Operational Notice: Rules Governing Transfers Between Long Term Debt Portfolio and Cash Management Portfolio

18 September 2003

Op Notice: No. 13/2003

Portfolio Framework

The AOFM’s portfolio framework allocates the Commonwealth net CGS debt portfolio between a Long Term Debt Portfolio and a Cash Management Portfolio. The objectives underpinning the allocation methodology are that:

  • The Long Term Debt Portfolio represents the trend volume of the net CGS debt portfolio on a year to year basis; and
  • The Cash Management Portfolio is to accommodate within-year variability in the volume of net debt around this trend level.

Initially, longer-term instruments such as bonds reside in the Long Term Debt Portfolio, while shorter-term instruments such as Treasury Notes and term deposits reside in the Cash Management Portfolio. Debt volumes are subsequently allocated between the two portfolios using transfers of assets and liabilities from one portfolio to the other, as governed by a set of objective rules.

Transfer Rules

The principles behind the transfer rules are that the trend level of net CGS debt should reside in the Long Term Debt Portfolio and that the Cash Management Portfolio should accommodate any within-year variation from this path. On average, the Cash Management Portfolio should therefore have neither a net asset balance, nor a net liability balance.

There are two types of transfer rules. The first are defined in terms of the steps necessary to offset the impact of one-off events such as bond issuance and maturities. This process is mechanical and triggered by externally observable events.

  • For example, consider the impact of the maturity of $5 billion worth of bonds. Initially, these bonds would have resided as liabilities within the Long-Term Debt Portfolio. If no transfer were made on the day of maturity, the Long-Term Debt Portfolio would fall by $5 billion. Consequently, a transfer is undertaken to reverse the impact of the maturity. This transfer of assets from the Long Term Debt Portfolio to the Cash Management Portfolio removes the discontinuity in the volume of net debt within the Long Term Debt Portfolio. From the perspective of the Cash Management Portfolio, the transfer of assets serves to offset the impact of the cash repayment of the maturing bonds.

The second set of transfer rules forces the value of the Long Term Debt Portfolio to trace out the estimated path of net CGS debt.

  • For example, in the event of a forecast budget surplus giving rise to an estimated reduction in the level of net CGS debt through the course of a financial year, a steady reduction in the level of the Long Term Debt Portfolio is to occur. This is achieved through the transfer of assets from the Cash Management Portfolio evenly through the course of the year. These assets serve to partially defease the liabilities within the Long Term Debt Portfolio, thereby reducing its net volume.

Estimating the Path of Net Debt

The AOFM bases its estimate of the path on financing information embedded within Budget projections, released in May each year. This data is used to generate the estimated path of net debt for the following financial year, under the assumption that any change in net debt will occur evenly over the course of the financial year.

Approximately halfway through the financial year, Mid-Year Economic and Fiscal Outlook (MYEFO) forecasts are released. Any change in the estimated financing requirement from the previous Budget projection is reflected in a revision of the path of net debt for the remainder of the financial year, effective 1 January. It is worth noting that
there is no one-off adjustment to the stock of net debt, but rather the path is adjusted to reflect any changes in that year’s expected financing requirement.

At the end of the financial year, the AOFM is in a position to determine the actual trend level of net debt through the course of that year. By determining the average daily balance of the Cash Management Portfolio throughout the year, a one-off adjustment is made to reduce this balance to zero, effective 1 July.

  • For example, in the event that the Cash Management Portfolio had an average asset balance of $1 billion throughout the course of the year, a one-off transfer of $1 billion worth of short-term assets would be made from the Cash Management Portfolio to the Long Term Debt Portfolio, effective 1 July.

This revision process ensures that the Long-Term Debt Portfolio converges upon the trend level of net debt. It is important to note that the path-estimation process is rule-based and therefore not subject to any discretion on
the part of the AOFM.

Information Principles

It is important that the AOFM provide confidence that the Long Term Debt Portfolio truly reflects the best estimate of the trend level of net CGS debt. If it were not to do so, it is likely that the Portfolio Framework would be criticised as a vehicle through which the AOFM could artificially achieve compliance with its benchmark risk limits.

For this reason, estimates of the path of net CGS debt are based upon information contained within Budget and MYEFO projections of annual financing requirements. The one-off adjustment to the stock of net debt within
the Long Term Debt Portfolio made on 1 July is based upon information that, while not publicly available at that time, will subsequently be made available at the time that the AOFM Annual Report is released. Therefore, the net debt adjustment path and one-off adjustments can be independently verified.

The table on the following page summarises the various triggers that can give rise to a transfer of assets between the Long Term Debt Portfolio and the Cash Management Portfolio.

Transfer trigger-event Why a transfer is required How will the transfer be achieved? What are the consequences of not doing the
Level of Long Term Debt Portfolio (LTDP) changes each day under target LTDP Path to reflect estimated path of net CGS debt. To ensure volume of debt in LTDP moves in line with  estimated trend for net CGS debt. (Note the trend is revised on 1 July and 1 January). Internal transfer of cash-like assets between Cash  Management Portfolio (CMP) and LTDP. Volume of net debt within LTDP will differ from trend
level of net CGS debt.
Revision to LTDP Path On 1st July the previous year’s actual level of net debt is known. (Conversely, any persistent asset/liability balance within CMP can be quantified.) A one-off internal transfer of cash-like assets between  CMP and LTDP is required to unwind the persistent asset/liability balance within the CMP and to get the LTDP back to a level consistent with net CGS debt. LTDP will not be representing the current forecast of trend path for net CGS debt portfolio. A persistent net asset/liability balance will be residing in the CMP.
Bond maturity / repurchase This event causes LTDP to fall below the target path.
An internal transfer is required to offset the effect.
Internal transfer of cash-like assets from LTDP to
LTDP will fall despite no corresponding change in
the level of net CGS debt.
Bond issuance This event causes LTDP to rise above the target path.
An internal transfer is required to offset the effect.
Internal transfer of cash-like assets from CMP to LTDP. LTDP will rise despite no corresponding change in the level of net CGS debt.



Blair Comley +61 2 6263 1100


Last updated: 5 March 2014