AOFM Activities for 2005-06

13 July 2005

CEO Presentation to Australian Business Economists
Sydney, Australia

Australian Business Economists

AOFM – Activities for 2005-06

Presentation by Neil Hyden
Chief Executive Officer, AOFM

13 July 2005

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Outline

  • Bond Issuance and Market Efficiency
  • CGS Tender Arrangements
  • Interest Rate Swaps
  • Collateral Arrangements
  • Cash Management

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Bond Issuance – Objectives

  • The aim of Treasury bond issuance is to maintain the bond and bond futures markets.
  • We issue:
    – Mid-curve bonds to support the 3-year futures contract.
    – Long-dated bonds to support the 10-year contract.
  • Each bond line is built up to around $5 billion.

Bonds on Issue
End June 2004

Bonds on Issue
September 2004 maturity

Bonds on Issue
2017 issuance

Bonds on Issue
2010 issuance

Bonds on Issue
End June 2005

Bonds on Issue
End December 2005

Bonds on Issue
End June 2006

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Bond Market Efficiency

  • Over the past year the CGS market has been operating efficiently, with fine two-way pricing.
  • Some instances of tightness in repo market affecting individual stocks for brief periods.
  • AOFM will continue to monitor conditions and maintain contact with market participants, RBA, AFMA and the SFE.

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Securities Lending Facility

  • A securities lending facility was established in September 2004.
  • Operated by the RBA on behalf of AOFM.
  • Intended to enhance liquidity and price making, without undermining the normal functioning of the market.

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Securities Lending Facility

  • The facility has been used 40 times so far and appears to be working smoothly.
  • We don’t intend to adjust the margin or change other operational details at this time.

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Tender Arrangements

  • We have reviewed arrangements for the conduct of tenders for the issue of CGS.
    – The review included consultations with market participants and the RBA.
  • Two changes:
    – Shorter time to the announcement of results.
    – New bidding system.

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Tender Arrangements

  • Shorter period between the closing time for submitting bids and announcement of tender:
    – Tender results will normally be announced within 15 minutes of the close of bidding.
    – New arrangements will take effect from 26 July 2005.

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Tender Arrangements

  • AOFM is also looking for a new system for the collection and processing of CGS tender bids.
    – We expect to issue a detailed request for tender later this calendar year.
    – New system operational in 2006-07.
  • The new system should provide improvements in the conduct of tenders, including a further reduction in the ‘announcement window’.

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Swap Activity 2004-05

  • Last year we announced a program of interest rate swaps for 2004-05 of around $9.5 billion.
  • The indicative program provided for:
    – Around $3.5 billion in short-dated swaps to pay fixed; and
    – Around $6 billion in longer-dated swaps to receive fixed.

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Swap Activity 2004-05

  • The program was suspended in May 2005 due to:
    – Unfavourable market conditions; and
    – The prospective transfer of seed capital to the Future Fund.
  • Total swap activity in 2004-05:
    – $2 billion in short-dated swaps to pay fixed.
    – $4.6 billion in longer-dated swaps to receive fixed.

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Swap Activity 2005-06

  • 2005-06 indicative program:
    – Around $2 billion in short-dated paying.
    – Up to $1 billion in long-dated receiving.
    – Subject to market conditions.

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Swap Activity 2005-06

  • The 2005-06 indicative swap program is smaller than those of recent years.
  • This reflects:
    – A change to the benchmark portfolio in response to changing market conditions; and
    – The impact on the portfolio of transfers to the Future Fund.

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Benchmark Portfolio

  • We use interest rate swaps to manage the expected cost and risk of the portfolio, using a benchmark as a guide.
  • The benchmark aims to indicate a desirable balance between cost and variability of cost (risk).

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Benchmark Portfolio

  • From 1 July 2005, the benchmark announced in September 2003 has been changed.
    – Modified Duration has been raised from 2 to 2.5.
    – Short Dated Exposure has been kept at 35%.
  • An important factor has been that we have lowered our estimate of the term premium, reflecting changes in yield curves over recent years.
  • Increased duration of the benchmark reduces the need for swaps.

Portfolio Management

Portfolio Management

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Benchmark Portfolio

  • The AOFM will be reviewing its approach to the benchmark during the year.
  • Including whether we should take account of other interest rate risks on the Australian Government’s balance sheet.

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Impact of the Future Fund

  • The Government has announced that around $16 billion of assets will be transferred to the Future Fund later this year as seed capital.
  • The transfer of these assets will act to reduce the duration of AOFM’s net debt portfolio:
    – offsetting the upward pressure caused by bond issuance; and
    – reducing the need for interest rate swaps to receive fixed rates.
  • This is a one-off effect that will occur only this financial year.

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Swap Arrangements – Collateral

  • Last year I indicated that we were looking to introduce collateral on our interest rate swaps.
  • We have now done so.
  • Agreements are in place with 10 counterparties and others are well advanced.

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Swap Arrangements – Collateral

  • Collateral will allow us to increase our range of eligible counterparties.
    – New counterparties (with ratings of A or better) will need to sign a collateral agreement to do swaps with us.
    – Swap business with existing counterparties is not at this stage contingent upon having a collateral agreement.
    – But credit limits may impact on our capacity to do swaps with existing counterparties who have not yet executed collateral agreements.

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Swap Arrangements

  • We have decided to increase the number of counterparties that we contact for bids when undertaking swaps from three to four.
  • We will in future normally include the successful bidder from the previous swap tender, provided it has a collateral agreement with us.

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Cash Management

  • Term deposits remain our primary cash management tool.
    – T-Notes secondary tool and issued as required.
  • T-Note issuance for 2004-05 was zero.
  • T-Note issuance for 2005-06 may be required to meet within year financing requirements.
    – The need for T-Note issuance will be dependent upon the size and timing of the transfer of assets to the Future Fund.

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Australian Business Economists

AOFM – Activities for 2005-06

Presentation by Neil Hyden
Chief Executive Officer, AOFM

13 July 2005

Last updated: 7 November 2013