Risk Hedging in Cash Management
on the Single Treasury Account
Yekaterina Semyonova–
Head,
Federal Budget Execution Department,
Treasury of Russia
VIENNA , AUSTRIA
MAY 2017
ROLE OF THE RUSSIAN TREASURY IN CASH MANAGEMENT
MODELS OF PUBLIC DEBT MANAGEMENT AND EXECUTION
OF ACTIVE OPERATIONS
Centralized Model – one managing
entity
France (case study)
Russian MoF- budget balance support
Decentralized Model – several
managing entities
billion
Roubles
Balancing by
sources
Russian Federation
…
…
Agence France Trésor
• public debt
• sovereign wealth funds
January
Russian
MoF
- receipts
period t
- expend-s
- surplus
Decemb
er
- deficit
Coordination of common parameters
•
public debt
•
active operations
reporting, cash plan, operational
information
Russian Treasury - liquidity management
•
active
operations
Russian
Treasury
billion
Roubles
«notional
zero
Buffer
volume
January
- active operations
December
Use of rough and fine-tuning tools
- Passive operations
2
KEY RISK HEDGING TOOLS INVOLVED IN CASH
MANAGEMENT
Objects of
Management
Managing
Entities
Risks

Ministry of
Finance
Federal
Treasury



Public Debt
Sovereign wealth funds
STA liquidity

Lack of resources to cover a
federal budget deficit – default
risk;
Irrecoverable loss of financial
assets from sovereign wealth
funds

Cash gap- default on
obligations;

Default on counterparties’
obligations– loss of placed
amounts
Hedging Tools

A balanced fiscal policy;

A balanced debt management policy;

Diversification of tools to manage sovereign wealth funds;

Development of requirements to counterparties


Setting of requirements to counterparties;
Development of strategy and tactics for placement/
raising of funds;
Establishment of an account buffer balance;
(auction) bid parameter control;
Diversification of active and passive (reactive) operations;
EFL*;
Development of a rapid response liquidity management
mechanism in case of a cash gap;
Information security of payments






* EFL=expenditure financing limit - a tool applied by the Russian MoF based partially on the Federal Treasury information
3
REQUIREMENTS TO COUNTERPARTIES
Placement of federal budget funds in
bank deposits
Purchase (sale) of securities through
REPO agreements
Budget credits
General License issued by the Bank of
Russia
Capital at least 25 billion Roubles
(FT may change the requirement))
One of the requirements:
- To be under direct or indirect control of the
Bank of Russia;
General License issued by the Bank of
Russia
The limit is 1/12 of the budget
revenue amount as approved by the
Budget Law or Regulation (except for
grants, subsidies and inter-budgetary transfers)
Capital at least1 billion Roubles
- Agreement with the Deposit Insurance
Agency on a Subordinate Loan and provision of
federal bonds
No overdue payables on deposits
participation in the mandatory deposit
insurance system
No overdue payables on deposits and
REPO
No currently active measure enforced by
the Bank of Russia for a failure to meet a
mandatory requirement
Maximum credit period is 50 days (the
credit repayment due date is November 25th
of the current year)
No resources placed in bank deposits
Other requirements
4
billion Roubles
DEVELOPMENT OF STA DAY-BY-DAY CASH FLOW FORECASTS –
KNOWLEDGE OF FUTURE LIQUIDITY LEVELS
V4
V3
V2
t+15
V1
notional zero
t+20
t+75
t+90
‘buffer’
volume
t+15
0
V 1 = 50
t+70
t+50
V 2 = 150
V 3 = 200
V 4 = 200
t+75
t+9
0
5
PLACEMENT OF FUNDS FOR T+1 -A SOURCE OF ‘INSTANT’
LIQUIDITY
DECISION MAKING MATRIX
18:00
Decision endorsement by Commission
Signature by the Commission Chairperson
17:30
17:00
Identification of maximum amount of
temporarily surplus cash
16:30
16:00
*
Identification of the amount to be placed
(decision-making)
Collection of major applications and
generation of information on all federal
treasury regional offices
*
*
* routine interaction/communications
FINE-TUNING OF LIQUIDITY
Outcome of daily
targeting
billion
Roubles
V1
V2
V3
V4
V5
V6
V6
Daily
targeting
perimeter
Vn
notional zero
‘buffer’ volume
0
t
6
BUFFER VOLUME ON STA– A SOURCE TO COVER URGENT
PAYMENTS
billion
Roubles
Depends on a fine-tuning toolkit
Period of ‘moderate’ receipts
Period of ‘large’ receipts
Период II
Key tax receipts (mineral
extraction tax, value added
tax)
Correlates with a period of fine-tuning
notional zero
‘buffer’
volume
Algorithm # 1
Algorithm # 2
A revisable value
0
Targeting options:
Algorithm # 1: Vpl= Sf-Exp-P+Rpl-Buf
Algorithm # 2: Vpl= Sf-Exp-P+Rpl+85%Rev-Buf
Vpl – volume of surplus cash (to be placed)
Sf – projected surplus funds for t+1
Exp – expenditures t+1
P – payments (sources, ‘long monies’, other) t+1
Rpl – recovered from placement t+1
Rev – revenues t+1
Buf - ‘buffer’ volume
Covers expenditures and payments t+1, t+2
A current targeting benchmark – ‘a corridor’ (a
collar) of 150-300 billion Roubles
7
CONTROL OF (AUCTION) SELECTION PARAMETERS OF
APPLICATIONS FOR DEPOSITS AND REPO DEALS
* In extreme cases may be used as a
strict cut-off tool for applications from
credit institutions (this cut-off method is
practically not used)
8
DIVERSIFICATION OF ACTIVE AND PASSIVE OPERATIONS
Active liquidity management – asset-liability operations related to STA residuals
Active operations– placement of temporary surplus
Passive (reactive) operations– raising of funds to cover temporary cash gaps in the
STA liquidity management goals:
• to ensure coverage of cash gaps
• to generate income
STA (outlook)
2017- 2018
For your information:
82,7
(US$1.4 billion)
Revenues from placement in 2008-2016 (billion Roubles)
90
75.1
80
70
60
50
Active operations are possible with budget-in-deficit as well
49.1
40
30.6
30
20
16.2
19.6
18.9
22.5
4.9
10
0
2008
2009
2010
2011
2012
2013
2014
2015
2016
9
EXPENDITURE FINANCING CEILINGS (EFCS) – LONG-TERM LIQUIDITY
TUNING
Projections (Key
Administrators of Budget
Funds)
Development of EFC Setting Framework
Information on STA Status
MoF is making a decision on EFC setting
If STA liquidity is insufficient– EFCs are
fortified with a parallel expenditure cuts
Other options to increase liquidity are available
(e.g., expansion of sources: securities, etc.)
If liquidity is sufficient on STA – EFCs stay at
the level of declared projections
Liquidity rough-tuning
EFCs setting
billion
Roubles
Development of LongTerm Placement
Programs
Notional
zero
Buffer
volume
January
Months
February
March
April
May
June
July
August
……
December
10
LIQUIDITY RAPID RESPONSE MECHANISM
Liquidity balancing options:
Outcome:
Execution of a payment within an intra-day debit balance on the STA
Reduction of one-day placement rate
withdrawal of funds
or fund-raising shall
be assessed and the
option with the
highest expected
yields shall be
selected
Withdrawal of funds from placement
Fund raising in the capital market
Yes
NO
Yes
NO
Application of payment due date
conclusion: balancing is only possible if a wide range of rapid response tools is
available
11
A WIDE RANGE OF FINE TUNING LIQUIDITY MANAGEMENT TOOLS –
A GUARANTEE FOR TEMPORARY CASH GAP COVERAGE
placement of funds from t+5*to t+n
•
deposits from t+5
•
REPO from t+5
placement of funds from t+5
• deposits up to t+5
• REPO up to t+5, overnight REPO
withdrawal from placement
Fund-raising in the capital market to cover temporary cash gaps
(nearest future)
Expenditure Financing Ceilings
(EFCs)
demand deposits (nearest future)
application of due date (nearest future)
*t+5 - nearest future (current time - t+3)
STA debit balance mode (being considered)
12
CONCLUSION
100%
Diversification and enhancement of risk hedging
tools is a mandatory condition for bringing
liquidity down to a ‘notional’ zero
HEDGING ZONE
0/
«условный» 0
13
THANK YOU FOR YOUR
ATTENTION!
14