1. PUBLIC CASH MANAGEMENT IN HUNGARY – THE ROLE OF THE GOVERNMENT DEBT MANAGEMENT AGENCY
András Réz
Deputy CEO

2. Current setup of cash management in hungary
ÁKK’s legal mandate:
The Government Debt Management Agency Pte. Ltd. (ÁKK) has been responsible for the state’s cash management since This mandate is given by the same law that governs public debt management (Act no. CXCIV. of 2011 on the Economic Stability of Hungary), stating that the minister responsible for public finances performs these tasks through ÁKK.
General objectives by the law:
Ensure the continuous liquidity of the budget
Manage the temporarily free state funds taking into account the forecasts provided by the Hungarian State Treasury
Separation of roles:
ÁKK plans and carries out all cash management transactions in the money market or with the central bank (FX swaps)
The Hungarian State Treasury carries out the budget execution and elaborates the forecasts for the TSA balance on the basis of budgetary information

3. cash management in ákk’s strategy
Incorporated into the debt management strategy:
Maintain the required liquidity buffer level for adverse outcome in financing (e.g. higher deficit, market shocks) to reduce financing risks
Liquidity buffer is provided by the annual financing plan and/or if needed by daily cash management operations
The TSA balance targets are included in the list of debt management benchmarks (other benchmarks define the debt structure)
Reduce the fluctuations of the TSA balance (TSA balance moves opposite to the interbank market liquidity, managing the TSA may reduce this, stabilize short term market rates as well)
Observe cost aspects of cash placements
Targets may be set for FX deposits as well
Support the domestic repo market activity by daily repo tenders

4. Tsa structure TSA structure:
The reform of the public sector in 1996 established the State Treasury and the TSA – all money of the central government (treasury circle) has to be placed on this account
Budgetary institutions can transfer money out from the TSA only if a valid budgetary expenditure is paid (expenditures are checked by the State Treasury)
One single account decreased the liquidity needs and debt of the budget and investment losses were avoided
Some special entities must keep their funds on the TSA as well (e.g. Student Loan Centre)
Local authorities must keep EU project related funds on the TSA
ÁKK needs to know only the projected TSA balance to plan its cash management operations, no breakdown of the TSA balance is needed
ÁKK has access to the debt management related sub-accounts of the TSA

5. planning framework, forecasts
Budgetary planning:
Budget deficit and other net financing need forecasts are provided by the Ministry of Finance on a monthly basis.
Forecasts for liquidity planning:
TSA balance forecasts are provided by
The State Treasury - 2x / week, for 2-3 months ahead
The Central Bank – 2x / week, for at least 3 months ahead
Each afternoon the State Treasury sends the expected TSA balance for that day – ÁKK executes the end-of-day overnight repo based on this.
Accuracy: it is the responsibility of the State Treasury. ÁKK takes the deviations into account in setting the TSA liquidity buffer level. Forecast error can be sizeable at times of large revenues or expenditures (e.g. VAT payments).
Problem in forecast: HST forecast is systematically pessimistic, actual cash balance is usually higher (overfunding)
Coordination of cash and debt management within ÁKK:
Cash management role is not separated from debt management within ÁKK; the cash management operations are planned, carried out, controlled and settled by the same staff who are doing these for the debt management operations.

6. Relationship with The central bank
Treasury Single Account:
The TSA (in local currency) is placed at the central bank (CB), the account holder is the Hungarian State Treasury, the account agreement is between these two entities
ÁKK gets only indirect information about the balance, interest remuneration, posterior corrections etc.
Remuneration (important info for ÁKK): used to be the base policy rate for a long time, currently it is the average O/N market rate (sometimes negative), but above a certain TSA balance it can be even lower
CB also provides TSA balance forecasts to ÁKK
FX operations:
ÁKK has FX accounts (for different currencies) at the CB
Agreement with CB: ÁKK converts FX to HUF and vice versa only with the CB
ÁKK currently places FX deposits only at the CB and carries out FX swaps only with the CB
ÁKK provides debt and cash management related FX cash-flow forecasts to the CB
Instruments:
ÁKK’s 1-day and 1-week repos do not interfere with the CB’s monetary policy tools (deposits, FX swaps etc.)

7. Liquidity management tools
ÁKK’s main tools of liquidity management:
Repos and reverse repos: 1-day (overnight, tomnext, spotnext) and 1-week (spot-week)
Liquidity discount T-bills (very short term: 4-8 weeks)
3-month discount T-bills (adjusted offered amount)
Use of the FX deposits held at the CB
Stand-by loan facilities (short term loans)
Characteristics:
T-bills are used for rough tuning, repos for fine tuning
Usage depends on the timeframe of the liquidity needs
Cash placements are done only via reverse repos (no deposits to the market) – always collateralized, low counterparty risk, collateral can be HUF government securities only
ÁKK holds repo tenders daily, usually a 1-day and a 1-week repo in the morning, and an overnight repo in the afternoon (when more information is available about the day’s closing TSA balance)

8. Relationship with COMMERCIAL banks
Repo counterparties:
17 liquidity repo partners (11 are PDs)
European Master Agreement (Hungarian law) is a prerequisite. Some int’l banks would prefer English law agreements.
Relatively high concentration, 3-5 banks take most of the trades
Some banks are more interested in ÁKK’s cash placements, others are more active in lending to ÁKK
A substantial part of planned repos are not executed due to lack of demand
Volumes:

9. Liquidity buffer
ÁKK calculates and proposes the level of the minimum liquidity buffer to be maintained in the next year. This benchmark is approved by the Minister of Finance.
Methods of calculation:
Until 2014 the minimum TSA balance was the sum of
4 or 6 weeks’ issuance of bonds and 12m T-bills (simulating failure of financing in case of a market shock)
Maximum forecasting error of the deficit
Others (retail debt issuance, forecasting error of EU funds).
In the minimum TSA balance was calculated also by looking at the given year’s maximum quarterly redemptions (50% of bond + loan redemptions per quarter).
Since 2017 the minimum TSA balance is calculated by the daily Treasury expenditures’ high percentile, and an optimal TSA balance (to be targeted by the financing plan) is also set, based on the previous (2014) methodology.
End of year TSA requirement may be lower (debt reduction), but should cover early January expenditures.
ÁKK strives to keep the TSA balance below the level set by the CB where the TSA interest remuneration decreases.

10. Liquidity buffer (contd.)
Maintaining and accumulating the liquidity buffer
ÁKK must keep the end-of-day TSA balance above the minimum level and strive to keep the TSA close to the optimal level through liquidity management tools.
Regular financing operations should already cover the optimal TSA balance requirement
Basic rule is to raise extra cash if the TSA balance were lower than the minimum level and to initiate cash placement to the market if the TSA balance were higher than the placement threshold.
High expenditures (e.g. bond redemptions) are pre-financed on the TSA, other tools are used as well (e.g. buy- backs, switches, FX deposit operations, stand-by loan drawdowns).
Asymmetric importance of financing/placement transactions: raising extra cash to meet the TSA minimum requirement is important to mitigate liquidity risk, while placements are not an obligation, here cost effectiveness counts as well: since 2010 there are restrictions, since 2013 no losses are allowed for cash placements.
After the crisis of liquidity risk became even more important. The cash buffer was increased by overfunding and/or the use of the IMF/EU loan. In the past few years the liquidity buffer requirements have become smaller.
FX deposits are part of the overall liquidity buffer. In some years there were explicit targets for the size of these.

11. summary
Liquidity management of the state is done by co-operation between Hungarian State Treasury and ÁKK, the Debt Agency of Hungary
Hungarian State Treasury has good information about budget execution and other net financing need
Only ÁKK is on the money and government securities market, therefore actual cash management is best done by ÁKK
A frequent information flow is needed only for effective liquidity management, meetings are not really used
Liquidity buffer is important and ÁKK maintain this at the targeted level
After the crisis of liquidity risk became even more important. The cash buffer was increased by overfunding and/or the use of the IMF/EU loan. In the past few years the liquidity buffer requirements have become smaller.

12. Thank you for your attention!