1. Arlingclose Ltd: Independent treasury management services 60 Moorgate London EC2R 6EL Tel +44(0)8448 808 200 Fax +44(0)8448 808 205 www.arlingclose.com Registered Office Barclays Bank Chambers Stratford-upon-Avon CV37 6AH Registered in England No 2853836 Regulated by the Financial Services Authority No 417722 Arlingclose Limited provides independent advice CIPFA Scottish Treasury Management Forum Workshop Risk Management Panel Session Mark Horsfield 23 rd February 2012

2. CIPFA Scottish Treasury Management Forum Workshop 2012 Factors to consider in building a lending list 1 THERE IS ONLY ONE IT IS TO MEET THE OBJECTIVES OF YOUR ANNUAL INVESTMENT STRATEGY CAPITAL PRESERVATION (without exception)

3. CIPFA Scottish Treasury Management Forum Workshop 2012 A “low for much longer” interest rate backdrop 2

4. CIPFA Scottish Treasury Management Forum Workshop 2012 Scrutiny has increased and changed 3  Training  Minimum acceptable credit quality  Investment Regulations require assessment of treasury risks  Benchmarking – risk(s) versus return  Scrutiny of strategy and activity – increased frequency  Wider range of instruments

5. CIPFA Scottish Treasury Management Forum Workshop 2012 What we consider 4 Macro Economics Inflation Interest Rates Currency GDP Statements of Potential Government Support Credit Ratings Institution Sovereign Credit Default Swaps Equity Prices & Money Market Indicators Trip levels Research & Media with a critical subjective overlay

6. CIPFA Scottish Treasury Management Forum Workshop 2012 What are we concerned about? 5  A loosening of criteria to accommodate process driven solutions - “..... not rely solely on the current credit ratings of counterparties but also includes the following overlays:  Credit watches and credit outlooks from credit rating agencies  Credit Default Swaps spreads to give early warning of likely changes in credit ratings  Sovereign ratings to select counterparties from only the most creditworthy countries”  Rejection of lowest common denominator approach to ratings in order to “not give undue preponderance to just one agency’s ratings.” But what if that agency’s view is right?  An emerging CIPFA led focus on investment concentration.

7. CIPFA Scottish Treasury Management Forum Workshop 2012 What are we reassured about? 6

8. CIPFA Scottish Treasury Management Forum Workshop 2012 What are we reassured about? 7

9. CIPFA Scottish Treasury Management Forum Workshop 2012 Appendices 8

10. CIPFA Scottish Treasury Management Forum Workshop 2012 Overnight Interest Rate Swap (OIS) & SONIA 9  OIS = Overnight Interest Swap  A transaction between banks on a NOTIONAL sum, not the physical.  Settlement at the end of the Swap is for marginal difference around a given interest rate, not full interest.  Marginal credit risk.  SONIA – Sterling Overnight Interest Average  An index of the average overnight rate that is used as the reference rate for OIS.

11. CIPFA Scottish Treasury Management Forum Workshop 2012 3 month OIS vs. LIBOR 10

12. CIPFA Scottish Treasury Management Forum Workshop 2012 12 month OIS vs. LIBOR 11

13. CIPFA Scottish Treasury Management Forum Workshop 2012 UK Bank CDS 12

14. CIPFA Scottish Treasury Management Forum Workshop 2012 Sovereign CDS - Excluding Greece & Ireland 13

15. CIPFA Scottish Treasury Management Forum Workshop 2012 Volatility Index 14

16. CIPFA Scottish Treasury Management Forum Workshop 2012 Sovereign GDP 15

17. CIPFA Scottish Treasury Management Forum Workshop 2012 Sovereign Net Debt as a % of GDP 16

18. CIPFA Scottish Treasury Management Forum Workshop 2012 17 This document is issued by Arlingclose Limited (Regulated by the Financial Services Authority) for information purposes only. The contents of this document are based upon sources of information believed to be reliable, however, save to the extent required by applicable law or regulations, no guarantee, warranty or representation (express or implied) is given as to its accuracy or completeness and, Arlingclose Limited, its directors officers and employees do not accept any liability or responsibility in respect of the information or any recommendations expressed herein which, moreover, are subject to change without notice. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. All data has been sourced from Bloomberg and other publicly available information. Arlingclose Limited provides independent advice.