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CIPFA Scottish Treasury Management Forum Workshop Risk Management Panel Session

CIPFA Scottish Treasury Management Forum Workshop Risk Management Panel Session. Mark Horsfield 23 rd February 2012. Factors to consider in building a lending list. A “low for much longer” interest rate backdrop. Scrutiny has increased and changed. Training

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CIPFA Scottish Treasury Management Forum Workshop Risk Management Panel Session

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  1. CIPFA Scottish Treasury Management Forum WorkshopRisk Management Panel Session Mark Horsfield 23rd February 2012

  2. Factors to consider in building a lending list

  3. A “low for much longer” interest rate backdrop

  4. Scrutiny has increased and changed • 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. What we consider with a critical subjective overlay

  6. What are we concerned about? • 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. What are we reassured about?

  8. What are we reassured about?

  9. Appendices

  10. Overnight Interest Rate Swap (OIS) & SONIA • 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. 3 month OIS vs. LIBOR

  12. 12 month OIS vs. LIBOR

  13. UK Bank CDS

  14. Sovereign CDS - Excluding Greece & Ireland

  15. Volatility Index

  16. Sovereign GDP

  17. Sovereign Net Debt as a % of GDP

  18. 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.

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