About

The AOFM’s key responsibilities involve managing the Australian Government’s debt portfolio through the issuance of Commonwealth Government Securities (CGS), managing the Australian Government’s overall cash balance in the Official Public Account (OPA), and any investment in financial assets arising from these activities or as a result of any specific policy mandate from the Australian Government. This requires close working relations with the Department of the Treasury, Department of Finance and the Reserve Bank of Australia (RBA). It also requires that the AOFM maintain credible professional relationships with the banking sector (which act as intermediaries in the CGS market) and with domestic and international investors in CGS.

The operations of the AOFM directly support the efficient management of the Australian Government’s finances and debt management and are influential for the development and efficient functioning of Australia’s domestic financial market. In particular, the sovereign bond market of CGS, of which the AOFM is seen as primary custodian, provides critical pricing benchmarks for financing raised by the state government and corporate sectors. It is also the case that the efficiency and resilience of the CGS market is an important indicator to international markets and investors as to the maturity of Australia’s financial markets generally.

Role and Operations

To manage the Australian Government’s debt portfolio, the AOFM issues CGS in the financial market, pays periodic interest coupons to the holders of these securities, occasionally repurchases CGS from the financial market, and repays bondholders their principal when these securities mature.

The AOFM develops an issuance program each financial year based on the Australian Government’s expected financing requirements as set out in the Budget and as updated in the Mid‑Year Economic and Fiscal Outlook. In developing this program, the AOFM considers a range of market factors in determining the types of securities to be issued and their characteristics (such as their term to maturity). It does so with the objective of meeting the financing requirement, while having regard for the ongoing cost and risk of the debt portfolio and broader development of the Australian debt market. In order to effectively undertake its task, the AOFM is required to maintain an understanding of domestic and international events that will impact financial markets.

The AOFM currently issues Treasury Bonds and Treasury Indexed Bonds through competitive tenders in the wholesale debt market. The AOFM occasionally issues bonds through syndication (bank) panels when first issuing new securities and where the required transaction volumes are larger than could be managed through the tender process. Retail investors can invest in these securities through the Australian Securities Exchange. The AOFM also operates a securities lending facility (through the RBA) for Treasury Bonds and Treasury Indexed Bonds. This provides liquidity to the wholesale CGS market and assists the efficient operation of the CGS market overall.

The AOFM’s cash management role ensures that there are sufficient funds available on a day to day basis to meet the Australian Government’s cash needs. Funds are received from tax and excise collections and debt issuance, while government outlays and debt maturities reduce cash balances. The AOFM liaises closely with the Australian Taxation Office (ATO), RBA and individual government spending agencies to gather information and combine this with experience and judgement to forecast daily revenue receipts and outlays. There can be significant mismatches between these ‘in’ and ‘out’ flows leading to times when the AOFM needs to liquidate short term financial assets or undertake short term borrowing (through Treasury Notes) to meet shortfalls. When there are surplus funds in the OPA, the AOFM invests in short term financial assets timed to mature when the funds will be required. In making these judgements the AOFM is aware, and takes account of, the uncertainty attached to these forecasts.

The AOFM can invest in a range of money market securities such as term deposits with the RBA, certificates of deposit with banks and bank-accepted bills to facilitate this cash management.

The AOFM can also invest in financial assets to meet a specific government mandate. For example, the AOFM manages a portfolio of residential mortgage-backed securities that it was directed to invest in between 2008 and 2013. This was part of a government program to maintain competition in lending for housing and small business loans. While the investment phase of this program finished in 2013, the AOFM continues to manage the remaining assets in the portfolio.

These AOFM operations take into account a range of risks, including funding, market, credit and operational risks that need to be managed by AOFM. To support and adequately manage these various operations and risks, the AOFM undertakes a comprehensive and carefully structured financial risk management, assurance, reporting, financial administration and accounting activities.

Governance

The AOFM is an agency within the Treasury portfolio and is accountable through the Treasurer to the Australian Government, the Parliament and the Australian community.  The Chief Executive of the AOFM is appointed by the Secretary to the Treasury.  The Secretary to the Treasury chairs an Advisory Board comprising persons with financial market and public policy experience who assist with broad oversight of the AOFM’s operations and provide advice on portfolio management and financial risk strategies.

The legislative power to undertake the AOFM’s operations arises from the Commonwealth Inscribed Stock Act 1911 and the Loans Securities Act 1919 for borrowing and debt issuance side and the Public Governance, Performance and Accountability Act 2013 for investments.

These Acts confer legal authority on the Treasurer. In accordance with various Acts, the Treasurer has provided the necessary operational delegations and authorisations to officials of the AOFM to undertake the activities, having issued directions as to the exercising of those powers.

Structure

The AOFM is structured into five broad groups. The Treasury Services, Financial Risk and Investor Relations groups are primarily concerned with the design, implementation and financial risk management of the AOFM’s debt issuance, cash management and investment management activities. The Finance, Settlements and Corporate and the Reporting and IT groups provide the operational support to ensure the AOFM meets all of its fiduciary responsibilities and obligations as a government agency and meets the Australian Government’s obligations to the holders of CGS. The Enterprise Risk and Assurance group provides an assurance role for the CEO to ensure that the AOFM’s risks are identified and appropriately managed and that controls are effective.

The AOFM operates using six groups structured to ensure an appropriate segregation of duties and reporting lines. These groups report directly to the Chief Executive Office, Rob Nicholl.  The six groups are: Treasury services, head of this group was Gerald Dodgson; Financial risk management, director of this group was Michael Bath; Investor relations, head of this group was Ian Clunies-Ross; Reporting and IT, head of this unit was Andrew Johnson; Finance, settlements and corporate, head of this group was Pat Raccosta; and Enterprise Risk and Assurance, head of this unit is Samantha Montenegro.

The Treasury Services group is responsible for deal execution, funding and liquidity management. Deal execution primarily involves the undertaking of tenders and syndications to issue CGS consisting of Treasury Bonds, Treasury Indexed Bonds and Treasury Notes. This group also manages the Australian Government’s day-to-day cash management requirements.

The Financial Risk group develops the Australian Government’s debt management strategy and financial risk management policies. It conducts research and modelling directed to managing the Australian Government’s debt portfolio so as to meet the AOFM’s objective of minimising cost, subject to an acceptable level of risk. This group is also responsible for managing certain government investments, such as the portfolio of residential mortgage-backed securities.

The Investor Relations group conducts and maintains regular communication with existing investors and new or potential investors in CGS. It liaises with the investment and banking communities in order to identify where the AOFM’s market education program updates and portfolio development communication efforts are best targeted. This group develops and undertakes annual investor relations programs taking into account market conditions and potential factors affecting demand for CGS. This may include amongst other issues, updates on the Australian economy, the AOFM’s issuance program, and the Australian Government’s fiscal position. Investor Relations achieves its aim via a number of methods which include direct investor contact via face to face meetings and presentations, email updates and direct correspondence, and occasional advertising or co-published articles in financial media.

The Reporting and IT group provides reporting focussed on the portfolio of debt and assets managed by the AOFM. This is used by AOFM management to monitor the outcomes of its programs and assess future implications; it also feeds into external reporting on the AOFM website and annual report. The group also provides a secure, robust IT environment to support operations.

The Finance, Settlements and Corporate group is responsible for the AOFM’s statutory financial reporting and Budget reporting; developing and maintaining a framework for the management of departmental financial resources and contracts; settling transactions undertaken with financial market counterparties; providing accounts payable, accounts receivable and operational human resources services; and meeting AOFM’s taxation obligations. This group is also responsible for managing the debt registry provider and services.

The Enterprise Risk and Assurance group is responsible for maintaining complementary frameworks for enterprise risk and assurance (including audit and compliance) that support a proactive culture of identification and management of obligations and exposures.  This group also coordinates legal services, and compliance with the AOFM’s obligations under relevant legal, regulatory and delegated authorisations.