1. Cash and Debt Management: Interaction and Coordination
PEMPAL Treasury Community of Practice
Chişinău, October 2017
Mike Williams

2. 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

3. 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

4. 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

5. 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

6. 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)

7. 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

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

9. 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

10. 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

11. Debt Management: Shared Functions and Interactions

12. 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

13. 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

14. 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

15. 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)?

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

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

18. 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

19. 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

20. 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

21. 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!