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Significant Work Completed During 2010/11

Borrowing programme

  • The bond programme announced at Budget 2010 was initially set at a maximum of $12.500 billion. Throughout 2010/11, favourable market conditions allowed NZDMO to increase its bond issuance to meet the Crown's new funding needs following the two major Canterbury earthquakes and to continue to part pre-fund future borrowing needs. The upper limit for the bond programme was revised upward four times to $20 billion.
  • In total, NZDMO issued $19.500 billion worth of bonds and successfully completed the largest ever weekly bond tender in April 2011, which raised $1 billion. As at 30 June 2011, bonds outstanding in the market were valued at $51.100 billion.
  • NZDMO introduced further measures aimed at increasing demand, diversifying funding sources and thus reducing the cost of the Crown's borrowing, including:
    • increasing the target tranche size from $8 billion to $10 billion for bonds maturing before December 2017 and to $12 billion for bonds maturing on or after December 2017
    • introducing two new bond maturities, March 2019 and April 2023, which will lengthen the average maturity profile and therefore reduce funding risk. In time, these maturities will become liquid benchmark bonds
    • launching a four-year Earthquake Kiwi Bond to help fund the recovery in Christchurch and provide retail investors with a new savings option. As at 30 June 2011, $1.480 million was outstanding
    • implementing new funding risk policy measures that: (1) require NZDMO to accumulate cash (and liquid assets) in advance of a maturing bond and; (2) restricting short-term debt with maturity of less than one year at issuance to less than 25% of total debt outstanding
    • resuming issuance of one-year US-dollar Euro Commercial Paper, and
    • undertaking work for the reintroduction of a new inflation-indexed bond, appointing a syndicate to lead distribution of the bond and monitoring market conditions on an ongoing basis.

Derivatives programme

  • NZDMO uses a relatively small set of vanilla derivatives to manage interest-rate and currency risk in the portfolios. During 2010/11, new derivative transactions entered into included currency swaps and interest-rate swaps as well as foreign-exchange (FX) options.
  • Risk associated with the changing market value of derivative positions was successfully managed within NZDMO's average monthly VaR target for the tactical portfolios.
  • In 2010, NZDMO received approval from the Minister of Finance to transact FX options for departments that have a special need for better management of foreign currency risk and have obtained separate ministerial approvals.
  • There are significant benefits to the Crown by having NZDMO transact FX options on behalf of departments, as opposed to leaving each to deal with the market separately. The benefits include:
    • cost savings in the form of better option pricing given the volume of NZDMO's FX business
    • improved management of credit risk facilitated by NZDMO's existing credit support agreements, and
    • efficiency gains arising from NZDMO's IT infrastructure.
  • Up until 30 June 2011, NZDMO had transacted 12 FX options in three currencies for the approved departments.
  • NZDMO continued to maintain regular contact with the credit rating agencies during the year to assist them in their assessment of New Zealand's credit worthiness, including extensive discussions with Standard & Poor's (S&P) following its rating outlook change from "Stable" to "Negative" in November 2010. Following the Canterbury earthquake in February 2011, NZDMO acted quickly to provide relevant available information, resulting in affirmations of New Zealand's sovereign ratings by the three main international credit rating agencies.

Marketing efforts and interactions with international stakeholders

  • Throughout the year, NZDMO has been active in promoting bonds and New Zealand more generally. These efforts include accompanying the Minister of Finance on overseas investor missions, developing and strengthening investor relations and engaging with sovereign peers.

Investment programme

  • As at 30 June 2011, NZDMO managed marketable securities valued at $3,286 million, deposits valued at $117 million and a cash balance of $14,360 million. These assets were used to fund Crown operations, to provide short-term liquidity if required and to help repay debt maturities as they fell due. Asset holdings increased during the year as NZDMO pre-funded future borrowing needs owing to uncertainty introduced by the two major Canterbury earthquakes and the financial position, and changes to funding risk policy.
  • Assets are invested primarily in AAA and AA-rated securities. The high quality of the asset portfolio, in conjunction with NZDMO's asset-liability matching policy, means the portfolio value had very low volatility, as reflected in an average monthly VaR during 2010/11 of less than $1 million.
Statement of Service Performance for Output Class - Permanent Legislative Authority Funding for NZDMO
Performance Dimensions for 2010/11 Target (see notes) Performance for 2010/11
Cost of new core Crown borrowing is less than the long- term average cost of the New Zealand Government.  Cost of new borrowing is less than 6%.

Achieved.

Average cost of borrowing was 4.31%.

Tender efficiency: Average domestic bond tender cover ratio.  Average tender cover ratio is greater than 2.

Achieved.

Average cover ratio was 2.97 times.

Tender efficiency: Average range of successful bids in domestic bond tenders.  Average range of successful bids is less than 5 basis points.

Achieved.

Average range was 1.91 basis points.

Funding risk: The nearest bond maturity will be at least 50% funded from NZDMO's holdings of cash and short-term liquid assets within six months of maturity, and fully funded within three months.  Funding target. Target met.
Compliance with risk management policies and parameters for portfolio management and debt issuance. No more than four breaches.

Achieved.

One liquidity policy breach.

Value-added from management of the Crown's debt and related financial assets to meet targets for tactical portfolios. See note on Value-added from management of the tactical portfolios below.  $40 to $60 million.

Not achieved.

Value-added was $32.720 million. This was a result of NZDMO's decision to conserve cash following the two major Canterbury earthquakes and changes to funding risk policy.

Average VaR for the tactical portfolios, at a confidence level of 95%.  See note on Average VaR below.  Average monthly VaR is less than $1.400 million.

Achieved. 

Average monthly VaR was $840,000. 

Losses incurred from the credit-related sale of securities, or from default by a counterparty. No losses. No losses. 
Number of settlement errors, and financial value of losses arising from settlement errors.  No more than 12 errors; losses do not exceed $10,000.

Achieved. 

Three settlement errors, with no cost. 

Cost - Permanent Legislative Authority Funding for NZDMO
2010
Actual
$000
Administration of Crown Borrowing PLA 2011
Actual
$000
2011
Main Estimates
$000
2011
Supp. Estimates
$000

Administration of Crown Borrowing PLA:




5,161 Expenses 4,931 5,526 5,231
 

Funded by:

     
5,059 Revenue Crown 4,814 5,428 5,138
102 Other revenue 117 98 93

Administration of Derivative Transactions PLA:




1,249 Expenses 1,077 1,258 1,092
 

Funded by:

     
1,227 Revenue Crown 1,055 1,236 1,073
22 Other revenue 22 22 19

Administration of Investment of Public Money PLA:




373 Expenses 671 320 803
 

Funded by:

     
366 Revenue Crown 657 316 791
7 Other revenue 14 4 12

Expenditure in the Administration of Crown Borrowing PLA was $300,000 (6%) under Supplementary Estimates owing to lower foreign legal fees owing to exchange rate movements. Expenditure in the Administration of Investment of Public Money PLA was $132,000 (16%) under Supplementary Estimates owing to lower registry and custodial charges owing to a lower demand for KiwiBonds than forecast and exchange rate movements.

Notes:

Aggregated performance targets for PLAs

  • Performance targets for Administration of Crown Borrowing PLA, Administration of Derivative Transactions PLA and Administration of Public Money PLA have been aggregated. The performance targets were specified as a total for activity across these output classes because this provided a more meaningful measure of the outputs produced by NZDMO.

Compliance with risk management policies - performance measure

To improve transparency, the 2010/11 target explicitly identifies the number of breaches considered acceptable under existing NZDMO policy.

Value-added from management of the tactical portfolios meets target level

NZDMO derives the value-added figure from its management reporting, which is calculated on a different basis from external Crown financial statement reporting. The "tactical" portfolios are those where NZDMO is able to conduct discretionary transactions to manage risks: specifically, the liquidity, departmental and FX portfolios.

NZDMO values its portfolio(s) by the commonly-used methodology of calculating net present values from all future cash flows using zero-coupon discount curves which are generated at least daily from current market data. Generally, no counterparty credit spreads are applied to the curves.

NZDMO uses current spot FX rates to translate foreign-currency net present values to New Zealand dollars. The value-added measure is primarily used to compare current performance against historic performance. Historic performance helps guide the establishment of future targets, which are set annually taking into account changes in the external environment.

Average VaR - performance measure

The Minister of Finance has agreed to a limit of $14 million for average monthly VaR across the whole of NZDMO's operations. NZDMO's performance target for the tactical portfolios is set at 10% of the total limit, or $1.400 million.

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