Appendix: Our recommendations

Effectiveness of the New Zealand Debt Management Office.

Recommendation 1
We recommend that NZDMO include as authorised in its Portfolio Management Policy, only instruments or currencies which NZDMO has full and final approval, functional capacity, and current skills to transact.

Recommendation 2
We recommend that NZDMO be explicit that Crown financial policy considerations have either been incorporated into NZDMO’s Portfolio Management Policy or completely removed from the policy, to clarify NZDMO’s role in relation to Crown financial policy.

Recommendation 3
We recommend that NZDMO review and clarify the NZDMO Advisory Board’s terms of reference with the Secretary to the Treasury with respect to assurance versus strategic advice, and clarify the role of the Treasury’s Risk Management Committee and its relationship to NZDMO’s Advisory Board.

Recommendation 4
We recommend that NZDMO review the degree of assurance provided by the current scope of the external audit, and determine what additional assurance could be obtained from a suitably qualified internal audit resource.

Recommendation 5
We recommend that NZDMO update its Portfolio Management Policy to synchronise the policy’s principles and management strategies with current business practices and goals. In particular, consideration should be given to expanding the Portfolio Management Policy by including the policies used to support the principles and limits in the document while retaining a Portfolio Management Policy which is clear and understandable.

Recommendation 6
We recommend that NZDMO progress the application of benchmarks that allow the matching explicitly or notionally of similar assets and liabilities.

Recommendation 7
We recommend that NZDMO review the mechanisms available to actively engage financial market participants in order to promote a well-functioning government debt market.

Recommendation 8
We recommend that NZDMO update its Portfolio Management Policy to reflect that the tactical activity currently being undertaken is asset and liability management activity and foreign exchange intermediation, rather than primarily outright tactical trading.

Recommendation 9
We recommend that NZDMO manage risks in its quasi-tactical advances desks within NZDMO’s risk limits for overall tactical activity (asset and liability mismatch management).

Recommendation 10
We recommend that NZDMO continue to seek improvements to its market risk modelling by considering implementation of the historical simulation methodology, and by producing periodic reports showing graphical time series of daily Value at Risk versus actual profit and loss.

Recommendation 11
We recommend that NZDMO implement an up-to-date credit risk methodology, particularly with regard to potential exposure management to address the inherent conservatism in the current methodology. Potential credit exposure for each counterparty should be calculated for all outstanding transactions and incorporated into a credit limits framework.

Recommendation 12
We recommend that NZDMO manage concentration risk in its portfolio exposures by implementing a limits framework of maximum exposures (as a percentage of total portfolio exposure) by counterparty type, credit rating, and country.

Recommendation 13
We recommend that NZDMO immediately remove options from the approved instrument schedule of its Portfolio Management Policy, and periodically review the lists of approved financial instruments (that is, schedules B, C and D of the Portfolio Management Policy) and update as required.

Recommendation 14
We recommend that NZDMO update its list of approved instruments to reflect only those instruments which NZDMO has the functional capability to process and which have been recently traded (for example, within the last two years).

Recommendation 15
We recommend that NZDMO review the term limitation formal authority across all the financial products that the NZDMO Treasurer can transact, and seek to apply a term limit that is based upon Portfolio Manager seniority and potential economic outcome.

Recommendation 16
We recommend that NZDMO consider expanding the suite of daily management reports to include portfolio composition views. These could include an analysis of portfolio assets and liabilities by maturity, stated in dollars and/or risk sensitivities.

Recommendation 17
We recommend that NZDMO include an overview of the current balance sheet composition of the tactical portfolio in monthly reports to senior management and NZDMO’s Advisory Board to better convey the extent of matching of assets and liabilities (and the associated residual risks) within this portfolio.

Recommendation 18
We recommend that NZDMO refine its value added performance measure (RAPM) to better report the diff erent components of market risk taking returns and the one off gains achieved by borrowing funds at the New Zealand Government rate and reinvesting them in marketable securities (which attract a higher rate). NZDMO should also mark-to-market all assets, liabilities, and derivatives at the appropriate yield curves which include the credit spread for each issuer.

Recommendation 19
We recommend that NZDMO use, where appropriate, the valuation methodologies developed for external reporting under New Zealand equivalents to International Financial Reporting Standards for its management reporting.

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