Glossary
Australian dollar Long-Term Debt Portfolio
The majority of the Long-Term Debt Portfolio consists of the domestic debt component known as the Australian dollar Long-Term Debt Portfolio. It consists of the Australian dollar denominated component of the estimated trend volume of net debt which comprises both ongoing liabilities and persistent asset balances. Within this portfolio, the excess of gross over net ongoing debt is matched by the persistent asset balances and allocated to the Debt Hedge Book, while the balance is allocated to the Core Book.
Basis point
One hundredth of one per cent.
Basis risk
The risk that two instruments with an identical sensitivity to interest rates do not behave in an identical manner. For example, the AOFM’s debt defeasance strategy consisted of overlaying the trend term deposit balance with interest rate swaps to receive fixed rates, matched against the excess of gross over net nominal debt. When swap rates and bond yields of similar terms did not move in unison the strategy was exposed to basis risk.
Cash Management Portfolio
The AOFM allocates its net debt between a Long-Term Debt Portfolio and a Cash Management Portfolio. The Cash Management Portfolio contains short-term assets and liabilities and is used to manage the within-year variability in the Government’s cash flows.
Commonwealth Government securities (CGS)
Refers to debt obligations of the Commonwealth evidenced by the issue of securities. The vast bulk of the CGS on issue is represented by Treasury Bonds and Treasury Indexed Bonds.
Core Book
Houses the domestic component of the trend level of net long-term CGS debt. It is part of the Australian dollar Long-Term Debt Portfolio.
Credit risk
The risk of financial loss arising from a counterparty to a transaction defaulting on its financial obligations under that transaction. Credit risk is contingent on both a default taking place and there being pecuniary loss as a result. The Commonwealth faces credit risk as a part of its debt management activities in relation to its swap derivative transactions.
Debt Hedge Book
Holds the continuing assets that have accumulated in the net debt portfolio as a result of debt issuance in excess of funding requirements, together with a matched set of liabilities, in the form of a representative cross-section of the Treasury Bonds on issue and associated interest rate swaps. It is part of the Australian dollar Long-Term Debt Portfolio, although it has been empty since 30 June 2005 in preparation for the transfer of assets to the Future Fund.
Defeasance
Arrangements whereby a set of debt liabilities are held against a set of assets with closely matching and offsetting cost and risk characteristics.
Discount
The amount by which the value of a security is less than its face, or par, value.
Duration
See modified duration.
Face value
The amount of money indicated on a security, or inscribed in relation to a security, as being due to be paid on maturity.
Foreign Debt Portfolio
The non-domestic currency component of the Long-Term Debt Portfolio. Following the elimination of the foreign currency derivatives exposure, this portfolio now consists of a single US dollar denominated loan issued in the 1980s.
Funding risk
The risk that an issuer is unable to raise funds, as required, in an orderly manner and without financial penalty. The Commonwealth faces funding risk in respect of the primary issuance, typically in tender processes, of its full range of debt instruments. Funding risk encompasses both long-term fund raising to cover budget deficits and the short-term funding or cash management implications of mismatches in the timing of government outlays and receipts.
Futures baskets
A collection of like financial products or commodities, grouped together to underpin a particular futures contract. For example, 3- and 10-year Treasury Bond futures baskets consist of a collection of Treasury Bond lines that have an average term to maturity of approximately 3 and 10 years respectively.
Futures contract
An agreement between two parties that commits one party to buy an underlying financial instrument or commodity and one party to sell a financial instrument or commodity at a specific price at a future date. The agreement is completed at a specified expiration date by physical delivery or cash settlement or offset prior to the expiration date. This type of agreement is traded on a futures exchange, with bond futures contracts being traded via the Sydney Futures Exchange.
General Government Sector net debt
The sum of selected financial liabilities less the sum of selected financial assets in the Australian Government General Government Sector balance sheet. It is the sum of deposits held, advances received, government securities, loans and other borrowings less the sum of cash and deposits, advances paid and investments, loans and placements.
Grade rate
The salary rate by reference to which salaries at each classification level are set according to an employee’s performance. The grade rate applies to superior performance at the classification level to which it refers.
Liquidity risk
The risk of financial loss that could occur should the debt portfolio require restructuring. Liquidity is the ease with which one financial claim can be exchanged for another as a result of the willingness of third parties to transact in this debt. The Commonwealth faces liquidity risk with respect to transactions in existing debt such as debt repurchases prior to maturity.
Long-Term Debt Portfolio
The AOFM allocates its net debt between a Long-Term Debt Portfolio and a Cash Management Portfolio. The Long-Term Debt Portfolio contains ongoing domestic and foreign currency liabilities and assets.
Market risk
The risk, from an issuer’s perspective, that once debt has been issued, financial market prices may move such that either debt servicing costs increase directly or the opportunity to reduce debt servicing costs is missed. The Commonwealth faces two main sources of market risk — interest rate risk and exchange rate risk.
Market value
The amount of money for which a security trades in the market at a particular point of time.
Modified duration
A measure of the sensitivity of the market value of a debt security to a change in interest rates. It is measured as the percentage change in the market value of a debt instrument in response to a one percentage point change in nominal interest rates. Modified duration is also closely related to the weighted average term to repricing and is the primary risk parameter used by the AOFM. Portfolios with higher modified durations have more stable interest costs through time but have a more volatile market value through time.
Net debt portfolio
The AOFM’s net debt portfolio comprises CGS on issue (net of Commonwealth holdings), term deposits at the Reserve Bank of Australia, and interest rate swaps administered by the AOFM. This portfolio represents a subset of General Government Sector net debt.
Nominal debt
Debt that is not indexed to inflation.
Novate
A novate is an arrangement where a third party agrees to take the place of a party to a transaction and honour the commitments of the original party to the transaction.
Operational risk
The risk of loss, whether direct or indirect, arising from inadequate or failed internal processes, people or systems, or from external events. It encompasses risks inherent in the agency’s operating activities such as fraud risk, settlement risk, legal risk, accounting risk, personnel risk and reputation risk.
Repo
A repurchase agreement under which the seller of a security agrees to buy it back at a specified time and price.
Repricing risk
Whenever the AOFM enters the market to borrow funds, it is exposed to repricing risk. Similarly, the use of interest rate swaps to reduce the duration of the portfolio, by receiving a fixed rate and paying a floating rate, increases the level of repricing risk.
Risk premium
The difference between the return available on a risk-free asset and the return available on a riskier asset.
Short-dated exposure
A measure of the proportion of the portfolio subject to immediate repricing. After allocating each cash flow within the net debt portfolio proportionally to the nearest two annual pricing points, the share of the portfolio’s market value allocated to the zero-year pricing point is the short-dated exposure. For example, a liability due to mature in one day would be allocated almost entirely to the zero-year pricing point, while 50 per cent of a bond with six months to maturity would be allocated to the zero-year pricing point. The net interest cost of debt portfolios with higher short-dated exposures responds more quickly to movements in market interest rates, all else being equal.
Securities lending
An activity whereby securities are lent to the financial market for a fee. This activity may be conducted to alleviate temporary market shortages of specific lines of stock.
Securities Lending Facility
A facility established by the AOFM in 2004 that lends Treasury Bonds to market participants for short periods when they are not readily available for other sources. The facility is operated by the Reserve Bank of Australia on behalf of the AOFM.
Swap
A financial transaction in which two counterparties agree to exchange streams of payments occurring over time according to predetermined rules. Swaps are used, for liability management purposes, to change the cost and currency and/or interest rate exposure associated with existing loans.
Tenor
The tenor of a financial instrument is another name for its term to maturity.
Treasury Bond
This is a medium- to long-term security issued by the Commonwealth that carries an annual rate of interest fixed over the life of the security, payable in six monthly instalments on the face, or par, value of the security. The Bonds are repayable at face value on maturity.
Treasury Indexed Bond
A medium- to long-term security which was issued by the Commonwealth in two forms (Capital Indexed and Interest Indexed) from 1985 until 2003. With Capital Indexed Bonds, the nominal value of the security, on which a fixed rate of interest applies, varies over time according to movements in the Consumer Price Index (CPI). At maturity, the adjusted capital value of the bonds is paid. Interest Indexed Bonds have all matured. Interest on these Bonds varied over time according to movements in the CPI. The Bonds were repayable at face value on maturity.
Treasury Note
An instrument issued at a discount and redeemable at par on maturity. The ‘interest’ payable on the Notes is represented by the difference between their issue value and their par or face value. Treasury Notes are issued to cover mismatches between the Commonwealth’s outlay and revenue streams within the course of a year that cannot be met by changes in the AOFM’s holdings of term deposits with the Reserve Bank of Australia.
Acronyms
AASB Australian Accounting Standard
ANAO Australian National Audit Office
AOFM Australian Office of Financial Management
APS Australian Public Service
ATO Australian Taxation Office
AUD Australian dollar
AWA Australian Workplace Agreement
CGS Commonwealth Government securities
CPI Consumer Price Index
CRF Consolidated Revenue Fund
EEO Equal Employment Opportunity
EL Executive Level (APS Classification)
FBT Fringe Benefit Tax
FMA Financial Management and Accountability Act 1997
FMO Finance Minister’s Orders
FOI Freedom of Information
GDP Gross Domestic Product
GST Goods and Service Tax
IT Information technology
OECD Organisation for Economic Co-operation and Development
OPA Official Public Account
RBA Reserve Bank of Australia
SES Senior Executive Service
USD United States dollar
Contact details
Enquiries
Enquiries regarding this report may be directed to:
Liaison Officer
Australian Office of Financial Management
Treasury Building
Langton Crescent
PARKES ACT 2600
Telephone (61-2) 6263 1111
Fax (61-2) 6263 1222
Email enquiries@aofm.gov.au
Internet address
A copy of this document can be located on the AOFM web site at: (http://www.aofm.gov.au/content/publications/reports.asp).