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Arlingclose Limited 6

1. Risk. 2. Treasury Management Risks Treasury Management Practices (TMP) 1. Liquidity risk Interest rate risk Exchange rate riskInflation riskCredit and counter-party risk Refinancing risk Legal and regulatory riskFraud, error, corruption and contingency management Market risk. 3. Credit Risk.

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Arlingclose Limited 6

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    2. 1 Risk

    3. 2 Treasury Management Risks Treasury Management Practices (TMP) 1 Liquidity risk Interest rate risk Exchange rate risk Inflation risk Credit and counter-party risk Refinancing risk Legal and regulatory risk Fraud, error, corruption and contingency management Market risk Liquidity risk - the risk that cash will not be available when needed; Interest rate risk - that fluctuations in the levels of interest rates create an unexpected or unbudgeted burden on an Council's finances against which it has failed to protect itself adequately; Exchange rate risk - the risk that fluctuations in foreign exchange rates also create an unexpected or unbudgeted burden on a Council's finances; Inflation risk - i.e. any unexpected or unbudgeted impact caused by levels of inflation; Credit and counter-party risk - the risk or failure of a third party to meets its contractual obligations under an investment, borrowing, capital, project or partnership financing, particularly as a result of the third party's diminished creditworthiness; Refinancing risk - the risk that maturing borrowings, capital, project or partnership financings cannot be refinanced on terms that reflect the provisions made by the Council for those re-financings, both capital and revenue; Legal and regulatory risk - the risk that the Council fails to act in accordance with its powers or regulatory requirements; Fraud, error, corruption and contingency management - the failure to employ suitable systems and procedures and to maintain effective contingency management arrangements to these ends; Market risk - the risk that through adverse market fluctuations in the value of the principal sums the Council invests, its stated policies and objectives are compromised. Liquidity risk - the risk that cash will not be available when needed; Interest rate risk - that fluctuations in the levels of interest rates create an unexpected or unbudgeted burden on an Council's finances against which it has failed to protect itself adequately; Exchange rate risk - the risk that fluctuations in foreign exchange rates also create an unexpected or unbudgeted burden on a Council's finances; Inflation risk - i.e. any unexpected or unbudgeted impact caused by levels of inflation; Credit and counter-party risk - the risk or failure of a third party to meets its contractual obligations under an investment, borrowing, capital, project or partnership financing, particularly as a result of the third party's diminished creditworthiness; Refinancing risk - the risk that maturing borrowings, capital, project or partnership financings cannot be refinanced on terms that reflect the provisions made by the Council for those re-financings, both capital and revenue; Legal and regulatory risk - the risk that the Council fails to act in accordance with its powers or regulatory requirements; Fraud, error, corruption and contingency management - the failure to employ suitable systems and procedures and to maintain effective contingency management arrangements to these ends; Market risk - the risk that through adverse market fluctuations in the value of the principal sums the Council invests, its stated policies and objectives are compromised.

    4. 3 Credit Risk The risk that Your Authority does not receive back its capital and/or interest from an investment.

    5. 4 Credit Risk Your Authority’s historic credit counterparty criteria?

    6. 5 Credit Risk Arlingclose current advice in light of financial market conditions.

    7. 6 Before the Crunch Represented by two spikes - initial news and later write downs (provisions for bad debts). Recent fall due to emergency interest rate cutting in the US and an anticipation that rates will be cut in the UK, (They should be this Thursday from 5.5% to 5.25% (last cut December)) Represented by two spikes - initial news and later write downs (provisions for bad debts). Recent fall due to emergency interest rate cutting in the US and an anticipation that rates will be cut in the UK, (They should be this Thursday from 5.5% to 5.25% (last cut December))

    8. 7 The Credit Crunch – up to 6th February 2009 Represented by two spikes - initial news and later write downs (provisions for bad debts). Recent fall due to emergency interest rate cutting in the US and an anticipation that rates will be cut in the UK, (They should be this Thursday from 5.5% to 5.25% (last cut December)) Represented by two spikes - initial news and later write downs (provisions for bad debts). Recent fall due to emergency interest rate cutting in the US and an anticipation that rates will be cut in the UK, (They should be this Thursday from 5.5% to 5.25% (last cut December))

    9. 8 The Crunch – Volatility Index, 2006 to end 2007 Represented by two spikes - initial news and later write downs (provisions for bad debts). Recent fall due to emergency interest rate cutting in the US and an anticipation that rates will be cut in the UK, (They should be this Thursday from 5.5% to 5.25% (last cut December)) Represented by two spikes - initial news and later write downs (provisions for bad debts). Recent fall due to emergency interest rate cutting in the US and an anticipation that rates will be cut in the UK, (They should be this Thursday from 5.5% to 5.25% (last cut December))

    10. 9 The Crunch – Volatility Index, 2006 to date Represented by two spikes - initial news and later write downs (provisions for bad debts). Recent fall due to emergency interest rate cutting in the US and an anticipation that rates will be cut in the UK, (They should be this Thursday from 5.5% to 5.25% (last cut December)) Represented by two spikes - initial news and later write downs (provisions for bad debts). Recent fall due to emergency interest rate cutting in the US and an anticipation that rates will be cut in the UK, (They should be this Thursday from 5.5% to 5.25% (last cut December))

    11. 10 Northern Rock An example of how these risks affect a UK organisation. Sub Prime – Increased interest rates at a time when absolute interest rates were high anyway.Sub Prime – Increased interest rates at a time when absolute interest rates were high anyway.

    12. 11 Building Societies

    13. 12 Northern Rock Could it happen to a building society. Sub Prime – Increased interest rates at a time when absolute interest rates were high anyway.Sub Prime – Increased interest rates at a time when absolute interest rates were high anyway.

    14. 13 Building Societies Rank by Asset Size Sub Prime – Increased interest rates at a time when absolute interest rates were high anyway.Sub Prime – Increased interest rates at a time when absolute interest rates were high anyway.

    15. 14 Building Societies Criteria for selection? Sub Prime – Increased interest rates at a time when absolute interest rates were high anyway.Sub Prime – Increased interest rates at a time when absolute interest rates were high anyway.

    16. 15 AAAm - Money Market Funds

    17. 16 Money Market Fund Performance (BGI) Sub Prime – Increased interest rates at a time when absolute interest rates were high anyway.Sub Prime – Increased interest rates at a time when absolute interest rates were high anyway.

    18. 17 Other AAA Rated Assets

    19. 18 Other AAA assets Sub Prime – Increased interest rates at a time when absolute interest rates were high anyway.Sub Prime – Increased interest rates at a time when absolute interest rates were high anyway.

    20. 19 EIB 2012 Spread over Gilts Sub Prime – Increased interest rates at a time when absolute interest rates were high anyway.Sub Prime – Increased interest rates at a time when absolute interest rates were high anyway.

    21. 20 Appendix

    22. Economic and Interest Rate forecast – January 2009

    23. 22 The Credit Crunch – as at 22nd September 2008 Represented by two spikes - initial news and later write downs (provisions for bad debts). Recent fall due to emergency interest rate cutting in the US and an anticipation that rates will be cut in the UK, (They should be this Thursday from 5.5% to 5.25% (last cut December)) Represented by two spikes - initial news and later write downs (provisions for bad debts). Recent fall due to emergency interest rate cutting in the US and an anticipation that rates will be cut in the UK, (They should be this Thursday from 5.5% to 5.25% (last cut December))

    24. 23 EIB 4 ¾ 2012 Bond Yield History Sub Prime – Increased interest rates at a time when absolute interest rates were high anyway.Sub Prime – Increased interest rates at a time when absolute interest rates were high anyway.

    25. 24 Money Market Fund - AAAm Sub Prime – Increased interest rates at a time when absolute interest rates were high anyway.Sub Prime – Increased interest rates at a time when absolute interest rates were high anyway.

    26. 25

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