The Corporate Plan highlights the AOFM’s core objectives and main activities for the year ahead, together with an account of emerging challenges and issues to be monitored and/or managed over the 2018-2022 reporting periods.
The AOFM annual corporate planning process involves a review of its approach to managing the year in prospect, including a review of risks and opportunities presenting to the AOFM. The Corporate Plan guides the development of corporate project plans and annual Business Group plans, both of which set the context for individual performance expectations.
Organisational performance against the Corporate Plan is monitored using key performance indicators, and regular updates on the progress of corporate projects.
The Corporate Plan is required by paragraph 35(1)(b) of the Public Governance, Performance and Accountability Act 2013.
Acknowledged for excellence in sovereign financial management.
To ensure the Government’s debt financing needs are fully met each year while managing the trade-offs between cost and risks for the cash and debt portfolios over the medium-long term. The AOFM will also take into account the potential for its operations to impact domestic financial markets.
- Meet the budget financing task in a cost-effective manner subject to acceptable risk.
- Facilitate the government’s cash outlay requirements as and when they fall due.
- Be a credible custodian of the Australian Government Securities (AGS) market and other portfolio responsibilities.
The key functions underpinning AOFM’s role are:
- issuing AGS in accordance with Government policy objectives (such as promoting sovereign bond market liquidity);
- managing the aggregate daily cash balances in the Government’s Official Public Account;
- managing financial assets according to policy directives as they arise from time-to-time, or as part of broader portfolio management;
- the settlement and payment of Commonwealth financial obligations on AGS;
- maintaining a capacity to provide specialist advice within government on debt financing (including related financial market matters) and balance sheet management;
- developing risk assessments to undertake cost effective management of the debt and asset portfolios; and
- where appropriate, supporting the efficient operation of the Australian financial system.
Guiding principles (AOFM Values)
The AOFM, as the interface between Government and financial markets is required to exercise considerable judgement. It is necessary to balance the pursuit of government objectives and community outcomes with an understanding of the incentives that drive financial market participants. In this regard, it is important that the AOFM is seen in its day-to-day dealings to be:
- of the highest integrity – we consistently act in a professional, respectful, transparent and impartial manner that will withstand scrutiny;
- results focussed – we demonstrate a thorough understanding of our responsibilities and take pride in our work, owning decisions that we make;
- responsive – we consult carefully and demonstrate initiative and the ability to adapt to changing circumstances; and
- clear – we communicate in a straightforward and timely manner.
The AOFM has arranged its core operational activities into three broad areas. 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 Reporting) 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. The middle office also administers controls in various business critical systems, maintains business databases that support monitoring and reporting on AOFM business activities and manages broader IT issues through our shared service relationship with the Treasury.
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).
The Treasurer is responsible for administering legislation associated with debt management, and has the power to authorise the investment of public funds for the purpose of asset management. The Department of the Treasury is responsible for borrowing money on the public credit of the Government and for administering the legislation relating to this responsibility. As such, the Secretary to the Treasury is accountable for implementation of the debt management mandate and looks to the AOFM to provide technical and strategic advice on related matters.
The AOFM Chief Executive Officer is accountable to the Secretary and to the Treasurer for the execution of debt management strategies and the achievement of financing tasks on behalf of the Government through the AOFM’s annual issuance programs.
The AOFM as sovereign issuer on behalf of the Australian Government is a price taker in global capital markets. Therefore, its strategy and issuance activities are shaped largely by the operating environment in which it operates. While there is a broad range of external factors that influence the way the AOFM meets the Government’s financing needs through time, most can be reduced to describe an impact on: the cost of issuing Australian Government Securities (AGS); investor demand for AGS; or factors that affect the AOFM’s access or route to market. Each influences the AOFM’s assessment as to how best to meet its debt and cash management obligations, including the timing and means of its interactions with financial markets and the funding mix it chooses. This outlook frames the strategy for the year ahead while conditions at any point in time determine how operational flexibility is used.
In order to better understand its operating environment, the AOFM maintains an active research program as well as an open dialogue with market participants (including domestic and offshore investors, intermediaries, the RBA and other sovereign debt issuers). The AOFM also works closely with Treasury in order to understand the potential for and likelihood of changes to the Government’s future financing needs. In planning for the 2018-19 issuance strategy, the AOFM has again assessed challenges in global markets as remaining heightened, but expects a moderation in funding risks over the next few years due largely to lower net-financing tasks that are set against a backdrop of an improving global economic growth outlook.
The global macroeconomic environment is at present generally positive and the outlook continues to be for steady improvement (at least partly due to continuing GDP growth in the US and Europe). The domestic economic outlook also remains positive, especially with the drag from declining mining investment coming to an end and with consumption and non-mining investment making marked contributions to growth. Jobs growth has also been consistent for some time now and, inflation may have bottomed in late 2017 and there is continuing improvement in the fiscal position. All of these factors are supporting Australia’s triple-A sovereign credit rating.
Despite the outlook for global growth, most major central banks continue to run accommodative monetary policy settings and are only early in the process of either withdrawing accommodation or signaling future tightening (be that ending quantitative easing or increasing cash rates). Domestically, interest rates remain very low while the estimated premium investors require to hold longer-term bonds compared to short term bonds remains compressed. This indicates that the AOFM can issue cost effectively for longer terms without facing undue cost penalties.
Geopolitical risks retain the potential to impact economic performance, the operation of capital markets and investor sentiment throughout calendar 2018 and 2019. Risks remain elevated but have changed in nature from the threats seen a few years ago of a partial break-up of the EU and related matters. The focus has instead shifted to security tensions and the potential for an escalating trade war in response to the recent introduction of tariffs by the US. The impact of the UK exiting from the EU remains unclear in terms of its effect on global growth and financial markets. On balance, rising geopolitical tensions tend to increase demand for so-called ‘safe haven’ assets, of which AGS would be widely considered an example. The main risks to AOFM operations would arise through a sudden loss of confidence in the parties through which AGS are traded. The relative strength of the AUD is also a potentially limiting factor to issuance operations given the extent to which offshore investors hold (and continue to buy) AGS. The AOFM will continue to tailor its debt management and liquidity strategies with a view to providing flexibility to a wide variety of operating circumstances including the potential for disruption to its normal funding operations.
Investor interest in AGS has been reasonable throughout most of 2017-18 but some headwinds in the form of rising North American and European yields may continue to erode the relative attractiveness of AGS to investors compared to other sovereign bonds (a key consideration together with relative market liquidity and currency levels). Another factor sovereign issuers are unsure about (not just the AOFM) is the direct and indirect effects of unprecedented central bank bond buying programs coming to an end that have been in place since the GFC. While it is likely that bond prices will generally fall (and yields will rise), in part reflecting the withdrawal of central bank demand and increase in supply (as central bank balance sheets are unwound), what is not clear is the relative impacts this will have across different bond markets and how investors will respond to such changes. A high degree of investor diversity in the AGS funding base (an ongoing focus of AOFM strategy) and easing in the AOFM’s expected funding task will partially mitigate risks if these factors precipitate a decline in AGS demand from some investor groups.
The regulatory environment for the banks on which the AOFM relies to intermediate the AGS market has undergone significant change in recent years. This continues to be an important factor for sovereign issuers generally as these changes have the potential to appreciably influence the way that the ‘primary’ market for bond issuance operates. More specifically, regulatory changes that have been made with the stated intention of reducing the likelihood that liquidity will be oversupplied (and/or underpriced) in future, may have an impact on the willingness and capacity of these banks to purchase bonds in the primary market, before on-selling to investors through the secondary market. Whilst it is unlikely that bank intermediation services would cease altogether, end investors will be faced with lower liquidity and higher transaction costs. Recent regulatory changes in the US may be an early indication that the regulatory cycle might be turning and that some regulation in the banking sector may be reversed in coming years.
Domestically, the flow through of Basel III prudential liquidity requirements to the banks has created a larger natural ‘home market’ for AGS and this has been reflected by a substantial increase in bank balance sheet buying of AGS in the past few years. Recent indications suggest this phase of domestic bank net accumulation of AGS may be near an end.
The AOFM recognises it has almost no influence over key drivers of the cost of the debt portfolio such as the amount of debt outstanding and the level of market yields. It can influence the cost of the debt portfolio over time through the choice of securities and maturities it issues, which are influenced by considerations beyond cost (including interest rate risk, refinancing risk, deal execution risk and funding risk). There are also (cost and risk) benefits over time from market confidence in the AOFM. This is because investors form views of, and are influenced by, the reputation of the issuer (delivered in large part through consistency and transparency).
The AOFM’s task requires trade-offs between cost and risk but its overriding aim is to ensure that the Government’s financing requirements are met in full and on time. Underpinning this are business processes reflecting minimal appetite for failure in any critical function (such as successful execution and settlement of bond tenders, buy-backs and syndications). Since the onset of the Global Financial Crisis reducing risk has, at the margin, taken primacy over cost. An improving fiscal outlook when the call on the market for financing is in decline will necessarily result in a different balance of consideration between risk and cost.
In terms of an external expression of those areas that should reflect interest in the combined effect of the circumstances under which the AOFM meets its responsibilities, the AOFM has chosen to use six indicators that cover three key considerations raised above: one is the cost effectiveness of its choices on portfolio management and issuance; another reflects its capacity to maintain market access to finance when required; and a third can be used to indicate how the AOFM influences its reputation in financial markets.
Reporting against these in the AOFM annual report will take into account the extent to which an appreciable deviation from the targets is a reflection of broader market changes, or decisions taken by the AOFM during the year (and why). While it is difficult for the AOFM to plan four years in advance because the financing task is only revealed at the Budget each year, the general outlook takes into account the potential for changes in financial markets that could impact the issuance task beyond the current year. The performance measures in the table below are, however, applicable for the four reporting periods covered by this plan (subject to review annually to ensure they remain relevant).
|KEY PERFORMANCE INDICATOR||MEASURE||TARGET|
|Meet the budget financing task in a cost-effective manner subject to acceptable risk|
|Term issuance||Shortfall in volume ($) between actual Treasury Bond issuance and planned issuance announced at the Budget and subsequent releases.||Zero|
|Financing cost (portfolio)||The cost of the long-term debt portfolio compared to the 10 year average of the 10-year bond rate.||Lower|
|Financing cost (issuance)||The cost of Treasury Bond issuance over the past 12 months compared to the average 10-year bond rate over the same period.||Lower|
|New issuance yields||Weighted average issue yield at Treasury Bond and Treasury Indexed Bond tenders less prevailing mid-market secondary yields.||Issuance yields at or below mid-market|
|Facilitate the Government’s cash outlay requirements as and when they fall due|
|Use of the overdraft facility||Number of instances the RBA overdraft facility was utilised to the extent that it required Ministerial approval during the assessment period.||Zero|
|A credible custodian of the AGS market and other portfolio responsibilities|
|AGS secondary market turnover||Annual turnover in the secondary market for Treasury Bonds and Treasury Indexed Bonds.||Greater than previous year|
|Market commitments||Number of times the AOFM failed to undertake actions consistent with public announcements.||Zero|
Risk Oversight and Management
The AOFM is committed to good governance principles and sound management practices, including a structured approach to the management of risk consistent with Commonwealth policy. The AOFM’s enterprise risk management framework highlights the need for the active and transparent management of risk (opportunities and threats). The framework facilitates a consistent approach to identifying and managing risk. It also helps to inform the focus and allocation of risk management effort.
AOFM risks are categorised as strategic, portfolio, or operational. Given the specialist nature of its core business, the AOFM has a particular focus on financial risk management, which applies to all financial and portfolio risks - including cash management and debt portfolios, and associated issuance activities. That said, however, this is not at the expense of ensuring appropriate oversight of strategic and operational risks.
Themes emerging from recent inquiries or reviews into elements of, or participants in, the financial sector have served to highlight the need for maintaining an appropriate understanding of and ownership of operational risks (such as conduct risk). In this regard AOFM recognises the need for and promotes a sound risk culture to enable effective risk management. Key learnings from these reviews have been considered by the AOFM in the context of emerging operational risks and in the context of its regular review of internal practices to risk management. The enterprise risk management framework is complemented by protective security, fraud control and business continuity management practices. The AOFM Audit Committee reviews the maturity of the AOFM’s governance, financial and risk management arrangements, together with examining procedures for managing operational and financial risks. Internal assurance activities support the Audit Committee and monitor the effectiveness of the AOFM’s internal control framework in mitigating risks, as well as our adherence to obligations and commitments.
Each year the AOFM corporate planning process involves an assessment of emerging risks in so far as the potential for them to challenge the achievement of its core objectives and purpose over the next four years. Commentary on these risks is provided in the ‘external environment’ and ‘strategic outlook’ sections of this plan and considered in the context of the ‘key objectives’ section of this plan. They are also incorporated into considerations about implementation of the AOFM workforce plan.
Capability and Strategies
Business groups have developed operational plans for 2018-19. These detail the range of tasks and initiatives that each group will undertake in support of the AOFM achieving its core objectives.
The objectives the AOFM seeks to achieve include: the advancement of macroeconomic growth and stability; the effective operation of financial markets, through issuing debt; investing in financial assets; and managing debt, investments and cash for the Australian Government (for more information see Outcome 1 for the AOFM as published in the Treasury Portfolio Budget Statements 2018-19). The annual focus is on meeting the Government’s financing requirements while managing the trade-offs between cost and risks for the cash and debt portfolios. To achieve this, the AOFM needs to take account of market conditions and other portfolio considerations, which are likely to be impacted by current issuance decisions. To be successful in its roles as portfolio manager and issuer, the AOFM plans AGS issuance based on an annual debt management strategy. The 2018 19 debt management strategy has been reviewed and endorsed by the Secretary to the Treasury and subsequently approved by the Treasurer. As has been the case in recent years, the debt management strategy calls for Treasury Bond issuance to be weighted towards relatively long tenors, for Treasury Note and Treasury Indexed Bond issuance to be undertaken primarily to support ongoing investor engagement, and for precautionary asset balances to be maintained at a level necessary to allow for a degree of flexibility to respond to deteriorating market conditions, should they arise.
The AOFM endeavours to maintain sufficient issuance flexibility to be able to respond appropriately to changes in its operating environment. The AOFM is also acutely aware of the need to monitor external factors, such as market conditions, that have the potential to impact its ability to meet the Government’s financing requirements. It does this through various means, including by liaising with a comprehensive and extensive network of domestic and offshore market contacts based on its relationships with intermediaries and investors.
The AOFM has an extensive ongoing consultation process with Treasury (in terms of monitoring changes to the financing task for example) and market participants (to understand risks to financing conditions for example) as part of it business as usual approach, which is drawn upon in the development of the corporate plan each year.
The AOFM is a specialised entity with staff skilled in debt and related portfolio management, risk management, financial investments, and financial reporting. Its core business requires staff to foster relationships and communicate effectively with the finance sector in particular. The Workforce Plan 2014-2018 was developed and used as an effective means of maintaining a focus on the need for: (1) recruiting high quality potential capable of being developed in a manner to support AOFM operations; (2) assessing the AOFM’s capacity to meet its core objectives and developing existing staff through training and opportunities with reference to that assessment; and (3) providing the guidance and management for staff to maximise the potential of AOFM overall.
The Workforce Plan 2018-2022 builds on the most effective elements of the previous plan and uses the experience gained from implementing it to continue the awareness of a need for high quality recruitment, staff development, improving internal management capability, and maintaining strong external relationships.
Key objectives for the financial year 2018-19 and three forward years
Key priorities for the reporting periods are:
- delivering the Budget financing task through its Treasury Bond and Treasury Indexed Bond issuance programs;
- delivering the cash management task – through managing the Australian Government’s daily cash position. Proactive engagement with key entities will continue to be pursued to ensure that
- reliable revenue receipts and forecast outlays are available. Over the medium term the AOFM will look to enhance its cash management practices by leveraging technological advancements in payments infrastructure;
- maintaining strong and productive relationships with intermediaries and investors to facilitate the effective delivery of the issuance program. The focus will be on: consulting market
- participants where decisions have the potential for impacting the market and the external view of AOFM as a responsible issuer; understanding shifts in investor demand preferences; and
- enhancing existing stakeholder engagement strategies to improve reach and transparency;
- working with the Treasury on Government debt and associated financial policy related issues and regularly updating Treasury on issues of potential significance for fiscal or debt policy;
- gathering market intelligence for analysis and dissemination within AOFM to inform the AOFM’s issuance strategy, through greater understanding of current demand dynamics;
- converting the AOFM corporate website to a new platform and migrating it to a new hosting environment;
- ensuring AOFM has relevant input to the Government’s adoption of the New Payments Platform and that cash portfolio management arrangements are revised for changes to the agency banking framework;
- investigating suitable opportunities to engage with offshore investors through forums and bank hosted conferences; and
- capitalising on business improvement opportunities, through leveraging system capabilities and reviewing critical functions to increase operational efficiencies and resilience.
In previous years, the AOFM has identified projects, to be managed at the corporate level that will address emerging challenges for the agency as a whole and/or progress corporate priorities. These projects are determined on the basis that they are forward looking, require coordination and collaboration across the entity, and affect the way the entity operates as a whole.
For 2018-19 there will be one corporate project (which is an extension of a project from last year) specifically identified. There is also a corporate priority for 2018-19 relating to the agency’s website. AOFM’s corporate website is a key communication tool and should continue to represent a contemporary image of the agency and its operations. Last year, work was undertaken to update the AOFM’s understanding of how its target audiences use the website, and to identify and prioritise potential website enhancements. Some content changes have already been implemented and a range of others will be developed over time.
1. Analysing global investor behaviour
Since the global financial crisis issuance and market development of AGS has changed significantly and this has led to a marked increase in the volume of government bonds held by offshore investors, as has the diversity of the investor base, both by type and geographical spread. Understanding the range of AGS market engagement motivations of investors has occupied a large part of the AOFM’s investor relations program. Even in the face of declining issuance programs (as the fiscal outlook continues to strengthen) the task of understanding patterns of offshore investor behaviour will remain an important task. This is likely to be made more challenging by the potential for appreciably increased volatility in global financial markets and changed dynamics as monetary policy for the major central banks begins to take effect. Therefore, there will be an increasing importance to improve on progress made to date in understanding how end holders (that is, the ‘buy-side’) of AGS behave in a world that is likely to be rapidly changing.
In order for the AOFM to remain attuned to changes and trends in financial market behaviours it requires a wide and more in-depth understanding of global capital flows, as well as, domestic and global market dynamics. This project was initiated last year and when completed in 2018-19 will further enhance AOFM’s understanding of how the buy-side responds to various changes occurring globally, thereby allowing the AOFM to be more informed when developing a long-term debt portfolio management strategy. Once implemented as a regular ‘diagnostic and analytical’ tool it will provide detailed coverage of global capital flows from important economic regions and regular reporting on such activity, as well as producing a systematic dissection of developments in domestic and global financial markets. Linkages between the two will also be drawn.