TARGETING OF CASH BALANCE ON THE SINGLE TREASURY

TARGETING OF CASH BALANCE ON THE SINGLE TREASURY ACCOUNT Oksana Pavlyukova– Deputy Head Federal Budget Execution Support Division Russian Treasury MOSCOW APRIL 2017

BALANCE TARGETING – A MUST FOR STA LIQUIDITY MANAGEMENT Targeting of cash balance on the Single Treasury Account (STA) is understood as a set of measures to manage a daily cash balance. Targeting-associated measures: identify the cash amounts to support a continuous execution of budget commitments and payments Identify the buffer (minimum) balance on the STA Identify a volume of temporarily surplus funds/funds raised on the STA to cover the potential temporary cash gaps on the STA 2

MAIN OBJECTIVES OF BALANCE TARGETING ON THE ACCOUNTS OF THE RUSSIAN TREASURY Targeting process parties Profile Unit 1 Subject of Targeting STA Targeting Objectives üDetermine the maximum level of temporarily surplus funds üDetermine the amounts to be raised in the capital market ü Full use of temporarily surplus funds Profile Unit 2 Other accounts of the Russian Treasury ü Fund raising in the capital market Justification documents STA cash flow plans and projections (cash budget, current status, etc. ) Plans and forecasts for placement/raising of funds (adjusted for the amounts of temporarily surplus funds/funds to be raised) ü Identification of the most profitable cash management tools in the current period Note: Profile Unit 1 - Profile Unit of the Russian Treasury responsible for STA monitoring and projections; Profile Unit 2 - Profile Unit of the Russian Treasury responsible for placement, recovery and raising of funds. 3

LONG-TERM BALANCE TARGETING - DEVELOPMENT OF PLACEMENT PROGRAM 1 stage: STA cash flow projections for the period of t+90 billion Roubles 2 stage: Identification of the level of temporarily surplus funds for various periods V 3 V 4 t+15 t+20 V 2 V 1 «conditional zero» t+75 t+90 «buffer» level 0 t+15 V 1 = 50 t+70 t+50 V 2 = 150 V 3 = 200 t+75 V 4 = 200 t+90 3 stage: submission of targeting results to Profile Unit 2 for further discussion at the Commission 4

Review of cash budgeting parameters, federal budget execution outcomes, STA status Recommendations to the Commission Core Functions BUSINESS PROCESSES OF THE FEDERAL TREASURY COMMISSION ON THE STA CASH BALANCE MANAGEMENT Development of decisions on placements, including their parameters (terms, rates, limits, etc. ) Development of decisions on purchase/sale of foreign currencies Review of failures to meet contract terms by the credit agencies, etc. Algorithm of Decision Making by Commission Status of Accounts Federal Budget Execution Review Targeting Results Market status review Commission Decision Draft 5

DECISION MAKING FOR THE PERIOD ABOVE t+1 & ITS IMPLEMENTATION Commission Decision Draft Approval by the Head 1. Publication on the official website of the Russian Treasury 2. Generation of a daily targeting perimeter 2. Notification of the credit agencies about the parameters ing isi on mak o de c e to d Pr io r Prio n cisio rt billion Roubles m ak in g 1. Use by cash budgeting units - reflected in the projections V 1 ‘conditional zero’ ‘buffer’ volume 0 V 2 V 3 V 4 «fine-tuning V 5 V 6 V 7 V 8 Vn Daily targeting perimeter t 6

CURRENT DECISION MAKING MATRIX ON THE VOLUME OF PLACEMENT OF TEMPORARILY SURPLUS FUNDS (WITH DAILY BALANCE TARGETING) 18: 00 Endorsement of the Commission Decision Signing off by the Commission Chairperson 17: 30 Identification of the Volume of the Funds for Placement (decision formulation) 17: 00 Identification of the maximum * level of the temporarily surplus funds 16: 30 16: 00 * Collection of key requests and generation of information for all TOFTs * (Territorial Offices of Federal Treasury) (interregional operations office of the federal treasury * Operational interaction 7

DAILY TARGETING SPECIFIC FEATURES Periods of moderate and large revenues billion Roubles Buffer volume: Depends on the liquidity fine-tuning tools Period of moderate revenues Period of large revenues Период II Key tax revenues(mineral extraction tax – MET, Value added Tax -VAT) Corresponds to the fine-tuning period «conditional zero» «buffer» volume algorithm № 1 algorithm № 2 Reassessable value 0 Targeting options: algorithm № 1: Vpl= Sf-Exp-P+Rpl-Buf algorithm № 2: Vpl= Sf-Exp-P+Rpl+85%Rev-Buf Vpl –volume to place Sf – projected surplus funds (balance) as of t+1 Exp – expenditures t+1 P – payments (sources, ‘long placements’, other) t+1 Rpl – recovery from placement t+1 Rev – revenues t+1 Buf - ‘buffer’ volume Covers expenditures and payments t+1, t+2 The targeting benchmark now is a ‘corridor’ of 150200 billion Roubles 8

AUTHORIZATION OF TOFT ADDITIONAL REQUESTS ON A SAME-DAYBASIS authorization of additional TOFT requests IOOFT STA TOFT Federal Treasury authorization of payments on a same day basis STA Info account Bank account № 30101 TOFT treasury account International Experience Short-term outlook Federal Treasury Mid-term outlook (with “large” STA) (WITH DAILY BALANCE TARGETING) Public finance dept SAT system EVCLI system * According to ENFi. P Unstated payments for the amounts exceeding 1 million Euro need to be authorized by AFT* EVCLI is the main system, while SAT is a backup system 9

DAILY MONITORING OF ACCOUNT STATUS AND TENDER PROCESS t 10: 00 STA Monitoring Acceptance of additional requests (urgent expenses) t+2 09: 00 17: 00 STA Monitoring Acceptance of additional requests (urgent expenses) Statement processing Account status identification Targeting results Targeting for t+2 10: 00 09: 00 17: 00 t On-line t+1 … 16: 30 Info on the need to apply a rigorous cutoff to crediting agencies’ requests ü Monitoring: account status disbursement revenues ü Acceptance of additional requests (urgent expenses) STA Monitoring Acceptance of additional requests (urgent expenses) * Selection; Establishment of cut-off rate Statement processing Account status identification Targeting results Targeting for t+1 16: 30 * Extreme necessity tool- practically unused 10

FIRST IMPLEMENTATION RESULTS OF STA DAILY BALANCE TARGETING MECHANISM II period weekdays Note: I period- period of steady revenues; II period- period of major revenues (a lumpsum cash revenue of 300 -500 billion Roubles, caused by a timely payment of key taxes administered by the Federal Tax Service (VAT and MET) 11

THE STA BALANCE DAILY TARGETING EVOLUTION “Conditional zero” 2 • closing balance on STA (t) – payments (t+1) “conditional zero” 1 • closing balance on STA (t)= 0 • closing balance on STA (t) – (payments (t+1) – поступления (t+1) ) Actual zero Notional Example: closing balance at STA (t)= 100 R. payments (t+1) = 70 R. Revenues (t+1) = 50 R. conditional zero 1 Vpl (t+1) = 100 R. – 70 R. = 30 R. actual zero conditional zero 2 Vpl (t+1) = 100 R. – 20 R. = 80 R. (20 – balance of counter cash flow(t+1) = 70 -50) Vpl (t) = 100 R. Vpl (t+1) = acc. to algorithm of “conditional zero” 2 = 80 R. Decision-making during period t *Vpl – volume for placement **Vpl(t) – net overnight – placement of funds at the end of a business day (t) until 9: 00 -10: 00 (t+1) (recovery using BESP system). 12

THE NEXT STAGE OF THE STA DEVELOPMENT - NEW OBJECTIVES The next stage implementation result OBJECTIVES ü Cash budgeting perimeter extension ü Improvement of cash flow planning quality for ü government extra-budgetary funds Liquidity gain in 2017 ü Optimization of the STA balance targeting algorithm ü Absorption of additional liquidity ü Reduction of the STA balance volatility 13

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