Part 3: How public entities manage and govern financial assets

3.1
In this Part, we summarise the main management, governance, and reporting practices of public entities that hold portfolios of financial assets. We also discuss the use of derivatives in the public sector.

Financial assets of 14 selected public entities

3.2
We reviewed 14 selected public entities that together hold about 65% of all financial assets in the public sector.

3.3
So that we could summarise their management and governance practices, we grouped the entities into four groups:

• Crown financial institutions (CFIs);
• special-purpose entities (SPEs);
• universities; and
• local authorities.

3.4
We reviewed:

• publicly available materials such as annual reports, financial statements, investment policies, public meeting agenda, statutory reviews, organisation charts, investment management agreements, long-term plans, and performance reports;
• public entities' internal documents such as meeting minutes, investment policies, remuneration structures, lists of holdings, memoranda, role descriptions, term sheets, and committee terms of reference; and
• other information supplied in interviews and by email.

3.5
Because receivables are managed and governed differently from other financial asset classes, these were not included in our review of the 14 entities.

Crown financial institutions

3.6
ACC, the Government Superannuation Fund, and the NZSF are CFIs that hold large portfolios of financial assets.¹⁵ CFIs tend to be long-term investors with small cash holdings.

3.7
Figure 9 shows the value of these CFIs' financial assets in 2014, the allocations in the various financial asset classes, and the CFIs' main reasons for holding the assets.

Figure 9
Amount, type, and reasons for holding financial assets – Crown financial institutions

	New Zealand Superannuation Fund	Accident Compensation Corporation	Government Superannuation Fund
Total financial assets, excluding receivables	$27.6 billion	$28.0 billion	$3.8 billion
Financial asset allocations
Cash and cash equivalents	14%	2%	7%
Debt securities	26%	64%	17%
Listed equity	41%	31%	59%
Unlisted equity/private equity or other	19%	3%	17%
Main reasons for owning financial assets
Working capital needs
Funding capital expenditure projects
Backing specific current or future liabilities
Supporting economic development projects
Subsidy of revenue, including rates

3.8
In these CFIs, the largest asset classes are debt securities and listed equity shares. ACC is also a substantial holder of domestic debt securities. The main reason for holding financial assets is to help pay for a specific set of current or future liabilities – pensions, superannuation, or accident compensation costs.

Special-purpose entities

3.9
Special-purpose entities (SPEs) include New Zealand Venture Investment Fund Limited, Public Trust, Te Tumu Paeroa, the New Zealand Debt Management Office, and Housing New Zealand Corporation. The value of the SPEs' financial assets is far less than the CFIs' financial assets. SPEs also have different financial asset allocations, reflecting the different objectives for their financial asset portfolios.

3.10
Figure 10 shows the value of the financial assets held by SPEs in 2014, the allocations in the various financial asset classes, and the SPEs' main reasons for holding the assets.

Figure 10
Amount, type, and reasons for holding financial assets – special-purpose entities

	New Zealand Venture Investment Fund Limited	Public Trust	Te Tumu Paeroa	New Zealand Debt Management Office	Housing New Zealand Corporation
Total financial assets, excluding receivables	$0.12 billion	$0.54 billion	$0.10 billion	$18.0 billion	$0.70 billion
Financial asset allocations
Cash and cash equivalents	9%	69%	39%	25%	89%
Debt securities	0%	31%	29%	21%	8%
Listed equity	0%	0%	2%	0%	0%
Unlisted equity/private equity or other	91%	0%	30%	54%	3%
Main reasons for owning financial assets
Working capital needs
Funding capital expenditure projects
Backing specific current or future liabilities
Supporting economic development projects
Subsidy of revenue, including rates

3.11
The largest asset classes the SPEs held were cash and unlisted shares and private equity.

3.12
Most of New Zealand Venture Investment Fund Limited's financial assets were unlisted shares and private equity investments designed to help New Zealand companies with start-up funding. The greater part of Housing New Zealand's financial assets comprised short-term cash and money-market investments to help fund day-to-day maintenance and housing development projects (particularly in Christchurch). Public Trust's cash assets mostly reflected short-term deposits from its trust or estate clients. For Te Tumu Paeroa, social returns are as important as financial returns, reflecting an economic development perspective.

3.13
The New Zealand Debt Management Office's other financial assets include significant advances to other public entities, such as the Reserve Bank of New Zealand and the Ministry of Health.

Universities

3.14
The tertiary education institutions we looked at were the University of Canterbury and University of Otago.

3.15
Figure 11 shows the value of the two universities' financial assets held in 2014, the allocations in the various financial asset classes, and their main reasons for holding the assets.

Figure 11
Amount, type, and reasons for holding financial assets – universities

	University of Canterbury	University of Otago
Total financial assets, excluding receivables	$0.21 billion	$0.33 billion
Financial asset allocations
Cash and cash equivalents	100%	43%
Debt securities	0%	17%
Listed equity	0%	40%
Unlisted equity/private equity or other	0%	0%
Main reasons for owning financial assets
Working capital needs
Funding capital expenditure projects
Backing specific current or future liabilities
Supporting economic development projects
Subsidy of revenue, including rates

3.16
The two universities' asset classes are clearly defined by their needs. A large proportion of the University of Otago's financial assets are held in a foundation trust, used for funding scholarships and research. In contrast, the University of Canterbury's financial assets are used mainly for working capital and funding capital expenditure. The University of Canterbury also holds some unlisted equity but in the context of this analysis it is immaterial.

Local authorities

3.17
The local authorities we looked at were Auckland Council, Dunedin City Council, New Plymouth District Council, and Otago Regional Council.

3.18
Figure 12 shows the value of their financial assets held in 2014, the allocations in the various financial asset classes, and their main reasons for holding the assets.

Figure 12
Amount, type, and reasons for holding financial assets – local authorities

	Auckland Council	Dunedin City Council	New Plymouth District Council	Otago Regional Council
Total financial assets, excluding receivables	$1.66 billion	$0.15 billion	$0.12 billion*	$0.11 billion
Financial asset allocations
Cash and cash equivalents	17%	30%	37%	46%
Debt securities	7%	11%	3%	3%
Listed equity	66%	23%	27%	51%
Unlisted equity/private equity or other	10%	36%	33%	0%
Main reasons for owning financial assets
Working capital needs
Funding capital expenditure projects
Backing specific current or future liabilities
Supporting economic development projects
Subsidy of revenue, including rates

* The total for New Plymouth District Council excludes a farming investment with a 2014 value of about $0.13 billion.

3.19
For these public entities, the largest asset classes are listed and unlisted equity. Auckland Council stands out as having large holdings of listed shares (including significant investments in Auckland International Airport Limited held by its investment subsidiary Auckland Council Investments Limited).

3.20
New Plymouth District Council, as part of its Perpetual Investment Fund, also owns a Tasmanian dairy and pastoral farming investment with a 2014 value of about $0.13 billion. The Council is currently in the process of selling this investment.

3.21
In 2014, Otago Regional Council, through its subsidiary Port Otago Limited, owned listed shares in Lyttelton Port Company Limited with a value of $50.6 million. In September 2014, these shares were sold to Christchurch City Holdings Limited.

3.22
Apart from working capital needs, the main use of financial assets is to subsidise local authority rates.

Responsible investment practices

3.23
Responsible investment practice looks at more than financial risks and value drivers. Public entities with investment portfolios that practise responsible investment also take into account environmental, social, and/or ethical considerations when researching, analysing, selecting, and monitoring investments.

3.24
All three CFIs, Public Trust, and the University of Otago have responsible investment policies. ACC, the Government Superannuation Fund, and the NZSF have signed the United Nations' Principles for Responsible Investment.¹⁶

3.25
As an example, ACC's Ethical Investment Policies mean that ACC:

• does not invest in companies that carry out activities that "are repugnant to the laws of New Zealand or exhibit corporate behaviour that seriously breaches ethical/responsible investment standards"; and
• will engage with companies that have serious environmental, social, or governance problems to modify corporate behaviour and improve performance in relation to ethical matters.¹⁷

3.26
A 2015 report by the Responsible Investment Association Australasia showed that ACC, the Government Superannuation Fund, and the NZSF were leaders in responsible investment in New Zealand. The report noted that, in 2014, $63.5 billion of assets was managed under responsible investment policies in New Zealand. ACC and the NZSF held about 86% of these assets.¹⁸

Three stages of managing and governing financial assets

3.27
The process of managing a portfolio of financial assets is an iterative one that involves three stages – design, implement, and monitor.

3.28
In the design stage, the public entity selects a portfolio to meet its objectives after considering the range of investments available and the way these investments can be combined. Investment principles (or beliefs) that underlie the portfolio management approach are agreed and investment policies (such as the Statement of Investment Policies and Objectives) are written and adopted.

3.29
In the implement stage, assets are bought or sold to put the design decisions into effect.

3.30
When a portfolio is in place, activities in the monitor stage include periodically assessing how well the portfolio is performing versus the objectives of the entity. If the performance of the portfolio is not in line with expectations, the investment environment changes, or objectives change, it might be appropriate to revisit the design or implement stages.

3.31
Alongside these three stages, the process of allocating governance responsibilities, authorities and accountabilities across an organisation holding financial assets also needs to be designed, implemented and monitored. The optimal governance structure will depend on the size and complexity of a portfolio, the purpose for which the assets are being held, the range of management services that can be internally resourced or outsourced, as well as the costs of those services.

3.32
When a governance structure is in place, it might be appropriate to revisit the structure periodically or in response to material changes in the size of the portfolio, the purpose for which it is being held, or the range of alternative models available.

What is good practice?

3.33
There is no set standard for judging whether management and governance processes are good practice or not, because practices vary with the scale, complexity, and purpose of the portfolio.

3.34
Consistent with the principle that "prudence is process", we looked at the design and operation of entities' processes for managing and governing their portfolios of financial assets. We did not look at the decisions that management or governors made about their portfolio, nor the details about the specific assets held.

3.35
Figure 13 sets out the attributes that we consider should be looked at to determine how well a portfolio management process supports responsible and transparent decisions.

Figure 13
Attributes of good practice for managing and governing financial assets

The three stages	Category	Attributes
Design	Objectives and planning	Consistency of investment objective with portfolio purpose Consistency of the strategic asset allocation with the investment objective Alignment of governors' tenures with the objectives and complexity of the fund Completeness and apparent justification for the set of beliefs Apparent rigour of any performance self-assessment processes
	Legislation	Awareness of relevant legislation and regulations Appropriateness of systems in place for maintaining compliance
	Governing bodies	Governors' familiarity with duties and authorities Appropriateness of the size of the membership Alignment of governors' tenures with the complexity of the process Consistency of skills and experience (in conjunction with any advisor) with the tasks and authorities Completeness and justification for the set of investment beliefs Apparent rigour of any performance self-assessment processes
Implement	Internal management	Internal managers' cognisance of duties and authorities Appropriateness of the sizes of committees (if any) Independence (potential for bias in decision-making) Consistency of skills and experience (in conjunction with any advisor) with the duties and authorities Extent to which accountabilities, performance measures, and remuneration reinforce alignment of interests
	External management	Formality and completeness of contracts, objectives, and guidelines Rigour of manager selection processes Extent to which accountabilities, performance measures, and remuneration reinforce alignment of interests
	Process	Sufficient frequency of face-to-face meetings Use of a rolling look-ahead work agenda Consistency of governors' and internal managers' actions with their roles
Monitor	Reporting	Capture and assessment of performance relative to standards Little potential for bias in reported returns Extent to which frequency and content of reporting meets the needs of governors and stakeholders Consistency of performance data/measures with original objectives Consistency of investment horizon with that adopted by governors Appropriate investment knowledge and skills
	Transparency	Comprehensiveness of published information on financial assets and the investment management process Frequency, ease, and accessibility of the information

Source: Fidato Advisory Limited.

3.36
The three portfolio management and governance stages are interrelated. Although many of the categories and attributes apply to one particular stage, they will influence the other stages. Some attributes will also apply to one or more stages – for example, the alignment and consistency of skills and experience with responsibilities.

Reviewing practices in the 14 public entities

3.37
To assess the extent to which the 14 public entities achieved good practice in the three stages of managing and governing financial assets, we used interviews and other information. Taking into account the size, complexity, and purpose of the entity's financial asset portfolio, we applied the following scale to each of the eight categories shown in Figure 13:

• Falls short of achieving good practice – where material shortcomings were found in the attributes we reviewed;
• Just achieves good practice – where shortcomings were found in the attributes we reviewed but were not considered material to the management and governance of the portfolio; and
• Clearly achieves good practice – where few shortcomings were found in the attributes we reviewed.

3.38
Figure 14 shows the proportion of the categories of management and governance that were found to fall short of, just achieve, or clearly achieve good practice.

Figure 14
How well the 14 public entities practised good management and governance of financial assets

	Overall percentage achieved in the eight categories
Clearly achieves good practice	67%
Just achieves good practice	28%
Falls short of achieving good practice	5%

Source: Fidato Advisory Limited.

3.39
As Figure 14 shows, most of the entities either clearly achieved or just achieved good practice within the eight categories reviewed.

3.40
Where an entity had a category that fell short of achieving good practice we intend to follow up these matters with the entity.

3.41
Figure 15 shows how the four entity groups performed in each of the categories.¹⁹

Figure 15
Review of financial asset management and governance practices in the four groups of entities

Source: Fidato Advisory Limited.

3.42
All four groups had strengths in preparing objectives, understanding legislation, and procedures for buying and selling financial assets. The entities in the CFI group were assessed as demonstrating the highest standards overall.

3.43
Some examples of the strengths in the 14 public entities include clear and well-defined:

• processes for selecting and monitoring managers;
• documentation and processes for trading and monitoring credit and liquidity risk;
• processes for engaging with external managers, external advisors, and independent service providers; and
• policies with clear objectives and a focus on risks and their management.

3.44
We also found examples of CFIs co-operating and sharing information well. For example, ACC, the Government Superannuation Fund, and the NZSF met regularly and have agreed to share responsible investment information and resources. ACC has developed a new investment database in collaboration with the NZSF.

3.45
However, we also found room for some improvement in the four groups. For example:

• Although there is normally considerable reporting about management activities, portfolio composition, and performance of financial assets, the clarity and usefulness of that information in many of the entities could be improved.
• The quality and completeness of investment policies varied considerably. Some entities could benefit from giving more thought to the connection between their operational objectives and their financial asset objectives. The entity's tolerance for risk was also often not documented.
• Some knowledge and skills gaps were observed in the governing bodies of those local authorities and universities where, for example, whole-of-council committees are used to oversee their investment portfolios. These investment portfolios are used to support the entities' core activities.

3.46
Improving transparency through better reporting and communication with stakeholders (including the public) about the objectives and performance of an entity's financial assets is about improving the relevance, rather than the amount, of information. For example, generally accepted accounting practice requires entities to report a lot of information about financial assets in their audited financial statements − all of it relevant but also, at times, highly technical. The challenge for entities is to make financial asset information more accessible, understandable, and useful to stakeholders.

3.47
Two of the three CFIs we reviewed noted that having a better relationship with the Treasury could help to improve the Treasury's capability to monitor these entities' activities. This was particularly important with the increasing sophistication of CFIs' activities in areas such as the use of derivatives. CFIs suggested more face-to-face contact to better understand the CFI's activities and steps to reduce staff turnover in the monitoring team. The Treasury believes that it has good working relationships with all of the CFIs, which include an appropriate amount of contact. It remains committed to rebuilding its CFI monitoring skills and expertise after some turnover of staff in early 2015.

3.48
A common theme in the 14 entities was the difficulty of attracting and retaining suitably skilled and experienced management and governors and the associated problem of "key person risk". We accept that this is a difficult area in practice. However, robust succession planning, realistic retention strategies, and sharing information between entities can all help to reduce these risks.

Financial asset governance of investment portfolios used to support core service delivery needs

3.49
Public entities with investment portfolios that support operational activities face a risk that these assets can become isolated from the entities' general management and governance. Local authorities, in particular, also need to balance the tension between involving their communities in governance and decision-making, and having the right investment skills and experience to manage financial assets.

3.50
We found that, where investment portfolios were being used to support other core activities, expertise in investment and capital markets and oversight structures for governing portfolios of financial assets were sometimes limited.

3.51
For example, two of the four local authorities with investment portfolios fell short of good practice in their governing bodies. The one tertiary education institution that clearly achieved good practice holds mostly cash assets.

3.52
Further work to support governors in these circumstances could include improving reporting and communication with stakeholders and making more use of independent expertise.

3.53
More innovative thinking about how best to gain the necessary expertise and structures to govern financial assets might also be required. For example, in the United States, "Local Government Investment Pools" combine the financial assets of various local governments to obtain greater efficiencies and expertise and better structures.

3.54
The pooling of financial assets is similar to the collective provision of debt financing that already takes place among local authorities.

Recommendation 1

We recommend that those public entities holding investment portfolios that support their core operational activities regularly assess how they can strengthen the skills and capabilities for governing their financial assets.

The use of derivatives in the public sector

3.55
All financial assets and liabilities have investment features that determine the set of benefits or costs that are expected to arise in the future. For example, the interest rate, the currency, the volatility, the financial strength of the parties, the timing, and/or the value of payments.

3.56
Derivatives are contractual agreements between two parties under which cash payments are made, depending on how one or more of these investment features (or some other market-based reference rate) moves over time.

3.57
Because the amount of the cash paid depends on the amount of the movement, derivatives can be used as:

• protection from unexpected movements in the investment features of an asset or liability ("hedging");
• a proxy for investing in the actual asset or liability –"investing synthetically", "increasing (or decreasing) exposure" or "tilting"; and
• a bet for, or against, future movements in an investment feature or reference rate ("speculation").

3.58
In explaining how derivatives can both protect and increase risk, The Economist quoted an eminent (unnamed) economist as saying:

Derivatives are like a car with four wheel drive. Four wheel drive makes driving safer, but it also means people will be more likely to drive in the snow.²⁰

3.59
The value of derivative contracts can vary with changes in the underlying investment feature or reference rate. If the contract's payments currently benefit the holder, the derivative is termed "in-gain" and reported in the financial statements as a financial asset. If the contract's payments do not currently benefit the holder, the derivative is termed "in-loss" and reported in the financial statements as a financial liability.

3.60
Where derivatives are used to protect against unexpected movements in the value or investment features of an asset or liability, the value of the derivative will usually rise as the value of the investment feature falls (and the other way around). Therefore, understanding the value of these derivatives also requires an understanding of how the underlying investment features move.

3.61
In all of central government, a little more than half of all derivatives in 2014 were in-gain and recorded as financial assets.²¹ The market value of these in-gain derivatives changes regularly but has increased from about $1.6 billion in 2008 to about $4.2 billion as at 30 June 2014. The 2015 FSG show that the value of in-gain derivatives declined during 2014/15 to about $3.0 billion, highlighting the potential volatility that surrounds their use and market value.

3.62
In local government, the value of in-gain derivatives has increased, on average, by about 13% a year from 2008 to $143 million in 2014.

The use of derivatives in the public sector is increasing

3.63
Figure 16 shows the changes in the notional value²² of all central government derivatives since 2008.

Figure 16
Changes in the notional value of central government derivatives

Source: Drawn from the Financial Statements of the Government.

3.64
The notional value of all of central government's derivatives has significantly increased, by an average of 14.2% each year from 2008 to 2014. The greatest level of activity is in foreign exchange and interest-rate swaps. The 2015 FSG show that the notional value of derivatives has increased significantly during the last year, to about $206 billion.

3.65
Although local government entities reported the fair (or carrying) value of their derivatives, we could not see a complete picture of the notional value of derivatives. This is because notional value is required to be reported only in certain circumstances. Based on the number of entities reporting fair values in 2014, 42% of all local government entities held in-gain derivatives, slightly down from 44% in 2008.

3.66
Most of the increase in the use of derivatives by central government entities has arisen from the investment practices of the NZSF, ACC, and the Reserve Bank of New Zealand, which use derivatives as a cost-effective way to protect investments or carry out asset allocation strategies. For example:

• In the last few years, the NZSF has substantially increased its use of credit default swaps to manage the risks of counterparties defaulting on debt obligations held by the fund. The NZSF also uses total return swaps as an alternative to investing directly in actual assets (such as shares) to meet its asset allocation needs.
• ACC has used interest-rate swaps to protect its Reserves Portfolio assets from adverse changes in interest rates.
• The Reserve Bank of New Zealand uses cross-currency swaps to protect against foreign exchange movements associated with funding most of the assets held for foreign reserves management. The Bank also uses foreign exchange swaps as an integral part of its dollar liquidity management operations.²³

3.67
Figure 17 shows the increasing use of different types of derivatives by ACC and the NZSF, taken from their annual reports in 2008 and in 2014.

Figure 17
Types of derivatives used by the Accident Compensation Corporation and the New Zealand Superannuation Fund

Accident Compensation Corporation		New Zealand Superannuation Fund
2008	2014	2008	2014
Interest-rate swaps Forward foreign currency contracts	Interest-rate swaps Forward foreign currency contracts Credit default swaps Cross-currency interest-rate swaps Futures contracts – long Futures contracts – short Options	Forward foreign exchange contracts Futures contracts Equity swaps Commodity swaps Options	Forward foreign exchange contracts Cross-currency swaps Volatility swaps Longevity contingent swaps Futures contracts Total return swaps – equity Total return swaps – bonds Credit default swaps Insurance linked swaps Interest-rate swaps Other OTC swaps Options

Source: Annual reports of ACC and the NZSF.

Some of the challenges in using derivatives

3.68
Although derivatives can be cost-effective and easy to convert into cash, the greater range and complexity of contracts can increase the risk of default by either party, errors in processing and reporting, and intentional misuse.

3.69
To better understand these challenges, we spoke with the NZSF about the risks it faces and how it manages those risks. Because derivatives are settled regularly in cash, the main risk that the NZSF faces using derivatives is not having enough money to pay another party when required − liquidity risk.

3.70
The NZSF manages liquidity risk through robust processes, systems, and controls but also by ensuring that enough money is available (termed a Minimum Liquidity Requirement) to pay other parties in the event of a two-day "crisis".

3.71
For larger and longer crises (such as another global financial crisis), the NZSF has plans to ensure that more of its assets can be converted into cash as required (known as the "liquidity replenishment system"). The NZSF expects the potential loss in fund value during a global financial crisis to be largely the same, regardless of whether it uses derivatives. However, the way derivative gains or losses are paid in cash could expose the fund to more liquidity risk than if the investment was limited to only shares or bonds (where a reduction in values would not immediately lead to a demand for cash).

3.72
Although derivatives are used to protect against day-to-day risks, such as currency movements, the NZSF does not use derivatives to help protect the fund from a catastrophic or global financial crisis. The NZSF believes that the opportunity cost (in lost returns) to the fund outweighs the benefit of this type of insurance.

3.73
Counterparty risk, or the risk that the other party to the contract fails to pay money owed to the NZSF (for example) is also important in derivatives. Figure 18 shows that, at a whole-of-government level, the credit risk of the other parties that central government is dealing with in in-gain derivatives from 2008 to 2014 has increased.

Figure 18
Changing credit exposure of central government's "in-gain" derivatives

Note: Standard & Poor's uses the AA, AA, and A ratings when assessing credit risk. Some derivatives have other credit ratings, and some do not need to be rated.
Source: Financial Statements of the Government.

3.74
Figure 18 shows that, for all of central government's in-gain derivatives, the risk of a counterparty not paying the Government when required has increased. The 2015 FSG show that this risk has reduced since 2014, but remains greater than in 2008. One possible reason for this increase is the re-rating of some of the larger financial institutions after the global financial crisis, many of which are counterparties in central government derivative contracts.

3.75
Figure 18 and the increased value of derivatives in central and local government suggest an increasing exposure to risk. However, credit exposure is only one aspect of derivative risk, and increasing activity does not necessarily mean increased exposure to risk. For example, one derivative contract might be entered into to offset another derivative contract or an asset, so the net exposure could be neutral.

3.76
Because of the number and variety of derivatives in the public sector, assessing the current and future exposure to risk is beyond the scope of this report.

---

15: "Crown financial institutions" is a term used to describe five public entities with specific responsibilities for managing and investing large financial assets – the NZSF, the Government Superannuation Fund Authority, the Earthquake Commission, ACC, and the National Provident Fund (a statutory board).

16: See the United Nations Principles for Responsible Investment website, www.unpri.org.

17: See ACC's 2014 annual report, page 124.

18: See the Responsible Investment Benchmark Report 2015 New Zealand, pages 4-5 and 14, available at the Responsible Investment Australasia website, www.responsibleinvestment.org.

19: For clarity, we combined the legislation and objectives and planning categories, and the internal and external management categories.

20: See the 2008 blog post Wither the derivative? at www.economist.com/blogs.

21: Those in-loss derivatives, recorded as financial liabilities, are not included in this analysis.

22: Notional value refers to the principal or contract amount on which the derivative contract is based, including both in-gain and in-loss derivatives. It is a better indicator of derivative activity than the carrying value in the financial statements.

23: For more information, see the Reserve Bank of New Zealand's 2015 annual report, pages 81-82.