The Future of the Commonwealth Government Securities Market

Two Broad Themes

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

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 Net Call on the Market

Commonwealth General Government Debt

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

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

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

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

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

• 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

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

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

• 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

• 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

• 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

• 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

• 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

• 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

• 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

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

AOFM

• over-arching philosophical position of the 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

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

Last updated: 7 November 2013