Part 3: Assurance mechanisms used for governance

Effectiveness of the New Zealand Debt Management Office.

Our expectations and overall findings

We expected that NZDMO’s governance structure would include:

  1. a legal framework to facilitate its management of the Government’s debt, cash, and marketable securities/assets;
  2. a clear and concise policy framework that ensures implementation of its strategy and risk management objectives;
  3. an institutional framework that ensures clear roles and accountabilities to carry out its activities;
  4. a reporting framework that provides its management, the Treasury’s senior management, and NZDMO’s Advisory Board with adequate information and assurance that NZDMO’s activities comply with its policy framework; and
  5. e. quality assurance practices specific to NZDMO.

We found that NZDMO’s governance structure included:

  1. a legislative framework that allows it to borrow, invest, and hedge financial risk (using derivatives), through delegation arrangements from the Minister of Finance, within an acceptable operating framework;
  2. a policy framework that addresses all key financial risk management issues but requires some updating to reflect current practice;
  3. an appropriate structure to enable it to be held accountable for its current activities, but with a lack of clarity about its role in wider Crown financial policy;
  4. an adequate reporting framework with respect to governance, but the need for some improvement of its performance and strategy reporting; and
  5. assurance practices consistent with similar entities, with the exception of an internal audit function within NZDMO.

We concluded the assurance mechanisms used for governance were adequate and effective for managing NZDMO’s key risks and activities.


The head of NZDMO is its Treasurer. The NZDMO Treasurer reports to the Treasury’s Deputy Secretary responsible for the Macroeconomic Group, who in turn reports to the Secretary to the Treasury who is accountable to the Minister of Finance.

The Treasurer has three direct reports within NZDMO – the Head of Portfolio Management, Head of Risk Policy and Technology, and Head of Accounting and Transactional Services. The organisational structure of NZDMO is shown in Figure 3.

Figure 3
Organisational structure of the New Zealand Debt Management Office

Figure 3.

Source: The Treasury

NZDMO’s organisational structure has defined responsibilities and accountabilities that ensure segregation of key duties, notably with separation of deal execution activities (Portfolio Management), an independent middle Office risk analysis function (Risk Policy and Technology), and settlements/accounting (Accounting and Transactional Services). There is an established risk management culture within the management team that is supported by a body of policies, including ethical guidelines, codes of conduct, and dealing limits for the Portfolio Management Group.

Legal framework

Most of the functions of NZDMO are fulfilled through the exercise of statutory powers contained in the Public Finance Act 1989 (the Act). The Act establishes the legal framework for the use of public financial resources, and includes authorities and controls for:

  • the operation of bank accounts;
  • the investment of public money;
  • the raising, repayment, and conversion of loans and the issuing of securities;
  • the giving of guarantees and indemnities; and
  • entering into derivative transactions (or “contracts”).

While these authorities and controls are generally vested in the Minister of Finance, many have been delegated to the Secretary to the Treasury, with a chain of further sub-delegations to the NZDMO Treasurer and then to specified positions within NZDMO depending on the function.

In addition to the formal delegations, NZDMO’s risk framework is reinforced with further sub-allocation of responsibilities by the Head of Portfolio Management to staff based on their seniority and experience. This limits the transactions that staff may enter into with respect to borrowing, investing, and executing derivative transactions.

The Act defines derivative transactions very widely, including a number of products that NZDMO has never traded in (such as options, commodities, and credit default swaps). This wide mandate is narrowed by NZDMO’s Portfolio Management Policy (PMP). The PMP contains a list of financial instruments and currencies in which NZDMO is approved to transact by its Treasurer. Any changes to the PMP are communicated to NZDMO’s Advisory Board, the appropriate Treasury Deputy Secretary, and the Secretary to the Treasury through NZDMO’s monthly report.

While NZDMO is authorised to enter into practically any type of derivative transaction, Ministerial approval is sought before new currencies or instruments are added to the list of authorised instruments or currencies in the PMP. If NZDMO wishes to transact in a new currency or instrument, it prepares a business case for doing so and seeks the approval of the Minister of Finance. Before seeking this permission, NZDMO prepares a risk control document that identifies the risks associated with the product and the processes that will be put in place to manage those risks.

The Act gives the Minister of Finance the power to borrow in the name of the Crown. While this power cannot be delegated, the Minister of Finance has appointed Borrowing Agents to act on his behalf to borrow funds within the parameters of his borrowing programmes. Senior NZDMO staff are among the appointed Borrowing Agents.

The Act contains a permanent appropriation for the payment of all principal and interest in respect of any loan to the Crown. It also contains a permanent appropriation for the payment of expenses associated with the raising and management of loans and the issuing and management of securities.

The PMP lists options only as “approved in principle”. Forward Rate Agreements have not been recently transacted, and the current Treasury Management System (TMS) does not support them.

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.

Ownership of Crown financial policy

In Part 2 of this report, we describe NZDMO within the broader context of Crown Financial Policy.

The current decentralised, multi-responsibility approach to Crown financial policy has direct effects on NZDMO. It means that NZDMO does not have the mandate or capacity to further lead the implementation of an operationally co-ordinated Crown financial policy given NZDMO’s institutional and governance structure. It also means that there is ambiguity in NZDMO’s PMP about NZDMO’s role in translating Crown balance sheet and financial policy considerations into its debt management strategy. We noted reference to wider Crown balance sheet considerations within the financial risk technical appendix of NZDMO’s PMP.

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 Crown financial policy.

If Crown financial policy considerations are incorporated into the operational policy parameters, then those parameters should be monitored.

Governance oversight and independent review

NZDMO’s Advisory Board provides the Secretary to the Treasury with quality assurance on NZDMO’s activities, risk management framework, and business plan. The current Advisory Board contains skills gained as a senior partner in a major accounting firm, an adviser from a treasury and risk management firm, and a former Deputy Governor of the RBNZ. The other broader oversight function is provided by the Treasury’s Risk Management Committee, whose focus is Treasury-wide organisational risks such as human resources. A review of the role of the Risk Management Committee is planned for June 2007.

Role of the Advisory Board

Our review of documents and discussions with Advisory Board members confirmed that its role is primarily assurance oriented. Its key role is to confirm to the Secretary to the Treasury that NZDMO is operating within an appropriate policy and risk management framework. This role is consistent with those advisory boards of a number of similar sovereign debt managers internationally. The only observed variances are that some boards report or interact directly with the Minister of Finance.

The Advisory Board does not fulfil the function of a private sector board that, in addition to reviewing an entity’s risk management framework, may challenge or formulate the entity’s strategy and sometimes interact with management on operational decisions.

Any operational changes and strategic decisions made by NZDMO are reported to the Advisory Board for information purposes rather than for approval. International evidence suggests this approach is better practice as it avoids potential conflicts of interest for advisory board members with respect to transactional activity.

The high-level balance sheet and portfolio analysis provided by management to the Advisory Board is limited. Our discussions with the Advisory Board indicated that this may limit the review and analysis able to be undertaken by the Advisory Board of the information provided by management.

In recent years, the Advisory Board has not only been providing advice to the Secretary to the Treasury that NZDMO is operating within an appropriate policy and risk management framework, but has also been providing strategic advice as particular initiatives are considered by NZDMO and the Treasury.

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.

Internal audit function

NZDMO does not have an internal audit function. In terms of peer review, NZDMO is reliant on external audit, including periodic reviews that give more frequent reporting of control related issues.

It is considered good practice for treasury functions to receive regular internal audits, and we note that all central borrowing authorities in Australia have internal audit functions (although these are outsourced because of the level of expertise required).

There are potentially many advantages to having an internal audit function for an organisation such as NZDMO. For example, an internal audit function provides regular, systematic, and in-depth reviews of a range of issues, including determining compliance with policies and procedures. It also provides a conduit of information for senior management and the board. Internal audit can provide a source of ideas and another perspective for management, as well as creating momentum for change when it is required.

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.
page top