Treasury management half year review 2002/03

Report: 7
Date: 14 November 2002
By: Treasurer

Summary

This report provides a review of treasury management for the 6-month period ended 30 September 2002 and reviews current developments in 2002/03.

A. Recommendation

1.  Members note this report and the budgetary implications.
2.  Approve the recommendation to add Money Market Funds and the Debt Management Account Deposit Facility to the list of approved investments.

B. Supporting information

Introduction

1. On 20 July 2000 this Committee adopted a Treasury Management Policy Statement. This Statement requires that the Treasurer submit a regular report on treasury and debt management operations throughout the financial year.

2. The purpose of this report is to provide members with a review of treasury management operations for the 6-month period to 30th September 2002 and to recommend additions to the existing policy.

Investment operations

Portfolio structure

3. The average size of the investment portfolio for this period was £251 million compared to an average portfolio size of £203 million during 2001/2002. The increase to balances is attributed to the strengthening of balance sheet reserves and provisions in 2001/02 and the timing of large receipts and payments.

4. The structure of the portfolio continues to reflect the investment instruments selected for investment purposes as defined by Treasury Management Strategy. The average balances for each sector are set out in Table 1.

Table 1 – Portfolio by sector size.

5. Opportunities with building societies remained limited due to the size of that sector, whereas the foreign bank sector remains highly represented because of the number of counterparties that meet our lending criteria. The British banks sector, although representing 19.7% of our total portfolio value, has been restricted due to mergers and rating changes, with some former building societies not now meeting the prescribed criteria.

6. Call Money represents instant access funds held with the Bank of Scotland and Abbey National plc. The return on these accounts is base rate and in the current climate, where this represents a favourable return, we have maximized the use of these accounts.

7. For operational reasons our investment limit of £20m with the Bank of Scotland was exceeded by £1.9m on the day September grant was received. This was a temporary measure, but highlighted the need to increase the number of counterparties on the lending list and to increase individual lending limits. This is currently under review.

Interest rates

8. The Bank of England Base Rate has remained unchanged at 4% throughout this period. Money market rates have been influenced by economic data with an overall weakening of rates. An achievable rate for 3-month money in June 2002 was 4% but had fallen to 3.9% by the end of the period. Rates for 1-year money had also flattened with rates below 4% by the end of September 2002. Overnight money has been volatile with rates ranging from 3.5% to 5%.

Performance

9. The accrued interest on investments for the 6 month period was £4.93 million compared to the annual forecast of £8.0 million. The revised annual forecast for interest receivable on investments is now at least £9 million. This allows for some reduction in base rates. Table 2 summarises this position.

Table 2 – Interest receivable 2002/2003 - actual & forecast.

10. Performance is monitored against the British Bankers Association (BBA) LIBOR rate. The 6-month MPA return of 3.93% compares with BBA LIBOR (1 week) of 3.87% and BBA LIBOR (1 month) of 3.97%.

11. Investment activity is monitored by Institute of Public Finance’s Treasury Management Benchmarking Club. Returns for this period have been submitted to IPF with analysis expected in November 2002. This will be reported in the next update submitted to this committee.

New types of investment

12. The Local Authorities (Capital Finance and Approved Investments) (Amendment) (England) Regulations 2002, effective 1 April 2002, made changes to the rules governing local authorities’ investment of surplus funds. The effect of the regulations is to add two new kinds of investments, Money Market Funds and the Debt Management Account Deposit Facility, to the existing list of approved investments.

Money market funds (MMFs)

13. MMFs are commercially run pooled cash investments. The short-term loan structure of the funds is designed to minimise risk and allow investors ready access to their cash. The main requirement of the Regulations 2002 is that the MMF must have been awarded the highest possible rating. This AAA rating status represents low risk to the investor. The daily returns on a selection of funds have been monitored over 3 months. The returns fluctuate daily and the average return for the funds reviewed is in the range 3.77% to 3.84%. The return is less than that achieved in the money markets with the low risk of these funds offset by flexibility and instant access. Selective use of these funds could be a useful addition to the investment portfolio.

Debt management account deposit facility

14. This facility has been developed by the UK Debt Management Office and the Public Works Loans Board. Since the funds are held by the Treasury this facility carries a sovereign AAA credit rating, the highest security available. A pilot scheme to establish the demand for this facility has concluded and access has now been extended to all local authorities. The DMADF rates have not been accessible but are not believed to be competitive or flexible. Unless the rates are competitive and maturity dates meet cash flow requirements this facility is unlikely to be preferred but may on occasion be a useful tool.

15. It is recommended that Treasury Management Policy is amended to add MMFs and the DMADF as approved investments.

Debt management operations

16. The balance of debt outstanding at 30th September 2002 is £125.97 million, unchanged from the 31st March 2002 position. No long-term debt management operations have been undertaken during this period.

C. Equality and diversity implications

There are no equality and diversity implications arising from this report.

D. Financial implications

The financial implication of this report is that investment income in the current financial year is likely to be £1.0 million in excess of budget.

E. Background papers

None.

F. Contact details

Report author: Stephen Skirten, Treasury & Control Manager

For more information contact:

MPA general: 020 7202 0202
Media enquiries: 020 7202 0217/18

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