Australian Government, the Australian Office of Financial Management

The Future of the Commonwealth Government Securities Market

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The Future of the Commonwealth Government Securities Market

Two Broad Themes

  • fiscal context for the Commonwealth's debt management operations
  • establishment of the AOFM

Two Broad Themes

Commonwealth Headline Cash Balance*

* Following recent changes in the Australian National Accounts Standards, the underlying and headline cash balance estimates in the chart from 1998-99 onwards include payments by the Commonwealth in respect of accumulated PTE superannuation liabilities.

Commonwealth Headline Cash Balance

Commonwealth Net Call on the Market

Commonwealth Net Call on the Market

Commonwealth General Government Debt

Commonwealth General Government

Fiscal Context

  • Australia in the vanguard of OECD countries in addressing a new set of debt management policy issues
    • benefits of maintaining sovereign curve

Fiscal Context

Fiscal Context

  • Government position set out in Budget
    • a managed reduction in CGS
    • not to the full extent of projected reduction in net debt

Fiscal Context

Fiscal Context

  • maintaining the curve offers a number of benefits, including:
    • supports a range of domestic derivative and related markets
    • consistent with further development of Australia as a centre for global financial services

Fiscal Context

Operational and Strategic Challenges

  • a number of major operational and risk management challenges ahead
  • balance between gross new debt issue, selected debt repurchase, yield curve consolidation
    • efficient execution within a rigorous risk framework very demanding of systems and resources

Operational and Strategic Challenges

AOFM

  • Australian Office of Financial Management established from 1 July 1999
  • management of these challenges an important consideration
    • but establishment of AOFM properly seen in a much longer-term, broader-based context

AOFM

AOFM

  • rising tide of financial sector deregulation, technological innovation and globalisation of markets over past 10-15 years
    • fundamentally changed financial markets environment
    • balance of risks, challenges and opportunities facing all debt managers

AOFM

AOFM

  • across the OECD, clear trend through the 90s towards increasing efficiency in public sector service delivery
    • power, transport, telecommunications

AOFM

AOFM

  • Australia among the leaders in the OECD in pursuing a complementary focus on reform of public sector financial management
    • Charter of Budget Honesty
    • Accrual budgeting, reporting and accounting

AOFM

AOFM

  • Commonwealth ahead of the OECD sovereign curve in recognising the need to conduct debt management with an explicit financial risk management framework
    • market risk of the debt portfolio a particular management focus
    • introduced new management challenges in terms of credit and operational risk

AOFM

AOFM

  • risk management focus provides a framework for making such choices about risk
    • these additional risks taken on consciously and explicitly in pursuit of an optimal risk-return trade-off
    • very demanding of systems and resources
    • implications for institutional arrangements?

AOFM

AOFM

  • four-tiered management hierarchy for any borrower with a risk management orientation to debt management
    • philosophical approach
    • operating framework
    • measurement and reporting framework
    • organisational structure
  • clear need for internal consistency among the four elements of the hierarchy

AOFM

AOFM

  • establishment of the AOFM not merely a `band-aid' response to the prospective operational challenges of maintaining the liquidity and efficiency of the Commonwealth curve

AOFM

AOFM

  • much more about providing operational capability, systems and resources
  • address inconsistencies between the philosophical commitment to financial risk management and the other three elements of the hierarchy
    • which have undermined the capacity to deliver the full benefits of a risk framework

AOFM

AOFM

  • as with any corporate treasury function, sovereign debt management is a business exposed to a variety of financial risks
    • fiduciary responsibility to taxpayers
  • but critical distinctions between sovereign and a corporate as well

AOFM

AOFM

  • the sovereign, in its policy setting role, has the capacity to directly influence key financial market prices
  • sheer weight of the sovereign as the largest issuer in the domestic market

AOFM

AOFM

  • sovereign curve provides the risk free pricing benchmark
  • sovereign securities a primary hedging vehicle for the markets

AOFM

AOFM

  • over-arching philosophical position of the AOFM

AOFM

AOFM

  • eschew the potential short-term gains
  • pursue the longer-term benefits of market confidence, liquidity and cost savings that accrue to responsible, transparent debt management, good communication and genuine citizenship

AOFM

AOFM

  • Details of the role and operations of the AOFM over the period ahead

AOFM

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