts outside the TSA (e.g. donor accounts) Agreed procedures for opening and closing bank accounts Handling of foreign currency flows Bank statements, timing and detail; respective reconciliation responsibilities. Payments processed by the CB: timing and mode of data transfer from Treasury. Deadlines for transaction handling The rate of interest to be paid on balances in the TSA, including its calculation Arrangements for borrowing from the central bank, where that is allowed Degree of automaticity, limits, maturities, roll-over capabilities, interest to be charged Additional provisions may be needed where the Treasury is a participant in the payments systems Default will be the rules applying to all participants

Specific Services: Fiscal Agent Arrangements for any prior discussion of borrowing plans or the security chosen at the forthcoming auction Notice of related decisions (some of this may be in the MoU) Handling of auctions: Publication of auction details Collection of bids Handling of any cash deposits Processing and internal presentation of results for decision making Publication of results Associated deadlines for these activities Respective responsibilities for primary dealer contracts Nature of any secondary market transactions by the CB on behalf of the Treasury, and associated instructions and reporting Market activity reports

Specific Services: Settlement and Registration Settlement & Related Services Registration Services Interaction with settlement system: Account structure, respective responsibilities of CB and Treasury Transaction & stock reporting Treasury access to settlement data, inc for reconciliation Deadlines for handling transactions to meet settlement cut-offs Confirmation of transactions settlement Handling of fails by the counterparty Access to intra-day liquidity Treasury access to the collateral held by CB for special repo operations Repo collateral handling Where the Treasury is actively managing cash and using the repo market Maintenance of the register of all bond holders Ensuring that all primary and secondary market transactions are captured accurately Reporting bond ownership in agreed format and frequency Payment of coupons and redemptions by due date Handling of unclaimed payments Procedures (timings, information flow) for handling liability management operations May be a separate protocol

Specific Services: Other Business Continuity Treasury Services to the CB Assurances about business continuity Arrangements for reporting a problem and for recovery; and what happens following a business continuity event Compensation in the event of an IT failure See French example [Arrangements for CB to take over from Treasury/DMO if it is unable to carry out its normal business] Cash flow forecasts Detail, format and frequency Other relevant data under MoF control E.g on budget performance, balance of payments, etc Timely information on budget plans, auction timetable, unusual debt or cash operations, and so on French example In France the CB has assured DMO/Treasury of “uninterrupted availability of account keeping applications” and “implementation of an emergency back-up procedure in the event of an incident that affects the telecommunications link” The MoU provides for “compensation for investment opportunities that are missed because the [CB] is unable to honour its contractual commitments.”

The Headings of the SLA? Background, Purpose and Scope Authorities Valid instructions, signatories, record keeping etc Obligations Services supplied, business continuity, indicators Liability Force majeure, compensation Disputes Procedure Forward Planning Willingness to deliver new requirements Monitoring and Liaison Regular meetings Charging and billing arrangements Control assurances Confidentiality Review, Revision and Termination Next slide Previous slides

Two Contentious Issues Control Assurances How does the Treasury obtain assurance that the CB’s internal control system is adequate Private sector increasingly requires service providers to present external audit report on their internal systems Treasury should ask for an analogous report from CB Charges Treasury should pay for services (CB should pay interest on TSA balances) – to give the right economic signals Usually more efficient to levy per transaction (possibly plus a lump sum), not by value Fees paid could be linked to performance targets

Next Steps Circulated paper gives much more detail Grateful for feedback Some questions Is this material helpful; is it what was requested? Does it make sense in the light of country experiences; is it practical? What is missing; what would be most help as the next step in this area? Thank You!