Letter from MPA Chief Executive to MPA Vice Chair regarding KPMG review of Icelandic Investments

4 March 2009

Kit Malthouse AM
First Deputy Chair
Metropolitan Police Authority
10 Dean Farrar Street
LONDON SW1 H0NY

Dear Kit,

Thank you for your letter dated and received on 2 March 2009.

Both the Authority and the MPS have been actively engaged in ensuring that the Treasury Management function has responded positively to the increasingly turbulent markets and the lessons learnt from the Landsbanki deposit.

Both the Treasury Management Strategy and working practices were reviewed and revised immediately after the Landsbanki incident and further revisions are being proposed to the Finance and Resources Committee in March as part of the annual review of the policy and strategy. Many of the issues raised in the KPMG report have already been implemented. However, following consideration by Committee, an action plan will be developed in response to KPMG’s recommendations.

With regard to the six action points you identified, the current position can be summarised as follows:

• Effective dialogue on treasury management takes place between the Director of Resources and the Treasurer
  Meetings between the Treasurer and MPS Finance Services are now taking place almost weekly. Discussions cover a wide range of Treasury Management issues including: Lending lists and maintenance of counterparties, cash balances, use of the government’s Debt Management Office facility, other risk averse investment options and more recently with the purchase of NSY being completed the need and timing of future long term borrowing.
• The limit on overseas investments is reduced significantly
  In November 2008 the Authority increased the MPA minimum long-term requirement from Fitch Rating Agency from "A" to "AA-" this reduced the number of foreign banks on the lendlist from 12 to 9. Only 3 of these banks have been active in sterling during the period November to date. All foreign banks had an individual limit of £30m - the highest exposure to foreign banks being £90m. With the continuing turmoil in the banking industry MPA/MPS have further reduced foreign banks on the lend list for the 2009/10 Treasury Management Strategy to 4 with individual limits of £20m, but will only allow a total exposure of £20m in this sector.
• During the current climate we adopt a more risk-averse approach to investments
  The MPA/MPS implemented a risk averse approach immediately after funds were frozen by the Icelandic Government by: Using higher minimum credit ratings from Fitch, depositing about 25% of investment with the government’s Debt Management Office and significantly reducing the lending list. It is also worth noting that since the NSY purchase cash balances have reduced from an average of £300m to £130m. The smaller cash balances mean that investments can be placed largely with call account (our bankers) or DMO. To reduce risks further all investments made with financial institutions and local authorities is less than 3 months. In addition to using Fitch ratings, a second credit rating agency – Moody’s was added, and in assessing minimum risk the lowest common denominator from the two agencies is now used. A revision to the Treasury Management Strategy was approved by Finance and Resources Committee on 20 November 2008.
• A wide range of market indicators and intelligence, including credit default swap prices, are monitored proactively
  MPS are continually monitoring press releases via Reuters and BBC pages and speak to other members of the GLA Treasury Managers Group weekly, to exchange views and soft information, and have received updates from Sector via the GLA. MPS talk with money market brokers daily regarding up to date market intelligence and are also members of the South East England Treasury Managers Forum that meet three times annually. The treasury management team will also look at joining the CIPFA Treasury Management Forum. As mentioned MPS have subscribed to Moody's Rating Agency to compliment Fitch ratings. MPS are in the process of obtaining the most efficient/cost effective way of receiving credit default swap prices from KPMG.
• Daily management of the investment portfolio is reported to MPS senior management and the Treasurer, including 100% coverage of cash balances
  Daily treasury management activities have always been reported to MPS senior management. The Treasurer now receives a daily portfolio update including all outstanding investments and current cash balances. This includes 100% coverage of cash balances.
• Changes to the lend list are approved at Director level and notified immediately to the Treasurer
  This has been implemented and full notification made.

I hope this gives you the necessary reassurance that the Authority and MPS have, and will continue to, take all necessary action to provide an effective treasury management function.

Yours sincerely,

Catherine Crawford
Chief Executive to the Authority 

Send an e-mail linking to this page

Feedback