- 1 Corporate Plan 2016-17
- 1.1 Introduction
- 1.2 Vision
- 1.3 Purpose (Mission)
- 1.4 Objectives (Delivery)
- 1.5 Role
- 1.6 Guiding Principles (AOFM Values)
- 1.7 Organisational Structure
- 1.8 Operating Environment
- 1.9 Planned Performance
- 1.10 Risk Oversight and Management
- 1.11 Capability and Strategies
- 1.11.1 Core Operations
- 1.11.2 Strategic Outlook
- 1.11.3 Workforce Planning
- 1.11.4 Key Objectives for the Financial Year 2016-17 and three forward years
- 1.11.5 Strategic Projects (to commence in 2016-17)
- 1.11.6 1. Alternative Issuance Techniques
- 1.11.7 2. Evaluating the potential future demand for AGS and how the AOFM can influence this demand.
Corporate Plan 2016-17
The Corporate Plan highlights the AOFM’s core objectives and main activities for the year ahead, together with an account of emerging challenges and issues to be monitored and/or managed over the 2016-2020 reporting periods.
The AOFM annual corporate planning process involves a review of its responsibilities and how they should best be exercised, including a review of risks and opportunities presenting to the AOFM. The Corporate Plan guides the development of strategic project plans, annual Business Group plans, and individual performance plans.
The Corporate Plan is subject to review and revision in the face of unanticipated changes to the operating environment or the AOFM’s mandate. Organisational performance against the Corporate Plan is monitored using key performance indicators, and regular updates on the progress of strategic projects.
The Corporate Plan is required by paragraph 35(1)(b) of the Public Governance, Performance and Accountability Act 2013.
Acknowledged for excellence in sovereign financial management.
To ensure the government’s debt financing needs are fully met each year while managing the cash, debt and other portfolios over the medium-long term at low cost subject to acceptable risk. The AOFM will take into account the potential for its operations to impact domestic financial markets.
- Meet the budget financing task in a cost-effective manner subject to acceptable risk.
- Facilitate the government’s cash outlay requirements as and when they fall due.
- Be a credible custodian of the Australian Government Securities (AGS) market and other portfolio responsibilities.
The key functions underpinning AOFM’s role are:
- issuing AGS in accordance with broad government policy objectives (such as promoting sovereign bond market liquidity);
- managing aggregate cash balances in the Commonwealth government’s Official Public Account on a daily basis;
- managing financial assets (including Australian Residential Mortgage-Backed Securities (RMBS)) according to policy directives or as part of broader portfolio management;
- the settlement and payment of Commonwealth financial obligations on AGS;
- developing risk assessments to undertake cost effective management of the debt and asset portfolios; and
- where appropriate, supporting the efficient operation of the Australian financial system.
Guiding Principles (AOFM Values)
The AOFM, as the interface between government and financial markets, makes decisions and interacts in a way that requires considerable judgement. It is necessary to balance the pursuit of government objectives and community outcomes with an understanding of the incentives that drive financial market participants. In this regard, it is important that the AOFM is seen in its day-to-day dealings to be:
- of the highest integrity – we act in a professional, respectful, transparent and impartial manner that will withstand scrutiny;
- results focussed – we take pride in our work, owning decisions that we make;
- responsive – we demonstrate initiative and the ability to adapt to changing circumstances; and
- clear – we communicate in a straightforward and timely manner.
The AOFM has structured its core operational activities into three broad areas. Activities in portfolio and global market research (including monitoring and anticipating regulatory impacts of financial markets) , deal design and execution, and investor engagement together form what in the financial sector is typically viewed as ‘front office’ related (Funding, Markets and Strategy).
Business Operations comprise the settlement of deals, together with all payment obligations and the monitoring and financial statement reporting of the AOFM’s transactions (and balance sheet activity) on behalf of the Commonwealth form what is typically viewed in the financial sector as the ‘back office’ (Accounting Services). This is effectively two separate teams.
A ‘middle office’ (Enterprise Assurance and Performance) oversights separation of the back and front office functions through maintaining complementary frameworks for enterprise risk and assurance (including audit) and the coordination of legal services, and compliance with the AOFM’s obligations under relevant legal, regulatory and delegated powers. It also undertakes performance monitoring of the various portfolio and transaction activities.
AOFM governance, corporate related functions and support to the Chief Executive sit within a separate part of the organisation (Corporate Development). Advice on issues surrounding the AOFM’s staff development objectives and APS specific issues are provided directly to the Chief Executive by a senior advisor role.
This overall structure provides for an appropriate segregation of duties – consistent with financial industry best practice. Each office is organised into a number of teams that focus on specific aspects of the AOFM’s business processes, internal support and government financing (and asset management).
The Treasurer is responsible for administering legislation associated with debt management, and has the power to authorise the investment of public funds for the purpose of asset management. The Department of Treasury is responsible for borrowing money on the public credit of the government and for administering the legislation relating to this responsibility. As such, the Secretary to the Treasury is accountable for implementation of the debt management mandate and is Chair of the AOFM Advisory Board. The AOFM Advisory Board comprises membership from both private and public sectors, and offers a source of independent advice to the Secretary on debt management related matters.
The AOFM Chief Executive Officer is accountable to the Secretary and to the Treasurer for the execution of debt management strategies and the achievement of financing tasks through the annual issuance programs.
In the intervening period since the onset of the global financial crisis, global financial markets (and domestic markets through exposure to broader market influences) have been subjected to a range of events and policy responses (mostly from central banks) that have resulted in heightened volatility and an intensified search by investors for relatively high yielding assets. Yet it is a decade on and market participants continue to find themselves facing possibly more uncertainty than ever, with the ability to accurately price risk remaining a significant challenge.
The AOFM continues to face circumstances in which it is required to demonstrate an ability to meet the challenges posed by increasing issuance programs within the context of financial markets that exhibit appreciable volatility. In recent years there has been innovation in debt capital markets globally, including the development of investment solutions (such as for example green bond funds and green investment banks); and a growth in alternative and informal financing channels to meet investor demand for yield enhancement. This is producing a continual shift in the global pattern of demand for assets and imposing appreciable change on the banking system and traditional financial channels.
Throughout the coming year, the AOFM will continue to assess the market risks and all costs associated with the issuance of government bonds and the associated portfolio management tasks. It will also continue to be active in looking for meaningful ways in which to further develop the AGS market, taking into account its broader domestic financial market role as custodian of the sovereign yield curve.
These foundational aspects will be considered against the backdrop of some important changing dynamics within and across international capital markets.
The regulatory environment for banks has undergone significant change in recent years. Some of the impacts of these changes are emerging as important issues for the AOFM (and indeed sovereign issuers generally) as they will change the way in which the primary market for bond issuance operates. This is of particular interest given the heavy reliance of the AOFM on this as a means by which to access domestic and global markets. More specifically, this relates to the ability of financial institutions to hold/warehouse bonds won at tender (in the ‘primary’ market) before on-selling to investors through the ‘secondary market’. In a world where banks (for a number of reasons, not the least of which will be increased costs) have a reduced appetite for warehousing government bonds and to be involved in fixed interest market-making, this will have implications for market liquidity, something that is of key importance to investors. It also has implications for the concentration of banks that are active price-makers for government bonds in the secondary market and for those that are willing to participate regularly in primary market tenders – in this regard a concentration has already begun to emerge. In turn this will have implications for the manner and rate at which the AOFM can look to regularly conduct its issuance programs.
Given the continued low growth and low inflation outlook for much of the developed world, together with underlying demographic changes, the mechanisms with which financial markets have come to operate are changing. An emerging issue is the opportunity for new products that support post-retirement income – for example retirement annuity style products. It also relates to the development of and the way in which technological infrastructure underpinning markets is being deployed, notable amongst these is the impact of High Frequency Trading in fixed income markets.
That a rise globally in interest rates is yet to commence in earnest would have been very difficult to predict years ago. The opposite is probably now more true in that a large part of the global sovereign bond market exhibits negative yields (as a result of very low and even in some instances negative interest rates) and a clear easing bias from many central banks persists. Moreover, although the United States has recently implemented its intention to increase its cash rate, the speed with which this is occurring is proving to be much slower than was previously expected. The likelihood that interest rates will remain below long-run average levels for some time still to come is a central consideration for the global outlook. The potential consequences are far reaching – many may directly (and indirectly) impact the AOFM. It will also influence AOFM decisions about lengthening the average term to maturity of the stock of debt outstanding, this being in the context of considerations about exposure to funding risk and the overall cost to taxpayers of managing the portfolio over the long-term. Interest rate regimes will also remain an important influence on the relative attractiveness of sovereign bonds to investors, and the rate of return being required according to their investment mandates.
The credit rating of the Commonwealth will likely be a thematic for the coming year as well. Arguably however, the bigger issue is how the AOFM can best execute an issuance program in a world in which a gradual trend of reducing demand for sovereign debt globally may have begun. This trend will be exacerbated in a scenario where interest rates remain low (which is synonymous with low returns for investors) and market liquidity is poorer than in the past.
A summary of key performance indicators is shown in the table below.
|KEY PERFROMANCE INDICATOR*||MEASURE||TARGET|
|Meet the budget financing task in a cost-effective manner subject to acceptable risk|
|Term issuance||Shortfall between the government’s financing task (from the last official budget update) and actual issuance.||Zero|
|Financing cost||Compare cost of funds (total accrual costs as a percentage of the average stock of debt) with the cash rate and the average 10-year bond rate or other appropriate indicators||Monitor trend with reference to the benchmark|
|New issuance yields||Weighted average issue yield at tender less mid-market secondary yield at time of tender.||Actual yields at or below mid-market.|
|Facilitate the Government’s cash outlay requirements as and when they fall due|
|Use of the overdraft facility||# of instances usage of the overdraft facility is used, in excess of the Ministerial limit||Zero|
|AOFM is a credible custodian of the AGS market and other portfolio responsibilities|
|A liquid and efficient secondary market||Annual turnover in the secondary market of Treasury Bonds and Treasury Indexed Bonds||N/A|
Number of times the AOFM securities lending facility was accessed for overnight borrowing of Treasury Bonds and Treasury Indexed Bonds
Aggregate face value amount of Treasury Bonds and Treasury Indexed Bonds lent on overnight basis.
|Market Commitments||Number of times that we failed to undertake actions consistent with public announcements.||Zero|
* refer also to Program 1.1 of the Treasury Portfolio Budget Statements 2016-17
Risk Oversight and Management
The AOFM is committed to good governance principles and sound management practices, including a structured approach to the management of risk consistent with Commonwealth policy. The AOFM’s enterprise risk management framework highlights the need for the active and transparent management of risk (opportunities and threats). The framework facilitates a consistent approach to identifying and managing risk. It also helps to inform the focus and allocation of risk management effort.
AOFM risks are categorised as strategic, portfolio, or operational. Given the specialist nature of its core business, the AOFM focuses on financial risk management, which applies to all financial and portfolio risks – including the RMBS, cash management and debt portfolios, and issuance associated with the two latter portfolios.
The enterprise risk management framework is complemented by fraud control and business continuity management practices. The AOFM Audit Committee reviews the maturity of the risk framework, together with examining procedures for managing our operational and financial risks. Internal assurance activities support the Audit Committee and monitor the effectiveness of the AOFM risk management and control frameworks.
Capability and Strategies
Business groups within the entity have developed operational plans for 2016-17. These detail the range of tasks and initiatives that each group will undertake in support of the AOFM achieving its objectives.
The objectives AOFM seeks to achieve include: the advancement of macroeconomic growth and stability; the effective operation of financial markets, through issuing debt; investing in financial assets; and managing debt, investments and cash for the Commonwealth government (for more information see Outcome 1 for the AOFM as published in the Treasury Portfolio Budget Statements 2016-17). The annual focus is on meeting the government’s financing requirements in a cost effective manner, subject to acceptable risk. To achieve this, the AOFM needs to take account of market conditions and other portfolio considerations, which are likely to be impacted by current issuance decisions. To be successful in its roles as portfolio manager and issuer, the AOFM plans AGS issuance based on an annual debt management strategy. The 2016‑17 debt management strategy has been reviewed and endorsed by the AOFM Advisory Board.
The AOFM endeavours to maintain sufficient issuance flexibility to be able to respond appropriately to changes in its operating environment. The AOFM is also acutely aware of the need to monitor external factors, such as market conditions, that have the potential to impact the AOFM’s ability to meet the government’s financing requirements. It does this through various means, including by liaising with an extensive network of market contacts based on its relationships with market intermediaries and end- investors.
The AOFM is a specialised entity with staff skilled in debt and related portfolio management, risk management, financial investments, and financial reporting. Its core business requires staff to foster relationships and communicate effectively with the finance sector in particular. The Workforce Plan 2014-2018 was developed to improve the management of our people and their contribution to the AOFM business. It has a range of actions that will support high quality recruitment, staff development, improving internal management capability, and maintaining its strong external relationships.
Key Objectives for the Financial Year 2016-17 and three forward years
Key priorities for the reporting periods are:
- delivering the Budget financing task through its Treasury Bond and Treasury Indexed Bond issuance programs;
- delivering the cash management task – through managing the Commonwealth’s daily cash position. The challenges here relate largely to having updated and accurate information on revenue receipts. The large outlays and the AOFM will be engaging with key agencies to highlight the growing impact of unanticipated or poorly communicated changes throughout the year;
- maintaining strong and productive relationships with intermediaries and end- investors to facilitate the effective delivery of the Budget financing task, through consulting market participants about establishing new maturities and other market developments. The AOFM works with the Treasury on government debt and associated financial policy related issues and will maintain its broad and regular program of updates with the investor community;
- further diversifying the investor base through identification of and engagement with domestic and offshore investors to improve their understanding of, and to enhance the reputation of, Australian financial markets and AGS in particular; and
- capitalising on business improvement opportunities, through leveraging system capabilities and reviewing critical functions to increase operational efficiencies.
Strategic Projects (to commence in 2016-17)
Consistent with previous years, the AOFM has identified several projects, to be managed at the corporate level, that will address emerging challenges, progress corporate priorities or contribute towards the management of significant emerging risks. These projects are determined on the basis that they are forward looking, require coordination and collaboration across the entity, and affect the way the entity operates as a whole.
The strategic projects for the reporting period will be:
1. Alternative Issuance Techniques
The AOFM currently achieves the vast bulk of its issuance task via competitive tenders, and uses syndication for new longer-dated securities. Tender issuance involves reliance on Registered Bidders to warehouse securities before on-selling them to end-investors. This model is being challenged by the reduced appetite of banks to allocate their balance sheets to fixed interest market-making, and elevated issuance tasks.
The project will investigate alternative issuance techniques to supplement existing mechanisms. It is expected that one or more of these issuance techniques will be in place before the end of 2016-17.
2. Evaluating the potential future demand for AGS and how the AOFM can influence this demand.
The AOFM seeks to engage with new investors and maintains a program to engage with current investors in a manner that continues to grow these connections and understand their behaviour.
Market developments undertaken by the AOFM include lengthening the yield curve. Understanding demand that will support further extensions to the duration of AGS requires additional identification and engagement with a wider set of investors. This will include a different type of fund and asset/liability manager not necessarily common to the AOFM’s past sphere of engagement. Identifying and understanding global capital flows and how to access pools of funds will allow the AOFM to validate and refine its investor relations strategy to support current and future portfolio management strategies. A project that focuses specifically on refining the AOFM’s understanding for this part of global financial market activity will support these aims.
Last updated: 31 August 2016