Measuring Progress - Crown Debt and Related Financial Asset Management
NZDMO's objective is to manage Crown debt and related financial assets in order to maximise the long-term net return on the Crown's financial asset and debt portfolios, within an appropriate risk management framework. Our priority for 2008/09 was to manage the impact of the financial markets crisis, and to respond to the deteriorating fiscal position. Debt issuance was increased to its highest levels since 1991/92.
Performance measures have been developed to assess the amount of return (value added) and risk incurred by these portfolios. The goal is to maximise net return while reducing risk as much as possible. These activities should also be managed as cost-effectively as possible.
Our performance against these measures is discussed below. The measures are not intended to be interpreted with reference to any particular benchmark, but are rather to be seen as highlighting trends in performance in key result areas over time. The trends demonstrate that value add has remained strong, largely as a result of the flight to quality which raised demand for government securities, and an increase in foreign exchange risk management activity. Risk, as measured by monthly VaR, was higher than in recent years, but has been maintained well within target limits. Settlement errors remain low by historical standards, even while the volume of transactions has increased. The Treasury will continue to measure itself in these areas.
Cost-effectiveness
Value added generated for the Crown
- Annual value-added result
- Source: The Treasury
The value-added figure is derived from NZDMO's management reporting, which is calculated on a different basis from the financial statement reporting. The value-added result for 2008/09 is the highest since the measure was introduced, owing primarily to:
- higher demand for government securities in 2008/09, and
- substantially increased foreign exchange risk management activity on behalf of Crown clients.
Market risk
- Monthly VaR
- Source: The Treasury
NZDMO measures market risk (interest rate and foreign exchange rate risk) using VaR. VaR measures the worst expected loss over a given time interval under recent market movements at a given confidence level. The monthly VaR limit at the 95% confidence level is set at $14 million.
Owing to extreme market volatility, VaR increased significantly over the past year. VaR peaked in the March quarter and then reduced as market volatility eased. The average VaR for 2008/09 is $714,000; this is more than double the average VaR for 2007/08.
Accuracy of settlement
- Settlement errors against number of cash flows settled
- Source: The Treasury
In 2009, NZDMO settled a total of 27,000 cash flows, being an average of 520 cash-related transactions per week. Over the year, there were two settlement processing errors by NZDMO and 52 settlement errors by NZDMO's settlement counterparties.
- Gross payments against gross cost of settlement errors
- Source: The Treasury
In 2009, the total gross value of cash payments settled by NZDMO was $290 billion. The financial cost relating to NZDMO's settlement processing errors was $2,775.
