EXPLANATORY STATEMENT
Issued by the authority of the Treasurer
Commonwealth Inscribed Stock Act 1911, Loans Securities Act 1919 and the Financial Management and Accountability Act 1997
Directions relating to Commonwealth borrowing, securities lending and the investment of public money 2008
General Outline
The Directions provide guidance to certain officials of the Australian Office of Financial Management (AOFM) and the Reserve Bank of Australia (RBA) to whom the Treasurer has delegated powers to undertake borrowing, securities lending and investment of public money in the exercise of those powers.
Legislative Authority
The Treasurer, acting under section 51JA of the Commonwealth Inscribed Stock Act 1911 (CIS Act), section 5E of the Loans Securities Act 1919 (LS Act) and section 62A of the Financial Management and Accountability Act 1997 (FMA Act), signed the Directions on 13 July 2008.
The Directions are a legislative instrument for the purpose of the Legislative Instruments Act 2003. However, the Directions, as a ministerial direction, are not disallowable.
Date of Effect
The Directions commenced on the day they were signed by the Treasurer; that is 13 July 2008.
Background
The Commonwealth Securities and Investment Legislation Amendment Bill 2008 amended the CIS Act, LS Act and the FMA Act to enhance existing borrowing and investing powers of the Treasurer and to clarify the authority to undertake securities lending activities. It aims to ensure the efficient operation of Australia's financial markets.
Under the Acts, the Treasurer can delegate these powers to Government officials to undertake debt issuance and securities lending, undertake cash management and invest funds in financial assets. In exercising these powers, the officers must comply with directions provided by the Treasurer.
The Treasurer delegated his powers to officials of the AOFM and RBA on 13 July 2008.
Details of the Directions
Governance
The Directions require that officials exercising their powers under the Directions must comply with instructions given by the Secretary to the Treasury and/or by the Chief Executive Officer (CEO) of the AOFM. This allows the Secretary and the CEO to implement appropriate controls within the framework established by the Directions.
Commonwealth borrowing
The Directions set out the policy objectives of borrowing and debt issuance as being to maintain an active Treasury Bond market and to support the market in Treasury Bond futures contracts.
The Directions limit the maximum stock of Treasury Bonds on issue at any time to the face value of $55 billion.
The Directions also require that any borrowing by officials of the RBA under the Treasurer’s delegations must be in accordance with the Business Continuity plan of the AOFM.
Securities lending
The Directions set out the policy objective of securities lending activities as being to facilitate the efficient operation of the Treasury Bond market. Securities lending allows market intermediaries to borrow Treasury Bonds for short periods of time and helps them to make two-way prices.
The Directions specify assets eligible as collateral in securities lending transactions to include cash and/or financial assets specified in subsection 5BA(3) of the LS Act that is also of a kind accepted as collateral by the RBA in its open market operations.
Investment of public money
The Directions set out the policy objectives of investment made using the Treasurer’s investment powers in managing the daily balances in the Official Public Account and investing the proceeds of additional issuance of Treasury Bonds to maintain an active Treasury Bond market.
• In managing the Government’s day-to-day cash balance, priority is to be given to ensuring that the Government is able to meet its financial obligations when they fall due. Investments are to be in short term instruments with low credit risk.
• Investments of the proceeds of additional Treasury Bond issuance are to aim to provide returns that are commensurate with the debt service costs of the additional issuance while adopting a prudent approach to credit and interest rate risks.
The Directions specify classes of authorised investments within those authorised under the FMA Act.
The Directions provide that, in the event that an investment ceases to meet the specified credit rating requirements, they may continue to be held to maturity or until they can be sold at an acceptable price.