Report to:
Joint Audit and Governance Committee Cabinet Council
Report of Head of Finance Author: Donna Ross Telephone:  07917 088335 E-mail: donna.ross@southandvale.gov.uk Cabinet member responsible:  Councillor Pieter-Paul Barker Telephone: 01844 212438 Email:  pieter-paul.barker@southoxon.gov.uk
To:       JOINT AUDIT & GOVERNANCE COMMITTEE on               31 January 2023             CABINET on                                                                     02 February 2023             COUNCIL on                                                                    16 February 2023

Treasury Management and Investment Strategy 2023/24

Recommendations

That Joint Audit and Governance Committee approves each of the following key elements of this report, and recommends these to Cabinet:

1. To approve the treasury management strategy 2023/24 set out in appendix A to
this report;

2. To approve the prudential indicators and limits for 2023/24 to 2025/26 as set out in, appendix A.

3. To approve the annual investment strategy 2023/24 set out in appendix A, and the lending criteria detailed in table 6.

That Cabinet considers any comments from committee and recommends Council to approve report.

Purpose of report

1. This report presents the council’s Treasury Management Strategy (TMS) for
2023/24. This sets out how the council’s treasury service will support financing of capital investment decisions, and how treasury management operates day to day. It sets out the limitations on treasury management activity informed by the prudential indicators, within which the council’s treasury function must operate.

2. The strategy is included as appendix A to the report. This report includes the three elements required by legislation as follows:

· The prudential and Treasury indicators required by the CIPFA Prudential Code 2021 for Capital Finance in Local Authorities and CIPFA TM code of Practice 2021;

· The annual investment strategy. This sets out the council’s criteria for
selecting counterparties and limiting exposure to the risk of loss on its
investments.

· A statutory duty to approve a minimum revenue provision policy statement, (appendix A, paragraphs 15-20).

It is a requirement of the CIPFA Code of Practice on Treasury Management 2021 that this report is approved by full Council on an annual basis.

Strategic objectives

3. Managing the finances of the authority in accordance with the treasury
management strategy will help to ensure that resources are available to deliver its services and meet the council’s strategic objectives.

Background

4. Treasury management is defined as: “The management of the local authority’s investments and cash flows, its banking, money market and capital market transactions; the effective control of the risks associated with those activities; and the pursuit of optimum performance consistent with those risks.”

5. The primary function of the treasury management service is to manage cashflow and ensure cash is available when needed.  Surplus monies are deposited with low-risk counterparties and financial instruments with adequate liquidity to fund expenditure commitments. 

6. The funding of the council’s capital expenditure is also a function of treasury
management. The capital programme provides a guide to the funding needs of the council and informs long-term cash flow plans to ensure that the council can meet its capital spending obligations. All expenditure of a capital nature is managed through the council’s capital programme and is not covered by this report.

7. The treasury management and annual investment strategy set out the council’s
policies for managing investments and confirms the council gives priority to the
security and liquidity of those investments. It also includes the prudential indicators for the next three years; these demonstrate that the council’s capital investment plans are affordable, prudent and sustainable.

8. The council’s treasury management strategy 2023/24 is attached in
appendix A. Whilst every attempt has been made to minimise the technical content of this report, it is, by its very nature and the need for compliance with associated guidance, technical in parts. A glossary of terms in appendix G should aid members understanding of some technical terms used in the report.

Recommended changes to the treasury management strategy

9. Council approved the 2022/23 treasury management strategy on 17 February 2022. The proposed strategy for 2023/24 includes the changes detailed below, which cabinet is asked to recommend to council.

Counterparty limits

10. Amendments to individual maximum counterparty limits

· an increase to the counterparty limits for LVNAV &VNAV Money Market Funds to £30 million

11. Amendments to the minimum lending criteria

· An increase in the minimum asset value criteria for non-rated building societies from assets over £1 billion to assets over £2 billion.

Financial implications and risk assessment

12. This report and all associated policies and strategies set out clearly the parameters the council must work within. It is important that the council follows the approved treasury management strategy which is designed to help protect the council’s finances by managing its risk exposure.

13. Link Treasury Services has provided a counterparty methodology, but given the council’s balances, we have expanded on this methodology to include additional building societies to ensure a diversified portfolio.

14. At the time of writing the Bank of England base rate is currently 3.5 per cent.  The Bank of England increased the rate from 3.0 per cent on 14 December 2022 to help control the rise in inflation. This was the ninth consecutive hike since December 2021 and the highest rate for 14 years.

15. Link Group’s latest base rate forecast anticipates that the next bank base rate rise will be before the beginning of the 2023/24 financial year.  Table 1 below gives an estimate of the investment income achievable for the council next five years.

16. The 2023/24 budget setting report and medium-term financial plan will take into account the latest projections of anticipated investment income.

Climate and ecological impact implications

17. There are no climate or ecological implications arising from this report.  As a responsible investor, the Council is committed to considering environmental, social, and governance (ESG) issues, and has a particular interest in taking action against climate change and pursuing activities that have a positive social impact.

18. As opportunities to support the climate ambitions of the Council arise, they will be considered.   However, the treasury management function is controlled by statute and by professional guidelines and the first priorities of treasury must remain security, liquidity, and yield. 

Legal implications

19. There are no significant legal implications as a result of the recommendations in this report. Compliance with the CIPFA Code of Practice for Treasury Management in the Public Services, the DLUHC Local Government Investment Guidance provides assurance that the council’s investments are, and will continue to be, within its legal powers.

20. The council must approve any amendment to the treasury management strategy and annual investment strategy in accordance with the Local Government Act 2003 (the Act), the CIPFA Code of Practice for Treasury Management in the Public Services and the DLUHC Local Government Investment Guidance under Section 15(1) (a) Local Government Act 2003 and CIPFA Prudential Code for Capital Finance.

Conclusion

21. This report introduces the treasury management strategy and the annual investment strategy for 2023/24 which are appended to this report, together with the prudential indicators for approval to council. These documents provide the parameters within which the council’s treasury management function will operate.

Background papers

• CIPFA Code of Practice on Treasury Management 2021
• CIPFA Prudential Code 2021
• CIPFA Treasury Management in the Public Services Guidance Notes 2018
• CIPFA statement 17.10.18 on borrowing in advance of need and investments in commercial properties
• CIPFA Bulletin 02 Treasury and Capital Management Update October 2018
• Statutory Guidance on Local Government Investments (3rd Edition)

Statutory Guidance on Minimum Revenue Provision

Appendices

Appendix A Treasury Management Strategy 2023/24
Appendix B Economic Background
Appendix C Risk and performance benchmarking
Appendix D Explanation of Prudential and Treasury Indicators
Appendix E TMP1 extract

Appendix F Extension to the responsibilities of the S151 officer
Appendix G Glossary of terms

Appendix A

Treasury Management Strategy 2023/24

Introduction

1. The primary function of the treasury management service is to ensure the council’s cash flow is adequately managed, with cash being available when it is needed.  Surplus monies are invested in low-risk counterparties or instruments commensurate with the council’s low risk appetite, providing adequate liquidity initially before considering investment return. The second main function of the treasury management service is the funding of the council’s capital plans. 

2. Whilst any commercial initiatives or loans to third parties will impact on the treasury function, these activities are generally classed as non-treasury activities, (arising usually from capital expenditure), and are separate from the day-to-day treasury management activities.

3. CIPFA defines treasury management as:

“The management of the local authority’s borrowing, investments and cash flows, its banking, money market and capital market transactions; the effective control of the risks associated with those activities; and the pursuit of optimum performance consistent with those risks.”

4. Revised reporting was required for the 2019/20 reporting cycle due to revisions of the Department of Levelling Up, Housing and Communities (DLUHC) (formerly the Ministry of Housing, Communities & Local Government (MHCLG)) Investment Guidance, and Minimum Revenue Provision (MRP) Guidance, the Chartered Institute of Public Finance & Accountancy (CIPFA) Prudential Code and the CIPFA Treasury Management Code.  The primary reporting changes included the introduction of a capital strategy, to provide a longer-term focus to the capital plans, and greater reporting requirements surrounding any commercial activity undertaken under the Localism Act 2011.  The capital strategy is reported separately.

Treasury Management Reporting

5. The Council is currently required to receive and approve, as a minimum, three main treasury reports each year, which incorporate a variety of policies, estimates and actuals. 

a) Prudential and treasury indicators and treasury strategy (this report) - The first, and most important report is forward looking and covers:

· the capital plans, (including prudential indicators);

· a minimum revenue provision (MRP) policy, (how residual capital expenditure is charged to revenue over time);

· the treasury management strategy, (how the investments and borrowings are managed), including treasury indicators; and

· an investment strategy, (the parameters on how investments are to be managed).

b) A mid-year treasury management report – This is primarily a progress report and will update members on the mid-year treasury performance, amending prudential indicators as necessary, and whether any policies require revision.

c) An annual treasury report – This report reviews performance for the previous financial year and provides details of a selection of actual prudential and treasury indicators and actual treasury operations compared to the estimates within the strategy.

Scrutiny

6. The above reports are required to be adequately scrutinised before being recommended to the Council. This role is undertaken by the Joint Audit and Governance Committee.

Quarterly reports

7. In addition to the three major reports detailed above, from 2023/24 quarterly reporting (end of June/end of December) is also required.  However, these additional reports do not have to be reported to Full Council but are required to be adequately scrutinised.

Treasury Management Strategy for 2023/24

8. The strategy for 2023/24 covers the areas below:

· the capital expenditure plans and the associated prudential indicators;

· the minimum revenue provision (MRP) policy.

· the current treasury position;

· treasury indicators which limit the treasury risk and activities of the Council;

· prospects for interest rates;

· the borrowing strategy;

· policy on borrowing in advance of need;

· debt rescheduling;

· the investment strategy;

· creditworthiness policy; and

· the policy on use of external service providers.

9. These elements cover the requirements of the Local Government Act 2003, (the Act) the CIPFA Prudential Code, DLUHC MRP Guidance, the CIPFA Treasury Management Code and DLUHC Investment Guidance.

Councillor and Officer Training

10. The CIPFA Code requires the Head of Finance to ensure that members with responsibility for treasury management receive adequate training in treasury management.  This especially applies to members responsible for scrutiny. The training needs of treasury management officers and councillors will be reviewed, and further training will be arranged as required.

Treasury Management Consultants

11. The Council uses Link Group, Link Treasury Services Limited, as its external treasury management advisors.

12. The Council recognises that responsibility for treasury management decisions always remains with the organisation and will ensure that undue reliance is not placed upon the services of external service providers. All decisions will be undertaken with regards to all available information, including, but not solely, treasury advisory services.

13. It also recognises that there is value in employing external providers of treasury management services in order to acquire access to specialist skills, knowledge and resources. The Council will ensure that the terms of their appointment and the methods by which their value will be assessed are properly agreed and documented and subjected to regular review.

Capital Prudential Indicators

14. The Council’s capital expenditure plans (as detailed in the council’s capital programme) are a key driver of treasury management activity. The output of the capital expenditure plans is reflected in the prudential indicators, which are designed to assist members’ overview and confirm capital expenditure plans.

Minimum Revenue Provision (MRP) Policy Statement 2023/24

15. The council’s current 2023/24 capital programme will primarily be financed from internal resources and external funding. If borrowing is undertaken, then the council will be required by statute to set aside funds in the annual revenue budget to amortise the principal element of any borrowing – this is the MRP. There will also be a requirement to set aside revenue budget for the interest payments on any borrowing raised. Loans will generally be taken over the life of the assets being financed and amortised accordingly.

16. The council is required by regulation to approve an annual MRP policy before the start of the year to which it relates. Any in-year changes must also be submitted to the council for approval.

17. A variety of options are provided to councils for the calculation of MRP. The council has chosen the “asset life method” as being most appropriate. Using this method MRP will be based on the estimated life of the asset, in accordance with the regulations (this option must be applied for any expenditure capitalised under a Capitalisation Direction). Repayments included in annual PFI or finance leases are applied as MRP.

18. Currently, the council’s MRP liability is nil. This will remain the case unless capital expenditure is financed by external or internal borrowing.  The Head of Finance will determine the most appropriate repayment method, term of borrowing and duration of borrowing. The Capital Financing Requirement (CFR) estimate for the council is £15million from 2026/27 onwards.

Table 2: Example MRP and interest calculation
Loan Amount	£15,000,000
Loan Duration	50 Years
PWLB Interest	4.175%
2023/24 Tax Base	61,350
	£	£ per Band D
MRP Element	£300,000	4.89
Annual Interest Cost	£626,250	10.21
Total	£926,250	15.10

Prospects for Interest Rates

19. The council has appointed Link Group as its treasury advisor and part of their service is to assist the council to formulate a view on interest rates.  Link provided the following forecasts on 19.12.22.  These are forecasts for certainty rates, gilt yields plus 80 bps.

Table 2: Interest Rate Forecasts

Economic Background – Provided by Link

“Our central forecast for interest rates was updated on 19 December and reflected a view that the MPC would be keen to further demonstrate its anti-inflation credentials by delivering a succession of rate increases.  Bank Rate stands at 3.5% currently but is expected to reach a peak of 4.5% in H1 2023.

Further down the road, we anticipate the Bank of England will be keen to loosen monetary policy when the worst of the inflationary pressures are behind us – but that timing will be one of fine judgment: cut too soon, and inflationary pressures may well build up further; cut too late and any downturn or recession may be prolonged.

The CPI measure of inflation looks to have peaked at 11.1% in Q4 2022 (currently 10.7%).  Despite the cost-of-living squeeze that is still taking shape, the Bank will want to see evidence that wages are not spiralling upwards in what is evidently a very tight labour market.

Regarding the plan to sell £10bn of gilts back into the market each quarter (Quantitative Tightening), this has started and will focus on the short, medium and longer end of the curve in equal measure, now that the short-lived effects of the Truss/Kwarteng unfunded dash for growth policy are firmly in the rear-view mirror.

In the upcoming months, our forecasts will be guided not only by economic data releases and clarifications from the MPC over its monetary policies and the Government over its fiscal policies, but the on-going conflict between Russia and Ukraine.  (More recently, the heightened tensions between China/Taiwan/US also have the potential to have a wider and negative economic impact.)

On the positive side, consumers are still estimated to be sitting on over £160bn of excess savings left over from the pandemic so that will cushion some of the impact of the above challenges.   However, most of those are held by more affluent people whereas lower income families already spend nearly all their income on essentials such as food, energy and rent/mortgage payments.

PWLB RATES

• The yield curve movements have become less volatile of late and PWLB 5 to 50 years Certainty Rates are, generally, in the range of 4.10% to 4.80%. 
• We view the markets as having built in, already, nearly all the effects on gilt yields of the likely increases in Bank Rate and the elevated inflation outlook.

The balance of risks to the UK economy: -

· The overall balance of risks to economic growth in the UK is to the downside.

Downside risks to current forecasts for UK gilt yields and PWLB rates include:

· Labour and supply shortages prove more enduring and disruptive and depress economic activity (accepting that in the near-term this is also an upside risk to inflation and, thus, rising gilt yields).

· The Bank of England acts too quickly, or too far, over the next year to raise Bank Rate and causes UK economic growth, and increases in inflation, to be weaker than we currently anticipate.

· UK / EU trade arrangements – if there was a major impact on trade flows and financial services due to complications or lack of co-operation in sorting out significant remaining issues.

· Geopolitical risks, for example in Ukraine/Russia, China/Taiwan/US, Iran, North Korea and Middle Eastern countries, which could lead to increasing safe-haven flows.

Upside risks to current forecasts for UK gilt yields and PWLB rates: -

· The Bank of England is too slow in its pace and strength of increases in Bank Rate and, therefore, allows inflationary pressures to build up too strongly and for a longer period within the UK economy, which then necessitates Bank Rate staying higher for longer than we currently project or even necessitates a further series of increases in Bank Rate.

· The Government acts too quickly to cut taxes and/or increases expenditure in light of the cost-of-living squeeze.

· The pound weakens because of a lack of confidence in the UK Government’s fiscal policies, resulting in investors pricing in a risk premium for holding UK sovereign debt.

· Longer term US treasury yields rise strongly and pull gilt yields up higher than currently forecast.

· Projected gilt issuance, inclusive of natural maturities and QT, could be too much for the markets to comfortably digest without higher yields consequently.”

Treasury Limits for 2023/24 to 2025/26

20. It is a statutory duty, under Section 3 of the Act and supporting regulations for the council to determine and keep under review how much it can afford to borrow. The amount so determined is called the “Affordable Borrowing Limit”. The Authorised Limit is the legislative limit specified in the Act.

21. The council must have regard to the Prudential Code when setting the Authorised Limit, which essentially requires it to ensure that total capital expenditure remains within sustainable limits and that the impact upon its future council tax is ‘acceptable’.  The Authorised Limit is set on a rolling basis, for the forthcoming financial year and two successive financial years.

24 The following indicators set the parameters within which we manage the overall capital investment and treasury management functions. There are specific treasury activity limits, which aim to contain the activity of the treasury function in order to manage risk and reduce the impact of an adverse movement in interest rates. However, if these are set to be too restrictive, they will impair the opportunities to reduce costs/improve performance.

25 The limits are set out in table 3 below.  The graph below the table shows the council’s liability benchmark which is also required to be calculated.  Cabinet is asked to recommend council to approve the limits:

Table 3: Prudential indicators
	2022/23	2023/24	2024/25	2025/26
	Approved	Estimate	Estimate	Estimate
	£m	£m	£m	£m
Debt
Authorised limit for external debt
Borrowing	30	30	35	35
Other long term liabilities	5	5	5	5
	35	35	40	40
Operational boundary for external debt
Borrowing	25	25	30	30
Other long term liabilities	5	5	5	5
	30	30	35	35
Interest rate exposures
Maximum fixed rate borrowing	100%	100%	100%	100%
Maximum variable rate borrowing	100%	100%	100%	100%
Investments
Interest rate exposures
Limits on fixed interest rates	100%	100%	100%	100%
Limits on variable interest rates	50	100	100	100
Principal sums invested > 364 days
Upper limit for principal sums invested >364 days	65	55	55	55

Current position

26 The maturity structure of the council’s investments at 30 November 2022 was as follows:

* The figure for total investments shown above excludes the £15 million 20-year loan to SOHA made in 2013/14.

Note: £179 million does not represent uncommitted resource the council has at its disposal. This amount includes council tax receipts held prior to forwarding to Oxfordshire County Council and the Police and Crime Commissioner for the Thames Valley, business rate receipts prior to payment to the government and committed capital and revenue balances. Details of the council’s uncommitted balances are provided in the annual budget and council tax setting report.

27 At 30 November 2022, the council held as above, 89 per cent of its investments in the form of cash deposits, 69 per cent was invested for fixed terms with a fixed investment return and 20 per cent in liquid accounts, with the remainder held in non-cash deposits.

28 The council's considerations for investment will remain security, liquidity, and yield – in that order. Officers undertaking Treasury Management will work towards the optimum profile distribution.

Investment performance for the year to 30 September 2022.

29 The council’s budgeted investment return for 2022/23 is £1.777 million, and the actual interest received to date is shown as follows:

Borrowing Strategy 2023/24

30 The annual treasury management strategy has to set out details of the council’s borrowing requirement, any maturing debt which will need to be re-financed, and the effect this will have on the treasury position over the next three years. This council currently has no external debt and in general, the council will borrow for one of two purposes;

· to support cash flow in the short-term;

· to fund capital investment over the medium to long term.

31 Any borrowing undertaken will be within the scope of the boundaries given in the prudential indicators shown in Table 2, which allow for the council to borrow up to a maximum of £30 million, if such a need arose. This also allows short-term borrowing for the cash flow management activities of the authority.

32 The council’s current 2023/24 capital programme will primarily be financed from internal resources and external funding. If borrowing is undertaken, then the council will be required by statute to set aside funds in the annual revenue budget to amortise the principal element of any borrowing – this is the MRP. There will also be a requirement to set aside revenue budget for the interest payments on any borrowing raised. Loans will generally be taken over the life of the assets being financed and amortised accordingly.

33 Any borrowing for capital financing purposes will be assessed by the Head of Finance to be prudent, sustainable and affordable

34 This strategy allows the Head of Finance to determine the most suitable repayment terms of any borrowing to demonstrate affordability and sustainability in the medium-term financial plan if required. As a general rule, the term of any borrowing will not be longer than the expected life of the capital asset being created.

Policy on borrowing in advance of need

35 The Council will not borrow more than or in advance of its needs purely in order to profit from the investment of the extra sums borrowed. Any decision to borrow in advance will be within forward approved Capital Financing Requirement estimates and will be considered carefully to ensure that value for money can be demonstrated and that the Council can ensure the security of such funds.

36 Risks associated with any borrowing in advance activity will be subject to prior appraisal and subsequent reporting through the mid-year or annual reporting mechanism.

Annual investment strategy 2023/24

37 The Department of Levelling Up, Housing and Communities (DLUHC – this was formerly the Ministry of Housing, Communities and Local Government (MHCLG)) and CIPFA have extended their definition of ‘investments’ to include both financial and non-financial investments.  This report deals solely with financial investments, (as managed by the treasury management team).  Non-financial investments, essentially the purchase of income yielding assets, are covered in the Capital Strategy, (a separate report).

38 The Council’s investment policy has regard to the following: -

· DLUHC’s Guidance on Local Government Investments (“the Guidance”)

· CIPFA Treasury Management in Public Services Code of Practice and Cross Sectoral Guidance Notes 2021 (“the Code”)

· CIPFA Treasury Management Guidance Notes 2021 

39 The Council’s investment priorities will be security first, portfolio liquidity second and then yield, (return).  The council will aim to achieve, the optimum return (yield) on its investments commensurate with proper levels of security and liquidity and with regard to the council’s risk appetite.

40 In the current economic climate, it is considered appropriate to maintain a degree of liquidity to cover cash flow needs but to also consider “laddering” investments for periods up to twelve months with high credit rated financial institutions, whilst investment rates remain elevated.

41 The above guidance from DLUHC and CIPFA places a high priority on the management of risk.  This council has adopted a prudent approach to managing risk and defines its risk appetite by the following means:-

1. Minimum acceptable credit criteria are applied in order to generate a list of highly creditworthy counterparties.  This also enables diversification and thus avoidance of concentration risk.  The key ratings used to monitor counterparties are the short-term and long-term ratings.

2. Other Information: ratings will not be the sole determinant of the quality of an institution; it is important to continually assess and monitor the financial sector on both a micro and macro basis and in relation to the economic and political environments in which institutions operate.  The assessment will also take account of information that reflects the opinion of the markets.  To achieve this consideration the council will engage with its advisors to maintain a monitor on market pricing such as “credit default swaps” and overlay that information on top of the credit ratings.

3. Other information sources used will include the financial press, share price and other such information pertaining to the financial sector in order to establish the most robust scrutiny process on the suitability of potential investment counterparties.

4. Deposits will only be placed with counterparties from countries that meet the minimum sovereign rating criteria.

5. The council will set a limit for its investments which are invested for more than 365 days.

42 The council’s Head of Finance will ensure a counterparty list (a list of named institutions) is maintained in compliance with the recommended credit rating criteria (table 6) and will revise the criteria and submit any changes to the credit rating criteria to council for approval as necessary.

Investment types

43 The types of investment that the council can use are summarised below. These are split under the headings of ‘specified’ and ‘non-specified’ in accordance with the statutory guidance.

Specified investment instruments

44 These are high credit quality, sterling investments of not more than one-year maturity, or those where the council has the right to be repaid within 12 months if it wishes. These would include sterling investments with:

· UK government Debt Management Agency Deposit Facility (DMADF)

· UK government – treasury bills and Gilts with less than one year to maturity

· Deposits with UK local authorities

· Pooled investment vehicles (AAA rated)

· Deposits with banks and building societies (minimum F1/A- rated)

Non-specified investment instruments

45 These are any other type of investment (i.e. investments not defined as specified, above). Examples of non-specified investments include any sterling investments with:

· Supranational bonds of 1 to 10 years to maturity

· UK treasury stock (Gilts) with a maturity of 1 to 10 years

· Unrated building societies (minimum asset value £1 billion)

· Bank and building society cash deposits up to 5 years (minimum F1/A- rated)

· Deposits with UK local authorities up to 5 years to maturity

· Corporate bonds, Sovereign bonds, and covered bonds

· Pooled property, pooled bond funds and UK pooled equity funds

· Diversified Income Funds

· Multi-Asset Funds

· Ultra-Dated/Short dated bond Funds

· Non-UCITS Retail Schemes (NURS)

Approach to investing

46 The council holds core cash balances which are available to invest for more than one year. This is expected to reduce over the medium term as the approved capital expenditure is incurred and to fund the revenue budget shortfall.

47 In addition, the council has funds that are available to deposit on a temporary basis. These sums are held pending payment over to another body, for example precept payments and council tax. As the balances fluctuate on a daily basis, instant access and notice accounts, money market funds and short-dated deposits are normally utilised for these funds, to ensure funds are available to meet cash flow commitments.

48 Investments will be made with reference to the core balance and cash flow requirements and the outlook for short-term interest rates. Greater returns are usually obtainable by investing for longer periods.  While most cash balances are required to manage cash flow, where funds can be invested for longer periods, options will be carefully assessed.

49 If it is anticipated that Bank Rate is likely to rise significantly consideration will be given to keeping new deposits short term or variable.  Conversely, if it is thought that Bank Rate is likely to fall within an investment time horizon, consideration will be given to locking in higher rates currently obtainable, for longer periods.

50 Officers will continue to provide tight controls on the investments placed.  Where possible, opportunities to spread the investment risk over different types of instruments will be considered.

51 Should market conditions deteriorate suddenly to the extent that the council is unable to place money with institutions with the necessary credit rating, it may make use of the UK Government deposit account (DMADF).

52 The council has the authority to lend to other local authorities at market rates. Whilst investments with other local authorities are considered to be supported by central government, officers will consider the financial viability and sustainability of the individual local authority before including it on the councils list of approved counterparties.

53 During 2021 the council commissioned a review and health check of its treasury management activities.  The assessment, which was undertaken by Link Group, considered the market conditions in which the council was operating, compared activity with other local authorities and considered the council’s financial position and forecasts.

54 Following an evaluation of the suitability of investment options available, the council’s strategy for 2022/23 included an intention to engage Link Group to support a fund selection exercise.  However, the unanticipated change in market conditions, following Russia’s invasion of Ukraine, rising inflation, western economies moving into recession, and central banks raising interest rates has resulted in a suspension of the fund selection exercise during 2022/23.  Officers will continue to liaise with the council’s treasury advisors and will reconsider starting a selection exercise during 2023/24, if it is considered in the council’s best interest.

Counterparty selection

55 Treasury management risk is the risk of loss of capital to the council. To minimise this risk, the council uses credit rating information when considering who to lend to. Link Group provide the council with credit rating updates from all three ratings agencies – Standard & Poors, Fitch and Moodys.

56 The council will not use the approach suggested by CIPFA of using the lowest rating from all three rating agencies in evaluating investment opportunity. This is because adopting this approach could leave the council with too few counterparties for the strategy to be workable. Instead, whilst the council will have regard to the ratings provided by all three rating agencies, Fitch ratings will be used as the basis for setting minimum credit criteria and deriving counterparty investment limits.

57 Where counterparties fail to meet the minimum required criteria (Table 6 below) they will be omitted from the counterparty list. Any rating changes and rating watches (notification of a rating change under consideration) are provided to officers almost immediately after they occur, and this information is considered before any deal is entered into. Market movements may result in a downgrade of an institution or removal from the council’s lending list.

58 Additional requirements under the CIPFA Treasury Management Code require the council to supplement the credit rating data with operational market information such as credit default swaps (CDS), negative watches and outlooks, which are considered when assessing the security of counterparties. This additional information is used so that the council does not rely solely on current credit ratings of counterparties.

59 Where it is felt the council would benefit from utilising government guarantees provided by countries with an AAA rating, the council may lend to institutions covered by such guarantees. Any decision to lend in this way will be subject to consultation with the agreement of the cabinet member responsible for finance.

Country and sector considerations

60 The council has determined that it will only use approved counterparties outside the UK from countries with a minimum sovereign credit rating of AA- from Fitch Ratings. This is in line with the current Fitch Sovereign rating for the UK.  This is to enable deposits to be placed with foreign financial institutions with higher, or equivalent credit ratings to UK banks on the approved counterparty list.

61 The three major credit rating agencies have placed the UK Sovereign debt rating on Negative Outlook, the outcome of the rating agency reviews is unknown at present, but it is possible that the UK Sovereign rating could be downgraded. When setting minimum Sovereign debt ratings, the council will not set a minimum rating for the UK.

Counterparty limits

62 In the normal course of the council’s cash flow operations, it is expected that both specified and non-specified investments will be used for the control of liquidity.  Guidance states that specified investments are those requiring “minimal procedural formalities”. The placing of cash on deposit with banks and building societies ‘awarded high credit ratings by a credit rating agency’, the use of Money Market Funds (MMFs) and investments with the UK Government and local authorities qualify as falling under this category and form a normal part of day to day treasury management activity.

63 All specified investments will be sterling denominated, with maturities up to a maximum of 1 year, meeting the ‘high’ credit rating criteria where applicable.

64 Non-specified investments which would be specified investments apart from originally being for a period longer than 12 months, will be classified as being specified once the remaining period to maturity falls to under 12 months.

65 Non-specified investment products are those which take on greater risk. They are subject to greater scrutiny and include all longer-term instruments (greater than one year from inception to repayment). The council will lend to institutions that meet the criteria outlined in table 6 below:

66 If the council’s banking services contract is held with a bank that fails to meet the minimum credit criteria for banks in the specified or non-specified investment categories, the house bank limit will apply.  In this instance balances will be minimised as far as possible.  Standard bank limits will apply where the house bank meets the minimum credit rating criteria.

67 The operation of some building societies does not require a credit rating, although in every other respect the security of the society would match similarly sized societies with ratings. The council may use such building societies but will restrict their use to within the non-specified investments category limit for non-rated building societies. Where a building society has a credit rating, the minimum credit rating criteria for rated financial institutions will apply.

68 The counterparty limits apply at the time investments are arranged. Where the council has deposits on instant access, this limit may temporarily be exceeded by the accrual and application of interest or dividends into accounts such as call accounts, money market funds, or notice accounts.  Where the application of interest causes the balance with a counterparty to exceed the agreed limits, the balance will be reduced when appropriate, dependent upon the terms and conditions of the account and the cashflow position.

69 The counterparty limits apply to the net cash value of units purchased and sold at the time of investment, or disinvestment, in pooled and managed funds.  The limits will not apply to the value of accumulated or reinvested investment returns.

70 The criteria for choosing counterparties provides a sound approach to investment. Whilst councillors are asked to approve the criteria in table 6, the Head of Finance may temporarily amend the operational criteria to further restrict investment activity to those counterparties considered of higher credit quality than the minimum criteria set out for approval/or reduce maximum maturity limits.

71 Delegation 2.7 of the council constitutions allows the Head of Finance, in consultation with the cabinet member for finance, to raise counterparty limits by £3,000,000 within a financial year. 

Fund managers

72 The council does not currently employ any discretionary external fund managers. However, in the event of such an appointment, appointees will comply with this and subsequent treasury strategies. This strategy empowers the Section 151 officer to appoint such an external manager to manage a proportion of the council’s investment portfolio if this is advantageous.

Risk and Performance Benchmarks

73 A requirement of the Code is that security and liquidity benchmarks are considered and approved. This is in addition to yield benchmarks which are used to assess performance. The benchmarks are guidelines (not limits) so may be breached depending on the movement in interest rates and counterparty criteria. Their purpose is to allow officers to monitor the current trend position and amend the operational strategy depending on any changes. Any breach of the benchmarks will be reported, with an explanation in the mid-year or annual report to audit and governance committee. Detailed information for the assessment of risk is shown in appendix C.

74 Performance indicators are set to assess the adequacy of the treasury function over the year. These are distinct historic performance indicators, as opposed to the predominantly forward-looking prudential indicators. The indicators used to assess the performance of the treasury function are:

· Cash investments – 3-month compounded SONIA rate.

· Property related investments – IPD Balance Property Unit Trust Index.

75 The results of these indicators will be reported in both the annual mid-year and year-end treasury reports.

Policy on the use of treasury management advisors

76 The council has a joint contract with Vale of White Horse District Council for treasury management advice, which is currently supplied by Link Asset Services.  A range of services are provided and include:

· technical support on treasury matters, capital finance issues, statutory reports;

· economic forecasts and interest rate analysis;

· credit ratings / market information service involving the three-main credit rating agencies;

· strategic advice including a review of the investment and borrowing strategies   and policy documents;

· treasury management training.

77 The council recognises that responsibility for treasury management decisions always remains with the organisation and will ensure that undue reliance is not placed upon external service providers. It also recognises that there is value in employing external providers of treasury management services in order to acquire access to specialist skills, resources and up to date market information.

Treasury management scheme of delegation and the role of the Section 151 officer

78 Council

· receiving and reviewing reports on treasury management policies, practices and activities;

· approval of annual strategy.

79 Joint Audit and Governance Committee/ Cabinet

· approval of/amendments to the organisation’s adopted clauses, treasury management policy statement and treasury management practices;

· receiving and reviewing regular monitoring reports and acting on recommendations;

· Ensuring effective scrutiny of the treasury management function

80 Section 151 Officer/Head of Finance

· recommending clauses, treasury management policy/practices for approval, reviewing the same regularly, and monitoring compliance;

· submitting regular treasury management policy reports;

· submitting budgets and budget variations;

· reviewing the performance of the treasury management function;

· ensuring the adequacy of treasury management resources and skills, and the effective division of responsibilities within the treasury management function;

· ensuring the adequacy of internal audit, and liaising with external audit;

· Approving the selection of external service providers and agreeing terms of appointment.

81 The above list of specific responsibilities of the S151 officer in the 2021 Treasury Management Code has not changed.  However, implicit in the changes in both codes, is a major extension of the functions of this role, especially in respect of non-financial investments, (which CIPFA has defined as being part of treasury management), (See Appendix G).

Summary

82 Prior to the beginning of each financial year the council must approve the treasury management strategy. The strategy sets the parameters within which officers can manage the council’s cash flows and invest any surplus fund.

83 This strategy provides a commentary on the current financial climate and sets out the council’s lending strategy in response to this.

Appendix B

ECONOMIC BACKGROUND – Provided by Link Group

“Against a backdrop of stubborn inflationary pressures, the easing of Covid restrictions in most developed economies, the Russian invasion of Ukraine, and a range of different UK Government policies, it is no surprise that UK interest rates have been volatile right across the curve, from Bank Rate through to 50-year gilt yields, for all of 2022.

Market commentators’ misplaced optimism around inflation has been the root cause of the rout in the bond markets with, for example, UK, EZ and US 10-year yields all rising by over 200bps since the turn of the year.  The table below provides a snapshot of the conundrum facing central banks: inflation is elevated but labour markets are extra-ordinarily tight, making it an issue of fine judgment as to how far monetary policy needs to tighten. 

	UK	Eurozone	US
Bank Rate	3.5%	2.0%	4.25%-4.50%
GDP	-0.2%q/q Q3 (2.4%y/y)	+0.2%q/q Q3 (2.1%y/y)	2.6% Q3 Annualised
Inflation	10.7%y/y (Nov)	10.1%y/y (Nov)	7.1%y/y (Nov)
Unemployment Rate	3.7% (Oct)	6.5% (Oct)	3.7% (Nov)

Q2 of 2022 saw UK GDP revised upwards to +0.2% q/q, but this was quickly reversed in the third quarter, albeit some of the fall in GDP can be placed at the foot of the extra Bank Holiday in the wake of the Queen’s passing.  Nevertheless, CPI inflation has picked up to what should be a peak reading of 11.1% in October, although with further increases in the gas and electricity price caps pencilled in for April 2023, and the cap potentially rising from an average of £2,500 to £3,000 per household, there is still a possibility that inflation will spike higher again before dropping back slowly through 2023. 

The UK unemployment rate fell to a 48-year low of 3.6%, and this despite a net migration increase of c500k.  The fact is that with many economic participants registered as long-term sick, the UK labour force actually shrunk by c500k in the year to June.  Without an increase in the labour force participation rate, it is hard to see how the UK economy will be able to grow its way to prosperity, and with average wage increases running at over 6% the MPC will be concerned that wage inflation will prove just as sticky as major supply-side shocks to food and energy that have endured since Russia’s invasion of Ukraine on 22nd February 2022.

Throughout Q3 Bank Rate increased, finishing the quarter at 2.25% (an increase of 1%).  Q4 has seen rates rise to 3.5% in December and the market expects Bank Rate to hit 4.5% by May 2023.

Following a Conservative Party leadership contest, Liz Truss became Prime Minister for a tumultuous seven weeks that ran through September and October.   Put simply, the markets did not like the unfunded tax-cutting and heavy spending policies put forward by her Chancellor, Kwasi Kwarteng, and their reign lasted barely seven weeks before being replaced by Prime Minister Rishi Sunak and Chancellor Jeremy Hunt.  Their Autumn Statement of 17^th November gave rise to a net £55bn fiscal tightening, although much of the “heavy lifting” has been left for the next Parliament to deliver.  However, the markets liked what they heard, and UK gilt yields have almost completely reversed the increases seen under the previous tenants of No10/11 Downing Street.

Globally, though, all the major economies are expected to struggle in the near term.  The fall below 50 in the composite Purchasing Manager Indices for the UK, US, EZ and China all point to at least one, if not more, quarters of GDP contraction.  In November, the MPC projected eight quarters of negative growth for the UK lasting throughout 2023 and 2024, but with Bank Rate set to peak at lower levels than previously priced in by the markets and the fiscal tightening deferred to some extent, it is not clear that things will be as bad as first anticipated by the Bank.

The £ has strengthened of late, recovering from a record low of $1.035, on the Monday following the Truss government’s “fiscal event”, to $1.22. Notwithstanding the £’s better run of late, 2023 is likely to see a housing correction of some magnitude as fixed-rate mortgages have moved above 5% and affordability has been squeezed despite proposed Stamp Duty cuts remaining in place.

In the table below, the rise in gilt yields, and therein PWLB rates, through the first half of 2022/23 is clear to see.

However, the peak in rates on 28^th September as illustrated in the table covering April to September 2022 below, has been followed by the whole curve shifting lower.   PWLB rates at the front end of the curve are generally over 1% lower now whilst the 50 years is over 1.75% lower.

After a shaky start to the year, the S&P 500 and FTSE 100 have climbed in recent weeks, albeit the former is still 17% down and the FTSE 2% up.  The German DAX is 9% down for the year.

CENTRAL BANK CONCERNS – DECEMBER 2022

In December, the Fed decided to push up US rates by 0.5% to a range of 4.25% to 4.5%, whilst the MPC followed by raising Bank Rate from 3% to 3.5%, in line with market expectations.  EZ rates have also increased to 2% with further tightening in the pipeline.

Having said that, the sentiment expressed in the press conferences in the US and the UK were very different.  In the US, Fed Chair, Jerome Powell, stated that rates will be elevated and stay higher for longer than markets had expected.  Governor Bailey, here in the UK, said the opposite and explained that the two economies are positioned very differently so you should not, therefore, expect the same policy or messaging.

Regarding UK market expectations, although they now expect Bank Rate to peak within a lower range of 4.5% - 4.75%, caution is advised as the Bank of England Quarterly Monetary Policy Reports have carried a dovish message over the course of the last year, only for the Bank to have to play catch-up as the inflationary data has proven stronger than expected.

In addition, the Bank’s central message that GDP will fall for eight quarters starting with Q3 2022 may prove to be a little pessimistic.  Will the £160bn excess savings accumulated by households through the Covid lockdowns provide a spending buffer for the economy – at least to a degree?  Ultimately, however, it will not only be inflation data but also employment data that will mostly impact the decision-making process, although any softening in the interest rate outlook in the US may also have an effect (just as, conversely, greater tightening may also).”

Appendix C

Benchmarking and Monitoring Security, Liquidity and Yield in the Investment Service.

1. These benchmarks are targets and so may be exceeded from time to time. Any
variation will be reported, along with supporting reasons, in the Annual Treasury
Report.

2. Yield.

This council will use an investment benchmark to assess the performance of cash
investments of three month SONIA.  Property related investments are benchmarked against the IPD Balanced Property Unit Trust Index.

3. Liquidity.

Liquidity is defined as the council “having adequate, though not excessive, cash resources, borrowing arrangements, overdrafts or standby facilities to enable it at all times to have the level of funds available to it which are necessary for the achievement of its business/service objectives” (CIPFA Treasury Management Code of Practice).

4. In respect of this area, the council shall seek to:

· maintain a minimal balance held in the council’s main bank account at the close of each working day. Transfers to the councils call accounts, MMF and investments will be arranged in order to achieve this, while maintaining access to adequate working capital at short notice.

· use the authorised bank overdraft facility or short term borrowing where there is clear business case for doing so, to cover working capital requirements at short notice

5. Security of the investments.

In the context of benchmarking, assessing security is very much more a subjective area to assess. Security is currently evidenced by the application of minimum credit quality criteria to investment counterparties, primarily through the use of credit ratings supplied by the three main credit rating agencies (Fitch, Moody’s and Standard and Poor’s). Whilst this approach embodies security considerations, benchmarking levels of risk is more problematic.

One method to benchmark security risk is to assess the historic level of default against the minimum criteria used in the Council’s investment strategy. The table beneath shows average defaults for differing periods of investment grade products for each Fitch long term rating category over the last 20-30 years.

Average defaults for differing periods of investment

Long term rating	1 year	2 years	3 years	4 years	5 years
AA	0.02%	0.04%	0.09%	0.16%	0.23%
A	0.05%	0.14%	0.26%	0.38%	0.54%
BBB	0.14%	0.38%	0.66%	1.01%	1.36%

6. The council’s minimum long term (i.e. plus 365 day duration) rating criteria is currently “A-”. For comparison, the average expectation of default for a two year investment in a counterparty with an “A” long term rating would be 0.14 per cent of the total investment (e.g. for a £1m investment the average loss would be £1,400). This is an average - any specific counterparty loss is likely to be higher. These figures act as a proxy benchmark for risk across the portfolio.

Appendix D

Explanation of Prudential and Treasury Indicators
Prudential borrowing permits local government organisations to borrow to fund capital spending plans provided they could demonstrate their affordability. Prudential indicators are the means to demonstrate affordability.

Authorised limit for external debt – this is the maximum limit for external borrowing. This is the statutory limit determined under section 3(1) of the Local Government Act 2003. This limit is set to allow sufficient headroom for day-to-day operational management of cash flows.

Operational boundary for external debt – this is set as the more likely amount that may be required for day-to-day cash flow.

Upper limit for fixed and variable interest rate exposure – these limits allow the
council flexibility in its investment and borrowing options.

Upper limit for total principal sums invested for over 365 days – the amount it is
considered can be prudently invested for periods in excess of a year

Appendix E

Treasury Management Practice (TMP) 1 – credit and counterparty risk management

The CLG issued Investment Guidance in 2010, and this forms the structure of the

council’s policy below.

The key aim of the guidance is to maintain the current requirement for councils to invest prudently, and that priority is given to security and liquidity before yield. In order to facilitate this objective, the guidance requires this council to have regard to the CIPFA publication Treasury Management in the Public Services: Code of Practice and Cross-Sectoral Guidance Notes. In accordance with the code, the Interim Head of Finance has produced its treasury management practices (TMPs). This part, TMP1(1), covering investment counterparty policy requires approval each year

Thekey requirements of both the Code and the investment guidance are to set an annual investment strategy, as part of its annual treasury strategy for the following year, covering the identification and approval of following:

· the strategy guidelines for decision making on investments, particularly non-specified investments.

· the principles to be used to determine the maximum periods for which funds can be committed.

· specified investments that the Council will use. These are high security (i.e. high credit rating, although this is defined by the Council, and no guidelines are given), and high liquidity investments in sterling and with a maturity of no more than a year.

· non-specified investments, clarifying the greater risk implications, identifying the general types of investment that may be used and a limit to the overall amount of various categories that can be held at any time.

The investment policy proposed for the Council is:

Strategy guidelines – The main strategy guidelines are contained in the body of the treasury strategy statement.

Specified investments – These investments are sterling investments of not more than one-year maturity, or those which could be for a longer period but where the Council has the right to be repaid within 12 months if it wishes.  These are considered low risk assets where the possibility of loss of principal or investment income is small.  These would include sterling investments which would not be defined as capital expenditure with:

· UK government Debt Management Agency Deposit Facility (DMADF)

· UK government – treasury stock (Gilts) with less than one year to maturity

· Supranational bonds of less than one year’s duration

· Deposits with UK local authorities

· Pooled investment vehicles such as Money Market Funds (MMF) (AAA rated)

· Deposits with banks and building societies (minimum F1/A-)

· Certificates of deposits issued by banks and building societies (minimum rating as above) covers pooled investment vehicles, such as money market funds, rated AAA by Standard and Poor’s, Moody’s and / or Fitch rating agencies.

Within these bodies, and in accordance with the Code, the council has set additional
criteria to set the time and amount of monies which will be invested in these bodies.
These criteria are as stated in table 6 to this report.

Non-specified investments
These are any other type of investment (i.e. not defined or specified above). The
identification and rationale supporting the selection of these other investments and the maximum limits to be applied are as set out in Table 6.

IFRS  9

Risk management will need to take account of the 2018/19 Accounting Code of Practice proposals for the valuation of investments. Key considerations are:

• Expected credit loss model. Whilst this should not be material for ordinary treasury investments such as bank deposits, this is likely to be challenging for some funds e.g. property funds, (and also for non-treasury management investments dealt with in the capital strategy e.g. longer dated service investments, loans to third parties or loans to subsidiaries).
• The valuation of investments previously valued under the available for sale category e.g. equity related to the “commercialism” agenda, property funds, equity funds and similar, will be changed to Fair Value through the Profit and Loss (FVPL).

Following the consultation undertaken by the then Ministry of Housing, Communities and Local Government, [MHCLG], on IFRS9 the Government introduced a mandatory statutory override for local authorities to reverse out all unrealised fair value movements resulting from pooled investment funds. This was effective for five years to March 2023. In December 2022, the Department for Levelling Up, Housing and Communities announced an extension to the override for a further two years until 31 March 2025.  Local authorities are required to disclose the net impact of the unrealised fair value movements in a separate unusable reserve throughout the duration of the override in order for the Government to keep the override under review and to maintain a form of transparency.

Appendix F

Extension to the specific responsibilities of the S151 officer as per the Treasury Management code

The below list of specific responsibilities of the S151 officer in the 2021 Treasury Management Code has not changed.  However, implicit in the changes in both codes, is a major extension of the functions of this role, especially in respect of non-financial investments, (which CIPFA has defined as being part of treasury management);

• preparation of a capital strategy to include capital expenditure, capital financing, non-financial investments and treasury management, with a long-term timeframe.

· ensuring that the capital strategy is prudent, sustainable, affordable and prudent in the long term and provides value for money

• ensuring that due diligence has been carried out on all treasury and non-financial investments and is in accordance with the risk appetite of the authority
• ensure that the authority has appropriate legal powers to undertake expenditure on non-financial assets and their financing
• ensuring the proportionality of all investments so that the authority does not undertake a level of investing which exposes the authority to an excessive level of risk compared to its financial resources
• ensuring that an adequate governance process is in place for the approval, monitoring and ongoing risk management of all non-financial investments and long term liabilities
• provision to members of a schedule of all non-treasury investments including material investments in subsidiaries, joint ventures, loans and financial guarantees
• ensuring that members are adequately informed and understand the risk exposures taken on by an authority
• ensuring that the authority has adequate expertise, either in house or externally provided, to carry out the above
• creation of Treasury Management Practices which specifically deal with how non treasury investments will be carried out and managed, to include the following

o Risk management (TMP1 and schedules),including investment and risk management criteria for any material non-treasury investment portfolios;

o Performance measurement and management (TMP2 and schedules), including methodology and criteria for assessing the performance and success of non-treasury investments;        

o Decision making, governance and organisation (TMP5 and schedules), including a statement of the governance requirements for decision making in relation to non-treasury investments; and arrangements to ensure that appropriate professional due diligence is carried out to support decision making;

o Reporting and management information (TMP6 and schedules), including where and how often monitoring reports are taken;

o Training and qualifications (TMP10 and schedules), including how the relevant knowledge and skills in relation to non-treasury investments will be arranged.

Appendix G

GLOSSARY OF TERMS

Authorised Limit	The maximum amount of external debt at any one time in the financial year.
Basis Point (BP)	1/100th of 1%, i.e. 0.01%
Base Rate	Minimum lending rate of a bank or financial institution in the UK.
Benchmark	A measure against which the investment policy or performance of a fund manager can be compared.
Bill of Exchange	A financial instrument financing trade.
Callable Deposit	A deposit placed with a bank or building society at a set rate for a set amount of time. However, the borrower has the right to repay the funds on pre-agreed dates, before maturity. This decision is based on how market rates have moved since the deal was agreed. If rates have fallen the likelihood of the deposit being repaid rises, as cheaper money can be found by the borrower.
Cash Fund Management	Fund management is the management of an investment portfolio of cash on behalf of a private client or an institution, the receipts and distribution of dividends and interest, and all other administrative work in connection with the portfolio.
Certificate of Deposit (CD)	Evidence of a deposit with a specified bank or building society repayable on a fixed date. They are negotiable instruments and have a secondary market; therefore, the holder of a CD is able to sell it to a third party before the maturity of the CD.
Commercial Paper	Short-term obligations with maturities ranging from 2 to 270 days issued by banks, corporations and other borrowers. Such instruments are unsecured and usually discounted, although some may be interest bearing.
Corporate Bond	Strictly speaking, corporate bonds are those issued by companies. However, the term is used to cover all bonds other than those issued by governments in their own currencies and includes issues by companies, supranational organisations and government agencies.
Counterparty	Another (or the other) party to an agreement or other market contract (e.g. lender/borrower/writer of a swap/etc.)
CDS	Credit Default Swap – a swap designed to transfer the credit exposure of fixed income products between parties. The buyer of a credit swap receives credit protection, whereas the seller of the swap guarantees the credit worthiness of the product. By doing this, the risk of default is transferred from the holder of the fixed income security to the seller of the swap.
CFR	Capital Financing Requirement.
CIPFA	Chartered Institute of Public Finance and Accountancy.
Derivative	A contract whose value is based on the performance of an underlying financial asset, index or other investment, e.g. an option is a derivative because its value changes in relation to the performance of an underlying stock.
DMADF	Deposit Account offered by the Debt Management Office, guaranteed by the UK government.
ECB	European Central Bank – sets the central interest rates in the EMU area. The ECB determines the targets itself for its interest rate setting policy; this is the keep inflation within a band of 0 to 2 per cent. It does not accept that monetary policy is to be used to manage fluctuations in unemployment and growth caused by the business cycle.
Enhanced Cash Funds	A pooled investment fund. Longer dated investment than a MMF and, unlike a MMF, enhanced cash funds have variable asset value. Assets are marked to market on a daily basis and the unit prices vary accordingly. Investments can be withdrawn on a notice basis (the length of which depends on the fund) although such funds would typically be used for investments of 3 to 6 month duration.
Equity	A share in a company with limited liability. It generally enables the holder to share in the profitability of the company through dividend payments and capital gain.
Forward Deal	The act of agreeing today to deposit funds with an institution for an agreed time limit, on an agreed future date, at an agreed rate.
Forward Deposits	Same as forward dealing (above).
Fiscal Policy	The government policy on taxation and welfare payments.
GDP	Gross Domestic Product.
Gilt	Registered British government securities giving the investor an absolute commitment from the government to honour the debt that those securities represent.
Mark to Market Accounting	Accounting on the basis of the “fair value” of an asset or liability, based on the current market price. As a result, values will change with market conditions.
Minimum Revenue Provision	This is a prudent sum set aside each year to offset the principal repayment of any loan to smooth the impact on the local taxpayer.
Money Market Fund	A well rated, highly diversified pooled investment vehicle whose assets mainly comprise of short-term instruments. It is very similar to a unit trust, however a MMF relies on loans to companies rather than share holdings.
Monetary Policy Committee (MPC)	Government body that sets the bank rate (commonly referred to as being base rate). Their primary target is to keep inflation within plus or minus 1 per cent of a central target of 2.5 per cent in two years’ time from the date of the monthly meeting of the committee. Their secondary target is to support the government in maintaining high and stable levels of growth and employment.
Non-UCITS Retail Scheme (NURS) –	Undertakings for collective investments are funds authorised to be sold in the UK that are required to meet standards set by the UK services regulator. An example is property funds.
Operational Boundary	The most likely, prudent but not worst-case scenario of external debt at any one time.
Other Bonds	Pooled funds investing in a wide range of bonds.
PWLB	Public Works Loan Board.
QE	Quantitative Easing.
Retail Price Index	Measurement of the monthly change in the average level of prices at the retail level weighted by the average expenditure pattern of the average person.
Sovereign Issues (Ex UK Gilts)	Bonds issued or guaranteed by nation states, but excluding UK government bonds.
Supranational Bonds	Bonds issued by supranational bodies, e.g. European Investment Bank. The bonds – also known as Multilateral Development Bank bonds – are generally AAA rated and behave similarly to gilts, but pay a higher yield (“spread”) given their relative illiquidity when compared with gilts.
Treasury Bill	Treasury bills are short-term debt instruments issued by the UK or other governments. They provide a return to the investor by virtue of being issued at a discount to their final redemption value.