Arlingclose Ltd Independent treasury management services CIPFA Scottish

Arlingclose Ltd: Independent treasury management services CIPFA Scottish Treasury Management Forum Workshop Risk Management Panel Session Mark Horsfield 23 rd February 2012 60 Moorgate London EC 2 R 6 EL Tel +44(0)8448 808 200 Fax +44(0)8448 808 205 www. arlingclose. com Registered Office Barclays Bank Chambers Stratford-upon-Avon CV 37 6 AH Registered in England No 2853836 Regulated by the Financial Services Authority No 417722 Arlingclose Limited provides independent advice

Factors to consider in building a lending list THERE IS ONLY ONE 1 IT IS TO MEET THE OBJECTIVES OF YOUR ANNUAL INVESTMENT STRATEGY CIPFA Scottish Treasury Management Forum Workshop 2012 CAPITAL PRESERVATION (without exception)

A “low for much longer” interest rate backdrop 2 CIPFA Scottish Treasury Management Forum Workshop 2012

Scrutiny has increased and changed § Training § Minimum acceptable credit quality § Investment Regulations require assessment of treasury risks § Benchmarking – risk(s) versus return § Scrutiny of strategy and activity – increased frequency § Wider range of instruments 3 CIPFA Scottish Treasury Management Forum Workshop 2012

What we consider Macro Economics • Inflation • Interest Rates • Currency • GDP Statements of Potential Government Support Credit Ratings • Institution • Sovereign Credit Default Swaps Equity Prices & Money Market Indicators Research & Media • Trip levels with a critical subjective overlay 4 CIPFA Scottish Treasury Management Forum Workshop 2012

What are we concerned about? § A loosening of criteria to accommodate process driven solutions “. . . not rely solely on the current credit ratings of counterparties but also includes the following overlays: § Credit watches and credit outlooks from credit rating agencies § Credit Default Swaps spreads to give early warning of likely changes in credit ratings § Sovereign ratings to select counterparties from only the most creditworthy countries” § Rejection of lowest common denominator approach to ratings in order to “not give undue preponderance to just one agency’s ratings. ” But what if that agency’s view is right? § An emerging CIPFA led focus on investment concentration. 5 CIPFA Scottish Treasury Management Forum Workshop 2012

What are we reassured about? 6 CIPFA Scottish Treasury Management Forum Workshop 2012

What are we reassured about? 7 CIPFA Scottish Treasury Management Forum Workshop 2012

Appendices 8 CIPFA Scottish Treasury Management Forum Workshop 2012

Overnight Interest Rate Swap (OIS) & SONIA § OIS = Overnight Interest Swap § A transaction between banks on a NOTIONAL sum, not the physical. § Settlement at the end of the Swap is for marginal difference around a given interest rate, not full interest. § Marginal credit risk. § SONIA – Sterling Overnight Interest Average § An index of the average overnight rate that is used as the reference rate for OIS. 9 CIPFA Scottish Treasury Management Forum Workshop 2012

3 month OIS vs. LIBOR 10 CIPFA Scottish Treasury Management Forum Workshop 2012

12 month OIS vs. LIBOR 11 CIPFA Scottish Treasury Management Forum Workshop 2012

UK Bank CDS 12 CIPFA Scottish Treasury Management Forum Workshop 2012

Sovereign CDS - Excluding Greece & Ireland 13 CIPFA Scottish Treasury Management Forum Workshop 2012

Volatility Index 14 CIPFA Scottish Treasury Management Forum Workshop 2012

Sovereign GDP 15 CIPFA Scottish Treasury Management Forum Workshop 2012

Sovereign Net Debt as a % of GDP 16 CIPFA Scottish Treasury Management Forum Workshop 2012

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