Treasury management strategy report 2016-17

This strategy is compiled according to the DCLG’s guidance on local government investments ('the guidance') and the 2011 revised CIPFA Treasury Management in the Public Services Code of Practice and Cross Sectoral Guidance Notes ('the CIPFA TM Code'). It sets out our policies for managing our investments and for giving priority to the security and liquidity of those investments (and finally what return can be obtained consistent with these priorities).

In accordance with the above and in order to minimise the risk to investments, we have (in ***Annex B***) clearly stipulated the minimum acceptable credit quality of counterparties for inclusion on the lending list. Using the advisor's ratings service, bank's ratings are monitored in real time with knowledge of any changes notified electronically as the agencies notify any modifications.

The aim of this strategy is to generate a list of highly creditworthy counterparties which will also enable diversification and avoid the concentration of risk. The intention of the strategy is to provide security of investment and minimisation of risk.

Possible revisions to the strategy

The initial strategy may be replaced with a revised strategy at any time during the year in cases where any treasury management issues (including investment issues) need to be brought to the attention of the full council.

Security of investments

Specified and non-specified investments

In accordance with the investment guidance, we will, in considering the security of proposed investments, follow different procedures according to which of two categories, specified or unspecified, the proposed investment falls into.

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 we have the right to be repaid within 12 months if we wish. 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:

• the UK government (such as the Debt Management Account deposit facility, UK Treasury Bills or a Gilt with less than one year to maturity)

• supranational bonds of less than one year's duration

• a local authority, parish council or community council

• pooled investment vehicles (such as money market funds) that have been awarded a high credit rating by a credit rating agency

• a body that is considered of a high credit quality (such as a bank or building society)

Non-specified investments

These investments are any other type of investment (i.e. not defined as specified above). If we were to consider placing funds in any other type of investment which would be categorised as non-specified, the security of the capital sum would be the paramount concern.

The same requirements as to credit ratings relating to specified investments will apply, and in appropriate cases the advice of our treasury management advisors will be sought.

In considering whether it is prudent to place funds for longer than 12 months in 2016/17 and in determining the period of such investment the principles and limits set out in the 'liquidity of Investments' section below will apply together with the counterparty listing criteria set out in Annex B.

Use of treasury management advisor's creditworthiness service

We use the creditworthiness service provided by our treasury management advisors. This service employs a sophisticated modelling approach using credit ratings from the three main credit rating agencies, Fitch, Moody’s and Standard and Poor's. The credit ratings of counterparties are supplemented with the following overlays:

• credit watches and credit outlooks from credit rating agencies

• credit default swap (CDS) spreads to give early warning of likely changes in credit ratings

• sovereign ratings to select counterparties from only the most creditworthy countries

This modelling approach combines credit ratings, credit watches, credit outlooks in a weighted scoring system for which is then combined with an overlay of CDS spreads for which the end product is a series of colour coded bands which indicate the relative creditworthiness of counterparties. These colour codes are used by us to determine the duration for investments and are therefore referred to as durational bands.

All credit ratings will be monitored on a daily basis. We are alerted to changes to ratings of all three agencies through its use of the treasury advisor's creditworthiness service. Further details of the counterparty listing criteria can be seen in Annex B.

Approved investment instruments

We have laid down a list of approved investment instruments in the schedule to treasury management practice 4 (TMP4). These are reproduced below:

Extract from schedule to TMP 4

“The following types of investments will be permitted, fixed cash deposits, certificates of deposit issued by organisations falling into the categories listed under TMP1 (5), registered British Government Securities (Gilts) and Money Market Funds. Officers of the Council may only invest in Fixed Cash Deposits and Money Market Funds.”

Because fund managers are not currently employed, this means that investments in 2016-17 will be limited to fixed cash deposits (including deposit accounts and current accounts), money market funds and the debt management account deposit facility (DMADF). The DMADF is guaranteed by HM Government and offers investors a flexible and secure facility to supplement their existing range of investment options.

Liquidity of investments

Maximum investment periods

We will determine the maximum periods for which funds may prudently be committed. Investments will be for whatever period is considered appropriate by officers at the time that the investment is made. Regard will be had to relevant matters such as likely future capital values and our forecast need to realise investments in the future in order to finance capital expenditure or for any other purpose. The principles concerning time limits contained in the schedule to the treasury management practices will be followed.

There will be a limit placed upon the amount which may be invested for periods in excess of 364 days. This limit has been set using one of the prudential indicators required by the Chartered Institute of Public Finance and Accountancy Prudential Code for Capital Finance in Local Authorities. Investments will be regarded as commencing on the date the commitment to invest is entered into, rather than on the date on which the funds are actually paid over to the counterparty.

This prudential indicator is intended to limit our exposure to the possibility of loss that might arise as a result of it having to seek early repayment of sums invested. It consists of the amount that it is considered prudent to have invested for a period greater than 364 days in each of the next three years. The limits as set out below will apply:

It should be noted that in practice the sums available for investment are unlikely to be sufficient to allow amounts of this magnitude to be invested for such extended periods.

Return on investments (yield)

Current economic climate

Due to ongoing global economic uncertainties, investment returns are likely to remain relatively low during 2016-17. Interest rates on Instant access deposit accounts and Notice accounts have previously been more attractive than interest rates being offered by the market. However, banks have now reduced the rates they offer on their instant access and notice accounts.

Prudent investments

Priority will be given to the security and liquidity of all investments. Consistent with achieving the proper levels of security and liquidity, the highest rate of return will be sought for any investment made.

Specific strategy 2016-17

Capital receipts in hand and balances held in reserves

Amount available for investment

It is estimated that the amount of receipts in hand, plus reserve balances, and available for investment at 1 April 2016 will be in the region of £8,000,000.

Period of investment

This will be determined in accordance with the liquidity of investments section above.

Forward commitment

This involves agreeing in advance to place an investment with a borrower at a future specified date at an agreed interest rate. It is done in order to obtain the benefit of what are considered to be better rates than might be available later, when physical funds are likely to be available. No forward commitment has taken place to date in 2015-16. It is possible that forward commitment may be employed in 2016-17 in instances where market conditions warrant it.

Return on investment

The overriding consideration is safeguarding our capital. At all times the risk to us will be minimised. Within these constraints, the aim will be to maximise the return on investments.

Investment of money borrowed in advance of need

It is not our intention to undertake any borrowing in advance of need during 2016-17.

Other temporary surpluses

Amount available for investment

In addition to the receipts and reserve balances referred to above, we will, from time to time, find ourselves in possession of funds in excess of its immediate requirements. This may occur, for example, if income is received at a faster rate than expenditure is incurred or if grant payments are made to us in advance of the expenditure being incurred to which they relate. This is not a permanent state of affairs and the extent to which it will occur and, therefore, the amounts available at any time cannot be predicted.

Prudent financial management dictates that these temporary surpluses should be invested or used to redeem temporary loans if any are outstanding. Such surpluses may be placed in short term deposit accounts and current accounts, or, where the size of the surplus warrants, short term investments will be made in the market.

Capital receipts which arise during the year, as a result of asset sales, will be held in the capital receipts account pending use until the monies are invested. When useable receipts are required to finance capital expenditure, or for any other purpose, the amount will be disinvested and utilised.

Period of investment

All temporary surplus funds will be invested on a short term basis in order that they will be available for use as and when required. This requirement has been recognised in the calculation of the prudential indicator relating to total principal sums invested for periods longer than 364 days set out earlier.

Return on investment

The aim will be to obtain the maximum rate of return which is available at the time the investment is made with an external body. This must, however, be consistent with the safeguarding of our capital. At all times the risk to us will be minimised.

Current treasury management advisors view on interest rates

Part of the service provided by our treasury management advisors is to assist us in the formulation of a view on interest rates. The following gives their view of the Bank of England base rate for financial year ends:

• 31 March 2017 - 1.00%

• 31 March 2018 - 1.75%

• 31 March 2019 - 2.00%

There are negative risks to these forecasts (i.e. increases in bank rate occur later) if economic growth weakens. However, should the pace of growth quicken, there could be benefits.

Our treasury management advisors suggested budgeted investment earnings rates, for returns on investments placed for periods up to 100 days, during each financial year for the next three years are as follows:

• 2016-17 - 0.90%

• 2017-18 - 1.50%

• 2018-19 - 2.00%