The Future of the Commonwealth Government Securities Market
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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
