The AOFM’s key responsibilities involve managing the Australian Government’s debt portfolio through the issuance of Australian Government Securities (AGS), 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 AGS market) and with domestic and international investors in AGS.
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 AGS, 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 AGS 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 AGS in the financial market, pays periodic interest coupons to the holders of these securities, occasionally repurchases AGS 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 AGS market and assists the efficient operation of the AGS 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.
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.
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).
Last updated: 9 October 2017