Note 32: Financial Instruments
The Government has devolved responsibility for the financial management of its financial portfolios to its sub-entities such as NZDMO, Reserve Bank, NZ Superannuation Fund, Inland Revenue and ACC. The financial management objectives of each of these portfolios are influenced by the purpose and associated governance framework for which the portfolio is held. The purposes of a portfolio may cover:
- public policy considerations eg, the provision of student loans to support tertiary education policy
- liquidity management eg, Treasury bills and Government Stock are the primary debt instruments for funding core Government operations, and
- long-term economic return eg, the function of the NZ Superannuation Fund.
These purposes are not mutually exclusive, with portfolios typically established for, or arising from, a public policy objective, such as pre-funding future superannuation expenses, but in doing so are managed to maximise economic returns consistent with the policy objective.
Reporting to Ministers on these portfolios is done on a portfolio-by-portfolio basis. The institutional frameworks and policy objectives of these portfolios are reviewed periodically. Otherwise reporting on the consolidated financial management and performance of these portfolios is done in the context of the interim and annual Financial Statements of the Government and the forecasts reported in the Half-Year and Budget economic and fiscal updates.
Sub-entities with responsibility for managing significant financial assets or financial liabilities are:
| Manager | Financial Instrument Portfolio | Risk Management |
|---|---|---|
| New Zealand Debt Management Office (NZDMO) |
Financial assets and liabilities held to:
|
NZDMO operates within a risk management framework that is approved by the Minister of Finance. The framework specifies NZDMO's policies for managing market risk, credit risk, liquidity risk, funding risk and operational risk. The risk management framework is subject to continuous improvement. |
| The Reserve Bank of New Zealand |
Financial assets and liabilities held for the purpose of effective foreign exchange intervention capability, wholesale banking liquidity (settlement cash) and circulating currency | The overall risk management framework is designed to strongly encourage the sound and prudent management of the banks risk in a way that's consistent with financial market best practice. |
| Inland Revenue Department | Student Loans and tax receivables | The department has debt management policies and procedures to ensure debt can be collected in a timely manner in accordance with Government policy. |
| The New Zealand Superannuation Fund (NZS Fund) | Investment Fund assets |
The Guardians manage the NZS Fund's risks by adopting an appropriate risk profile that is commensurate with the return objective and time horizon of the Fund. The objective is to:
|
| Accident Compensation Corporation | ACC Reserves | The investment committee sets investment guidelines by requiring investment managers to manage their portfolios within defined market exposure limits. These limits include limits on percentage weight of any particular company in the portfolio relative to its benchmark weight; limits on aggregate investment in companies not represented in the benchmark; limits on the maximum investment in any individual company; duration limits relative to the duration of the benchmark; and maximum credit exposure to single entities. Compliance with the investment guidelines is reviewed by the internal auditors on a half yearly basis. |
| New Zealand Post (including Kiwbank) | Financial instruments from its debt portfolio and investment activity. This includes activities as a financial intermediary and financial market participant (Kiwibank). | The Board is responsible for risk management policies and procedures. This includes appointing a finance risk committee to monitor risk management. |
| Air New Zealand | Financial instruments arising from its business activity | The Board of directors approve risk management policies. Compliance with these policies is reviewed and reported monthly to the Board and is included as part of the internal audit programme. Group policy is not to enter, issue or hold financial instruments for speculative purposes. |
| Earthquake Commission | Assets in National Disaster Fund | Best-practice portfolio management that maximises return without undue risk to the Fund as a whole while avoiding prejudice to New Zealand's reputation as a responsible member of the world community. |
| Transpower | Financial instruments arising from its business activity | The Board has approved policy and guidelines and authorised the use of various financial instruments. The policy adopted by the Board prohibits the use of financial instruments for speculative purposes. All derivatives must be directly related to underlying physical debt or firm capital commitments on Board approved projects. |
| New Zealand Customs Service | Tax receivables | The Service has debt management policies and procedures to ensure debt can be collected in a timely manner in accordance with Government policy. |
| Ministry of Social Development | Benefit receivables and student loans | The Ministry has a series of policies to manage the risks associated with financial instruments. These policies do not allow any transactions that are speculative in nature. |
| Mighty River Power | Financial instruments arising from its business activity | The Group's overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse impacts on its financial performance. The Group uses derivative financial instruments to hedge these risk exposures. |
| Meridian Energy | Financial instruments arising from its business activity | Meridian’s overall risk management programme focuses on the unpredictability of financial markets and the electricity spot price and seeks to minimise potential adverse effects on the financial performance and economic value of the Group. The Group uses financial instruments to hedge these risk exposures. |
| Genesis Energy | Financial instruments arising from its business activity | Genesis's overall risk management programme focuses on the unpredictability of financial markets and the electricity spot price and seeks to minimise potential adverse effects on the financial performance and economic value of the Group. The Group uses financial instruments to hedge these risk exposures. |
The size of these portfolios on an unconsolidated basis (ie, including cross-holdings of government stock and other Crown instruments) are:
| 30 June 2008 $m | 30 June 2007 $m | |||
|---|---|---|---|---|
|
Unconsolidated financial assets |
Unconsolidated financial liabilities |
Unconsolidated financial assets |
Unconsolidated financial liabilities |
|
| NZDMO | 16,578 | 32,952 | 12,939 | 32,370 |
| Reserve Bank | 18,159 | 16,160 | 17,718 | 16,176 |
| Inland Revenue | 14,294 | 4,575 | 13,193 | 3,294 |
| NZ Superannuation Fund | 13,791 | 494 | 12,576 | 90 |
| ACC | 12,958 | 720 | 12,169 | 570 |
| NZ Post | 7,385 | 7,243 | 5,119 | 4,943 |
| Air New Zealand | 2,065 | 1,932 | 1,749 | 2,069 |
| EQC | 5,615 | 6 | 5,484 | 5 |
| Transpower | 283 | 1,266 | 762 | 1,642 |
| Customs | 1,570 | 4 | 1,335 | 4 |
| Ministry of Social Development | 1,407 | 368 | 1,261 | 311 |
| Mighty River Power | 459 | 1,096 | 308 | 729 |
| Meridian Energy | 689 | 1,649 | 327 | 960 |
| Genesis Energy | 510 | 1,035 | 295 | 682 |
(a) Significant accounting policies
Details of the significant accounting policies and methods adopted including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset and financial liability are disclosed in Note 1 of the financial statements.
