Corporate Plan 2017-18

Corporate Plan 2017-18

Introduction

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 2017-2021 reporting periods.

The AOFM annual corporate planning process involves a review of its approach to managing the year in prospect, including a review of risks and opportunities presenting to the AOFM. The Corporate Plan guides the development of strategic project plans and annual Business Group plans, both of which set the context for individual performance expectations.

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.

Vision

Acknowledged for excellence in sovereign financial management.

Purpose (mission)

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.

Objectives (delivery)

  1. Meet the budget financing task in a cost-effective manner subject to acceptable risk.
  2. Facilitate the government’s cash outlay requirements as and when they fall due.
  3. Be a credible custodian of the Australian Government Securities (AGS) market and other portfolio responsibilities.

Role

The key functions underpinning AOFM’s role are:

  • issuing AGS in accordance with Government policy objectives (such as promoting sovereign bond market liquidity);
  • managing the aggregate daily cash balances in the Government’s Official Public Account;
  • 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 consistently act in a professional, respectful, transparent and impartial manner that will withstand scrutiny;
  • results focussed – we demonstrate a thorough understanding of our responsibilities and take pride in our work, owning decisions that we make;
  • responsive – we consult carefully and demonstrate initiative and the ability to adapt to changing circumstances; and
  • clear – we communicate in a straightforward and timely manner.

Organisational structure

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 on financial markets) , transaction 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 transaction settlements, together with all associated payment obligations and the monitoring and financial statement reporting of the AOFM’s transactions (and balance sheet activity) on behalf of the Australian Government. These activities 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 outsourced 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 Corporate Development business unit. Advice on issues regarding 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).

Organisational Structure 2016-17. 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).

Operating environment

Governance

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 the 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 looks to the AOFM to provide technical and strategic advice on 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 on behalf of the Government through the AOFM’s annual issuance programs.

External environment

The AOFM looks to the environment in which it operates as having several key dimensions. One dimension is the domestic economic and fiscal position, which directly impacts the annual issuance programs required to meet the Government’s financing needs. The AOFM works closely with Treasury to understand the potential for and likelihood of change to this position. A second dimension is the circumstances influencing the combined domestic and offshore demand for Australian Government bonds. A third dimension is the nature of changes to the banking sector, which can impact the AOFM’s access to market.

The context in which global financial markets operate continues to be shaped by geopolitical and peripheral European financial uncertainty. Financial markets have reacted noticeably to a number of major events (including the change in US Government Administration; the decision in the UK for a withdrawal from the EU and anticipation of a number of European national election and referenda results). As a backdrop to all of this, there is a broadening expectation that economic indicators reflect sustained positive growth for the key regions – namely core Europe, the US and Japan. A continued orderly transition of the Chinese economy is also a matter of significance.

The regulatory environment for banks has undergone significant change in recent years. Some of the impacts continue to be important for the AOFM (and indeed sovereign issuers generally) as they have the potential to appreciably change the way that the primary market for bond issuance operates. This is of particular interest given the AOFM’s reliance on the market-making banks to distribute bonds to domestic and global investors. More specifically, this relates to the willingness and capacity of these banks to warehouse bonds won at tender (in the ‘primary’ market) before on-selling to investors through the ‘secondary market’. If the costs of this activity continue to be pushed higher as a result of regulation, intermediary banks may have a reduced appetite for fixed interest market-making. This will impact market liquidity, something that is of key importance to investors. It may also lead to further concentration among the intermediary banks. More recently, there has been some speculation that the trend towards increasing regulation in the banking sector may be reversed in coming years, particularly in the US.

The AOFM will continue to assess the cost effectiveness and risks associated with the issuance of government bonds and the management of the broader portfolio. Since the GFC and associated increases in issuance programs, the AOFM has been focused on market development (largely through incremental extension of the AGS yield curve and promoting investor diversification) in order to manage and mitigate the risks associated with growing debt balances. Lengthening of the average term to maturity of the portfolio has also been integral to this. While not without higher interest costs, careful analysis has underpinned the judgements reflected in these decisions. Although the funding task remains elevated, it is forecast to ease over time. With global markets now looking more stable, the AOFM sees less risk to funding tasks than has recently been the case.

There are, however, some important changing dynamics within and across international capital markets that continue from last year. One is the potential for a continuation of rising interest rates globally. This follows a prolonged period of clear easing bias from many central banks with the consensus financial market view now that this has come to an end. The US Federal Reserve has for example started increasing its cash rate and has made it clear that there are further rises to come. The potential consequences of this are widely understood and could directly (and indirectly) impact the decisions of issuers, including the AOFM. For instance, if US rate rises were to accelerate and steepen the AGS yield curve (with short term rates remaining anchored by domestic factors), the issuance strategy may need to be re‑evaluated in light of higher costs associated with pursuing a long average term to maturity of new AGS issuance. Different interest rate trajectories in the US, Europe and Japan over the next year or two could also influence the AOFM’s issuance decisions by changing the relative attractiveness of AGS to investors compared to other sovereign bonds (a key consideration together with relative market liquidity and cross-currency levels).

Planned performance

A summary of key performance indicators is shown in the table below. The key performance indicators are applicable for each of the four reporting periods covered by this corporate plan.

KEY PERFORMANCE INDICATOR* MEASURE TARGET
Meet the budget financing task in a cost-effective manner subject to acceptable risk
Term issuance Shortfall in volume ($) between actual Treasury Bond issuance and planned issuance announced at the Budget and subsequent releases. Zero
Financing cost The cost of the long-term debt portfolio compared to the 10 year average of the 10-year bond rate. Monitor outcome with reference to the trend
New issuance yields Weighted average issue yield at Treasury Bond and Treasury Indexed Bond tenders less prevailing mid-market secondary yields. 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 Number of instances the RBA overdraft facility was utilised to the extent that it required Ministerial approval during the assessment period. Zero
A credible custodian of the AGS market and other portfolio responsibilities
A liquid and efficient secondary market Annual turnover in the secondary market for Treasury Bonds and Treasury Indexed Bonds. Monitor trend
Number of times the AOFM securities lending facility was accessed and the aggregate face value amount of stock lent (excluding intraday borrowings). Monitor trend
Market commitments Number of times the AOFM failed to undertake actions consistent with public announcements. Zero

* refer also to Program 1.1 of the Treasury Portfolio Budget Statements 2017-18 (page 111)

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 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

Core operations

Business groups within the entity have developed operational plans for 2017-18. These detail the range of tasks and initiatives that each group will undertake in support of the AOFM achieving its core objectives.

Strategic outlook

The objectives the 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 Australian Government (for more information see Outcome 1 for the AOFM as published in the Treasury Portfolio Budget Statements 2017-18). 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 2017‑18 debt management strategy has been reviewed and endorsed by the Treasury Secretary and subsequently approved by the Treasurer.

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 its ability to meet the Government’s financing requirements. It does this through various means, including by liaising with a comprehensive and extensive network of domestic and offshore market contacts based on its relationships with intermediaries and investors.

Workforce planning

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 2017-18 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 Australian Government’s daily cash position. The challenges here relate largely to having reliable information on revenue receipts and forecast outlays. The AOFM will continue to engage closely with key agencies to highlight the growing impact of unanticipated or poorly communicated changes throughout the year – particularly where large transactions are planned;
  • maintaining strong and productive relationships with intermediaries and investors to facilitate the effective delivery of the issuance program. The focus is on: consulting market participants where decisions have the potential for impacting the market and the external view of AOFM as a responsible issuer; and advising clearly and in advance of developments the success of which depends on a sound understanding by intermediaries and investors;
  • working with the Treasury on Government debt and associated financial policy related issues and regularly updating Treasury on issues of potential significance for fiscal or debt policy;
  • 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. This involves a regular program of domestic and offshore investor meetings and engagement with the investor community through industry forums; and
  • capitalising on business improvement opportunities, through leveraging system capabilities and reviewing critical functions to increase operational efficiencies.

Strategic projects (to commence in 2017-18)

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. Better understanding the buy-side in a changing world

For some years now, the AOFM has faced increasingly elevated funding programs that are quite high by historical standards. This has been achieved through improving its understanding of a more diverse and geographically broadening investor base, together with a deliberate program of close communication with the financial markets. There will be an increasing importance to improve an understanding of how the end holders (that is, the ‘buy-side’) of AGS behave in a world that is rapidly changing. These changes may have their genesis from either the political, social, technological or economic spheres or indeed a combination thereof.

In order for the AOFM to remain attuned to changes and trends in financial market behaviours it requires a wide and more in-depth understanding of global capital flows and how these react to various developments. This project will enhance AOFM understanding of how the buy-side responds to various changes occurring globally, thereby allowing the AOFM to be more informed when developing a long-term debt portfolio management strategy.

2. Review the AOFM website

AOFM’s corporate website is a key communication tool and should be a reflection of the agency’s corporate identity. It has been three years since the last major website review and there now exists opportunities to further enhance content and streamline processes to better meet the needs of target audiences. This project will serve to promote an awareness across the AOFM of the importance of keeping website content current and to instil broad responsibility for its maintenance.

The project will aim to ensure that any enhancements align with the agency’s reputation in terms of professional integrity, credibility and relevance. Project actions will deliver a website that is modern, user friendly and compares favourably with international peers.

3. AOFM Workforce Plan (2018-22)

As a small specialised agency the AOFM is vulnerable to a number of staffing challenges, not the least being turnover in its core targeted skills set, while at the same time facing potential recruitment challenges where it is seen to be competing with the financial market sector. A fit-for-purpose workforce plan will identify and consider AOFM needs, challenges and aspirations in regard to staff recruitment, development and retention. It will reflect a consideration of medium-term risks and opportunities from an operational perspective.

Last updated: 31 August 2017