TREASURY

MANAGEMENT POLICY
June 2018

1
Table of Contents

Introduction ........................................................................................................................... 4
Purpose ................................................................................................................................ 4
General Policy Objectives ..................................................................................................... 4
Governance .......................................................................................................................... 5
Liability Management Policy .................................................................................................. 6
Objectives ......................................................................................................................... 6
General Policy ................................................................................................................... 6
Specific Borrowing Limits................................................................................................... 6
Security ............................................................................................................................. 7
Borrowing Mechanisms ..................................................................................................... 7
Debt Repayment ............................................................................................................... 7
The LGFA.......................................................................................................................... 7
Internal Borrowing ............................................................................................................. 8
Guarantees / contingent liabilities and other financial arrangements ................................. 8
Investment Policy .................................................................................................................. 9
General Policy ................................................................................................................... 9
Investment Mix ...................................................................................................................... 9
Equity Investments ............................................................................................................ 9
Property Investments......................................................................................................... 9
Loan Advances.................................................................................................................. 9
Development and Financial Contributions ....................................................................... 10
Financial Investments ...................................................................................................... 10
The LGFA........................................................................................................................ 11
Treasury Risk Management ................................................................................................ 12
Liquidity / Funding Risk ................................................................................................ 12
Interest Rate Risk ........................................................................................................ 12
Credit Risk ................................................................................................................... 12
Liquidity / Funding Risk ................................................................................................... 12
Interest Rate Risk ............................................................................................................ 13
Interest Rate Risk Control Limits ..................................................................................... 14
Counterparty Credit Risk ................................................................................................. 15
Legal Risk ....................................................................................................................... 16
Operational Risk .............................................................................................................. 17
Foreign Exchange Risk ................................................................................................... 17

2
 Concentration Risk .......................................................................................................... 17
Volatility Risk ................................................................................................................... 17
Carbon Credit Risk .......................................................................................................... 17
Treasury Performance ..................................................................................................... 17
Policy review ................................................................................................................... 18
Appendix 1: Glossary of terms ............................................................................................ 19
Appendix 2: Delegated Authorities ...................................................................................... 21
Appendix 3: Current approved interest rate instruments...................................................... 23

First adopted September 2017

Revision date: June 2018
Next review date: 2023
Document number: 4426754
Associated documents: -
Policy Owner: Finance

3
Introduction
1. The Kāpiti Coast District Council’s Treasury Management Policy comprises a liability
management policy and an investment policy, as required by the Local Government
Act 2002 (the Act).

2. Part 6, section 104 of the Act states that the liability policy must state the local
authority’s policies in respect of the management of both borrowing and other
liabilities, including interest rate exposure, liquidity, credit exposure and debt
repayment.

3. Part 6, section 105 of the Act states that the investment policy must state the local
authority’s policies in respect of investments, including the mix of investments, the
acquisition of new investments, procedures for managing and reporting investments
and assessment and management of risks.

Purpose
4. The Treasury Management Policy provides the framework for all of the Council’s
treasury management activities and defines key responsibilities and the operating
parameters within which treasury activity is to be carried out.

General Policy Objectives

5. This document identifies the policy of Council in respect of investment and liability
management activities. The Policy has not been prepared to cover other aspects of
Council’s operations, particularly transactional banking management, systems of
internal control and financial management. Other policies and procedures cover
these matters.

6. The objective of the Policy is to control and manage borrowing costs, investment
returns, liquidity requirements and risks associated with treasury management
activity.

7. Council is governed by the following relevant legislation:

• Local Government Act 2002, in particular Part 6 including sections 101,102,

104 and 105;
• Local Government (Financial Reporting and Prudence) Regulations 2014, in
particular Schedule 4; and
• Trustee Act 1956.

8. The Council is a risk averse entity, and wishes to minimise risk from its treasury
management activities. Interest rate risk, liquidity risk, funding risk and credit risk are
risks the Council seeks to manage, not capitalise on. Accordingly any activity that
may be construed as speculative in nature is expressly forbidden.

4
Governance
9. The Council has ultimate responsibility for ensuring that there is an effective policy
for the management of its treasury risks. In this respect the Council decides the level
and nature of risks that are acceptable. The Council is responsible for approving this
Treasury Management Policy and any changes to it required from time to time.

10. The authority to make or change the Policy has been delegated to the Operations
and Finance Committee. The Policy can be reviewed by other persons, and changes
recommended but the authority to make or change the policy rests with the
Operations and Finance Committee.

11. The Council may delegate its responsibilities under this Policy to its committees,
subcommittees and officers in accordance with its Governance Structure and
Delegations.

12. The full list of delegated authorities as they relate to the Treasury Management
Policy is attached as Appendix 2.

13. Treasury risk is minimised for the treasury activities by ensuring that there is
adequate segregation of duties among the core functions of deal execution,
confirmation, settling and accounting / reporting.

5
Liability Management Policy

Objectives
14. The Council’s liability management objectives in relation to borrowings are to:

• minimise borrowing costs within approved risk parameters;

• prudently manage the Council’s exposure to interest rate changes;
• ensure sufficient levels of liquidity to meet planned and unforeseen cash
requirements;
• prudently manage the Council’s credit exposure;
• monitor and report on the risk and the performance of debt portfolios against
predetermined limits and benchmarks;
• maintain a credit rating of at least A- from Standard & Poor’s.

General Policy
15. The Council’s liabilities comprise borrowings (internal / external) and various other
liabilities. The Council raises borrowings for the following primary purposes:

• General debt to fund the Council’s balance sheet, including working capital
requirements;
• Specific debt associated with ‘one-off’ projects and capital expenditure;
• To fund assets where their useful lives extend over several generations of
ratepayers;
• To invest in the Kāpiti Resilience Fund and the Kāpiti Growth Fund.

16. Any new borrowings or roll-over of existing borrowing needs to be budgeted for as
part of Council’s approved Long Term Plan or Annual Plan, or be subject to Council
approval. Debt will be repaid as it falls due in accordance with the applicable loan
agreement.

17. Any debt with a maturity beyond 12 years must be reported to the Operations and
Finance Committee at its next meeting.

Specific Borrowing Limits

18. In managing debt, the Council will adhere to the following targets and limits:

Item 1 Borrowing Borrowing

Target Limit

Net interest expense over total operating income < 10% < 20%

Net external debt over total operating income < 200% < 240%

Liquidity > 110% > 110%

1
Definitions of these and other terms are given in the glossary of terms attached as Appendix 1.

6
Security
19. Council’s external borrowings and interest rate risk management instruments will
generally be secured by way of a charge over rates and rates revenue offered
through a Debenture Trust Deed. Under a Debenture Trust Deed, Council’s
borrowing is secured by a floating charge over all Council rates levied under the
Local Government Rating Act. The security offered by Council ranks equally with
other lenders.

20. From time to time, and with Council approval, security may be offered by providing a
charge over one or more of Councils assets.

Borrowing Mechanisms
21. The Council is able to borrow through a variety of market mechanisms including
issuing stock / debentures and commercial paper, direct bank borrowing, the Local
Government Funding Agency (LGFA) or accessing the short and long-term debt
capital markets directly or indirectly. In evaluating strategies for new borrowing,
consideration should be given to the following:

• available rates and terms from lenders;

• the Council’s overall debt maturity profile;
• the outlook on future interest rate movements;
• consideration of counterparty credit risk by spreading borrowings across a
number of counterparties to avoid concentrations of credit exposure.

22. The Council’s ability to readily attract cost-effective borrowing is largely driven by its
ability to rate, maintain a strong financial standing and manage its relationships with
its investors, the LGFA and financial institutions / brokers.

Debt Repayment
23. The Council repays borrowings from refinancing or surplus general funds.
Borrowings may be refinanced by further borrowings with a 30 year maximum term.

24. Debt will be repaid as it falls due in accordance with the applicable borrowing
arrangement. Subject to the appropriate approval and debt limits, a loan may be
rolled over or re-negotiated as and when appropriate.

The LGFA
25. The Council may borrow from the New Zealand Local Government Funding Agency
Limited (LGFA) in accordance with its shareholding agreement with them. In
connection with that borrowing, the Council may enter into the following related
transactions to the extent that it considers necessary or desirable:

• contribute a portion of its borrowing back to the LGFA as an equity

contribution to the LGFA, for example Borrower Notes;
• provide guarantees of the indebtedness of other local authorities to the LGFA
and of the indebtedness of the LGFA itself;
• commit to contributing additional equity (or subordinated debt) to the LGFA if
required;

7
 • secure its borrowing from the LGFA and the performance of other obligations
to the LGFA or its creditors with a charge over the Council's rates and rates
revenue; and
• subscribe for shares and uncalled capital in the LGFA.

Internal Borrowing
26. The internal borrowing relates to Council borrowing from its reserves, special funds
and equity that the Council would otherwise have in cash. Council has borrowed
these funds to fund capital works which would otherwise be funded from external
borrowers.

27. Any internal borrowing of reserve and special funds used must be reimbursed for
interest revenue lost. Except where a specific rate has been approved for particular
circumstances, interest is charged annually in arrears on all internal loans using the
Council’s current cost of borrowings.

Guarantees / contingent liabilities and other financial arrangements

28. The Council, from time to time, provides financial guarantees to local organisations,
groups or bodies for recreational and community purposes. Council is not allowed to
guarantee loans to Council Controlled Trading Organisations under Section 62 of the
Local Government Act.

29. The total value of guarantees at any one time, excluding LGFA guarantees, will not
exceed 3% of the total annual rates levied during that year. Total loan guarantees
held at any time shall be taken into account when calculating the Council’s maximum
borrowing limit.

30. Council will ensure that sufficient funds or lines of credit exist to meet amounts
guaranteed.

8
Investment Policy

General Policy
31. Council may hold financial, property and equity investments if there are strategic,
economic or other valid reasons for doing so, for example, where it is the most
appropriate way to administer a Council function.

32. With the exception of financial investments, the acquisition of a new investment or
disposal of an existing investment needs to be budgeted for as part of Council’s
approved Long Term Plan or Annual Plan, or be approved through a Council
resolution.

33. The authority to acquire and dispose of financial investments is delegated to the
Group Manager, Corporate Services.

Investment Mix

Equity Investments
34. The Council currently maintains equity investments in Civic Financial Services
Limited (formerly the New Zealand Local Government Insurance Corporation
Limited). These shares were acquired by virtue of the Council insuring its past
activities through these companies. They are held as they are not readily
transferable, and the amount involved is immaterial, relative to the Council’s total
investment holdings.

35. New equity investments may be acquired if an opportunity arises and approval is
given by Council, based on advice and recommendations from Council officers.
Before approving any new investment, Council gives due consideration to the
contribution the investment will make in fulfilling Council’s strategic objectives, and
the financial risks of owning the investment.

Property Investments
36. Strategic Land Purchase - the Council has adopted a strategy of purchasing land
when the opportunity arises, where this has been identified as progressing the
community’s and Council’s vision for the future.

37. Each individual property purchase is subject to consideration and / or approval by the
Operations and Finance Committee.

Loan Advances
38. The Council will only advance loans to external organisations in exceptional
circumstances. Where loan advances are secured against the assets of the
borrower, those assets would revert to the Council in the event of loan default. New
loan advances are by Council resolution only.

39. All loan advances are monitored to ensure that interest and principal repayments
comply with the terms of the loan agreement. All loans in excess of $25,000 are
reported on a quarterly basis to the Operations and Finance Committee.

9
Development and Financial Contributions
40. In order to make it easier for developers to finance large-scale developments, the
Council may allow payment of development and financial contributions on some
residential developments to be deferred for a period. Payment arrangements, for
example, bank bonds can be used as security against the assets of the developer so
that those assets would revert to the Council in the event of default of the payment of
development / financial contributions.

Financial Investments
41. Council’s primary objective when investing is the protection of its investment capital.
Accordingly, Council may only invest in approved creditworthy counterparties.
Counterparties and limits can only be approved on the basis of long-term Standard &
Poor’s, credit ratings (or equivalent Fitch or Moody’s rating) being A+ and above and
/ or short term rating of A-1 or above.

42. With the exception of cash investments that are sourced from pre-funding, all other
cash investments must be restricted to a term of no more than 181 days to ensure
that future cash flow requirements and capital expenditure projections are met. Cash
investments from pre-funding can be invested for up to a maximum of 18 months.

43. Special Funds and Funding Reserves - liquid assets will not be required to be held
against special funds. Instead the Council will internally utilise these funds.

Managed funds
44. The Council may invest in shares and other financial instruments, and may borrow to
fund that investment.

Kāpiti Resilience Fund

45. The main objective in establishing the Kāpiti Resilience Fund is to achieve a
minimum return over the medium to long-term, net of all fees and charges
attributable to the fund that is at least the equivalent to the Council’s net borrowing
costs plus the rate of inflation, over the same period.

46. The surpluses will be used to fund a contribution towards resilience-focussed

projects, for example increased insurance costs and Civil Defence costs.

47. The following additional requirements for the Kāpiti Resilience Fund portfolio are
specified:

a. An appropriate level of investment risk for the fund is determined and accepted
by the Council.

b. The fund will be managed in a way that balances optimal returns with
safeguarding Council’s capital.

c. The fund performance will be regularly monitored.

d. The fund risks will be managed in a prudent manner.

e. All aspects of the investment process and functions will be reviewed regularly.

10
 Kāpiti Growth Fund

48. The main objective in establishing the Kāpiti Growth Fund is to achieve a minimum
return over the medium to long-term, net of all fees and charges attributable to the
fund that is at least the equivalent to the Council’s net borrowing costs plus the rate
of inflation, over the same period.

49. A key requirement of the Kāpiti Growth Fund will be the ability to withdraw capital
from it in order to fund strategic purchases.

50. The surpluses will be used to contribute towards specific growth-focussed projects
that encourage / incentivise businesses and recreational / visitor attractions to
establish an operating presence in the Kāpiti District.

51. The following additional requirements for the Kāpiti Growth Fund are specified:

a. An appropriate level of investment risk for the fund is determined and accepted
by the Council.

b. The fund will be managed in a way that balances optimal returns with
safeguarding Council’s capital.

c. The fund performance will be regularly monitored.

d. The fund risks will be managed in a prudent manner.

e. All aspects of the investment process and functions will be reviewed regularly.

The LGFA
52. The Council may invest in shares and other financial instruments of the LGFA, and
may borrow to fund that investment. The Council's objective in making any such
investment will be to:

• Obtain a return on the investment; and

• Ensure that the LGFA has sufficient capital to remain viable, meaning that it
continues as a source of debt funding for the Council.

53. Because of these dual objectives, the Council may invest in LGFA shares in
circumstances in which the return on that investment is potentially lower than the
return it could achieve with alternative investments.

54. If required in connection with the investment, the Council may also subscribe for
uncalled capital in the LGFA.

11
Treasury Risk Management
55. Borrowing exposes the Council to three principal risks:

Liquidity / Funding Risk

56. Liquidity risk is the risk that the Council does not have the ability to access committed
funding at a future time as required. Funding risk centres on the ability to re-finance
or raise new debt at acceptable pricing and maturity terms.

Interest Rate Risk

57. Interest rate risk is the risk that the Council will be exposed to changes in market
conditions, particularly wholesale interest rates, prevailing at any time. It is important
to consider this on a forward looking basis when issuing new debt and refinancing
existing debt on an on-going basis. It may impact on the maturity profile of issued
debt and the process of re-financing.

Credit Risk

58. Credit risk is the risk that a party to a transaction, such as a counterparty or a
financial intermediary / institution, may not settle or provide committed funding as and
when required. This risk is applicable where the Council is both a borrower and an
investor, with the more significant risk arising when the Council is an investor.

59. Other risks include legal risk, operational risk, foreign exchange risk, concentration
risk, volatility risk and carbon credit risk.

Liquidity / Funding Risk

60. A key factor in the management of liquidity risk is to spread and control the risk to
reduce the concentration of risk at any point so that the overall borrowing cost is not
increased unnecessarily and / or the desired maturity profile compromised due to
market conditions.

61. The following control limits apply to Council’s management of liquidity risk:

a. The Council will ensure that it has sufficient funds available to:

• fund all roll-over debt, and

• pay all financing costs.

b. External term loans and committed debt facilities together with available liquid
investments 2 must be maintained at an amount of 110% over existing
external debt.

c. Council has the ability to pre-fund up to 18 months forecast debt requirements

including re-financings.

d. The Chief Executive has delegated to the Group Manager Corporate Services
the discretionary authority to re-package existing debt on more favourable
terms. Such action is to be ratified and approved by the Operations and
Finance Committee at its next scheduled meeting.

liquid investments specifically exclude the Kāpiti Resilience Fund and the Kāpiti Growth Fund.
2

12
 e. The Council can borrow for a maximum term of 30 years. Any debt issued for
longer than 10 years will be reported to the Operations and Finance
Committee at the next quarterly reporting period.

f. The maturity profile of the total committed funding with respect to all external
loans / debt and committed facilities, calculated monthly on a rolling basis is
to be within the following limits:

Period Minimum Maximum

0 to 3 years 10% 70%
3 to 5 years 10% 60%
5 to 10 years 10% 50%
10 years plus 0% 20%
A maturity schedule that is outside the above limits, but self-corrects within
90 days is not in breach of this Policy. However, maintaining a maturity
profile outside the above limits for a period beyond 90 days requires specific
approval by the Operations and Finance Committee not later than the next
available meeting.

Interest Rate Risk

62. Interest rate risk is the risk that funding costs (due to movements in market interest
rates) will materially exceed adopted Annual Plan and Long Term Plan interest cost
projections, so as to adversely impact cost control, capital investment decisions,
returns and feasibility.

63. The primary objective of interest rate risk management is to reduce uncertainty of
interest rate movements through fixing of wholesale market interest costs. Certainty
around interest costs is to be achieved through the active management of underlying
interest rate exposures.

64. Dealing in interest rate products must be limited to financial instruments approved by
the Council as per an internally updated schedule. Credit exposure on these financial
instruments is restricted by specified counterparty credit limits.

65. A list of the current approved interest rate instruments is attached as Appendix 3.

66. All bank deposits, registered certificates of deposits, treasury bills and commercial
paper investments are limited to a term no greater than 181 days unless linked to a
pre-funding strategy.

67. All unsecured investment securities must be senior in ranking. The following types of
investment instruments are expressly excluded:

• structured debt where issuing entities are not a primary borrower / issuer;
• subordinated debt, junior debt, perpetual notes and debt / equity hybrid notes
such as convertibles.

68. Any other financial instrument not on the approved list must be specifically approved
by the Council on a case-by-case basis and only be applied to the one singular
transaction being approved.

13
Interest Rate Risk Control Limits
69. Major control limit – at any point in time the amount of all current interest rate risk
management instruments must not exceed the total amount of gross debt.

70. Hedging of Council’s external debt / borrowings must be within the following fixed/
floating interest rate risk control limit:

Master Fixed / Floating Risk Control Limit

Minimum Fixed Rate = 55% Maximum Fixed Rate = 100%

The percentages are calculated on the projected external debt levels in the Council’s
approved financial statements (Long Term Plan or Annual Plan). The forecast debt
level is subject to approval by the Group Manager, Corporate Services as being a fair
and reasonable forecast.

a. External debt is the total amount of gross debt. This allows for pre-hedging in
advance of projected physical drawdowns of new debt. When approved
forecasts are changed, the amount of fixed rate cover in place may have to
be adjusted to comply with the Treasury Management Policy minimums and
maximums.

b. Floating rate debt may be spread over any maturity up to 12 months. Bank
advances may be for a maximum term of 12 months.

c. The Council can hedge up to 15 years; any hedge longer than 10 years will
be reported to the Operations and Finance Committee at the next quarterly
reporting period.

71. The fixed rate amount at any point in time must be within the following maturity
bands:

Fixed Rate Maturity Profile Limit (% of External debt)

Period Minimum Cover Maximum Cover
1 to 3 years 15% 60%
3 to 5 years 15% 60%
5 to 10 years 15% 60%*
10 years plus 0% 20%**
*Maximum cover in the five to ten year period may be extended up to 70% during
periods of historical low long term interest rates subject to approval by the Chief
Executive and reported to the Operations and Finance Committee at its next
meeting.
**Maximum cover in the over ten year period may be extended up to 30% during
periods of historical low long term interest rates subject to approval by the Chief
Executive and reported to the Operations and Finance Committee at its next
meeting. The definition of ‘historical low long term interest rate’ is where the 10-year
swap rate is more than 15% below its rolling ten year average.

14
 a. A fixed rate maturity profile that is outside the above limits, but self-corrects
within 90 days is not in breach of this Policy. However, maintaining a maturity
profile beyond 90 days requires specific approval by Council at the next
available meeting.

b. Any interest rate swaps with a maturity beyond 12 years must be approved by
the Operations and Finance Committee at its next meeting.

72. For individual types of interest rate risk management instruments Council must
adhere to the following control limits at all times:

a. Forward rate agreements outstanding at any one time must not exceed 75%
of the total floating rate debt.

b. With the exception of 1:1 collar option structures, interest rate options must
not be sold outright because of the speculative nature of doing this.

c. Borrower swaptions held by Council must mature within 12 months.

d. Interest rate options with a maturity date beyond 12 months that have a strike
rate higher than 2.00% above the appropriate swap rate, cannot be counted
as part of the fixed rate cover percentage calculation.

e. The forward start period on swap / collar strategies to be no more than 24

months.

Counterparty Credit Risk

73. Counterparty credit risk is the risk of losses (realised or unrealised) arising from a
counterparty defaulting on a financial instrument where the Council is a party. The
credit risk to the Council in a default event will be weighted differently depending on
the type of instrument entered into.

74. Counterparties and limits can only be approved on the basis of a minimum long term
credit rating (Standard & Poor’s or Moody’s Investor Services) being A+ and a
minimum short term rating of A-1.

75. Limits should be spread amongst a number of counterparties to avoid concentrations

of credit exposure. The approval process to allow the use of individual financial
instruments must take into account the liquidity of the market the instrument is traded
in and repriced from.

15
76. The following table shows the gross counterparty limits:

Counterparty/ Minimum Investments Risk Borrowing

Issuer Standard and maximum per management maximum per
Poor’s long counterparty instruments counterparty
term / short maximum per
term credit counterparty
rating

NZ N/A Unlimited None Unlimited

Government

LGFA AA- / A-1 20.0 None Unlimited

NZ Registered A+ / A-1 60% of total 50% of total $50m

Bank investments or instruments or
$25m; $80m;
whichever is whichever is
greater. greater.

77. In determining the usage of the above gross limits, the following product weightings
will be used:

a. Money Market (e.g. Bank Deposits) – Transaction Notional x Weighting

100%.

b. Interest Rate Risk Management (e.g. swaps, FRA’s) – Transaction Notional x

Maturity (years) x 3%.

c. Foreign Exchange - Transactional face value amount x the square root of the
Maturity (years) x 15%.

78. A counterparty profile that is outside the above limits, but self-corrects within 90-days
is not in breach of this Policy. Any departures from the above limits will be reported to
the Operations and Finance Committee at its next meeting.

Legal Risk
79. Legal and regulatory risks relate to the unenforceability of a transaction due to an
organisation not having the legal capacity or power to enter into the transaction,
usually because of prohibitions contained in legislation.

80. This risk is minimised by standing dealing and settlement instructions being sent to
counterparties, matching of third party confirmations and the immediate follow-up of
anomalies.

81. Financial instruments can only be entered into with banks that have in place an
executed International Swaps and Derivatives Association (ISDA) Master Agreement
with the Council.

16
Operational Risk
82. This is the risk of loss as a result of human error (or fraud), system failures and
inadequate procedures and controls. Operational risk, particularly relevant to dealing
with financial instruments, is minimised through appropriate segregation of duties,
recording and reporting procedures and system controls.

Foreign Exchange Risk

83. Council has limited Foreign exchange risk through the occasional purchase of foreign
exchange denominated plant and equipment. Larger amounts may be hedged using
foreign exchange contracts and smaller payments are converted at the spot
exchange rate on the date of payment. The Council does not borrow or enter into
incidental arrangements within or outside New Zealand in any foreign currency other
than New Zealand dollars.

Concentration Risk
84. This is the risk of a loss arising as a result of a heavily lopsided exposure to one or
more counterparties. The risk is managed through adherence to the gross
counterparty limits.

Volatility Risk
85. This is the risk of a change of price of a portfolio as a result of changes in the
volatility of a risk factor. The risk is managed through ensuring that the asset
allocation is continuously reviewed to ensure that it stays diversified over the long
term.

Carbon Credit Risk

86. The Council needs to minimise the financial impact of movements in the carbon
credit prices by balancing the need for price stability with the benefit of realising
market opportunities to reduce costs as they arise.

Treasury Performance
87. In order to assess the effectiveness of Council’s treasury management activities,
benchmarks and performance measures have been prescribed to assess operational
performance and the management of debt and interest rate risk. The Council
undertakes regular reporting which includes the following four major information/
reporting objectives:

a. Cash / Debt Position.

b. Risk Exposure Position.

c. Risk Management Performance.

d. Treasury Management Policy Compliance.

17
88. The table below summarises the key reporting outputs in relation to treasury
management:

Report type Audience Frequency Format

Management Senior Leadership Quarterly Report compliance with
Team all limits and thresholds
Governance Audit and Risk Quarterly Overview of quarterly
Committee performance
Annual Report Operations and Annually Review of Annual
Finance Committee performance and of the
Policy and policy limits to
ensure they are fit for
purpose

Policy review
89. The Policy is to be formally reviewed on at least a triennial basis by the Operations
and Finance Committee. The Group Manager, Corporate Services will manage the
review process and the final report will be presented by to the Operations and
Finance Committee for its consideration.

90. In addition, any Policy changes arising from the annual report to the Operations and
Finance Committee provided by the Group Manager, Corporate Services or other
sources may be considered by the Audit and Risk Committee as required, but the
delegation rests with the Operations and Finance Committee.

18
Appendix 1: Glossary of terms
Annual rates income: the amount equal to the total revenue from any funding mechanism
authorised by the Local Government (Rating) Act 2002.

Borrower swaption: gives the holder of the swaption the right to enter into a swap where
they pay interest on a notional loan amount at a fixed rate of interest and receive payments
at a floating rate;

Call option: a financial instrument that gives the buyer the right, but not an obligation, to buy
a set quantity of a security at a set strike price at some time on or before expiration.

Closing out: the cancellation / termination of a financial instrument or contract before its
maturity date, resulting in a realised gain / loss if the current market rate differs from the
contract rate.

Derivatives: investment vehicles whose price is dependent on an underlying asset. The

most common forms of derivatives include stock options, futures & swaps.

Fixed rate: an interest rate repricing date beyond 12 months forward on a continuous rolling
basis;

Floating rate: an interest rate repricing within 12 months;

Forward rate agreement: an agreement between two counterparties locking in an interest

rate today, for money that one counterparty intends to borrow in the future. The
counterparties agree to pay each other the interest difference between the agreed-upon rate
(the "forward rate") and the actual interest rate on the future date (the "floating rate").

Forward start interest rate swap: a fixed-for-floating interest rate swap whereby the swap
coupon is set at the contract date but the swap doesn’t start on that date, that is it is delayed
to some future date. This provides certainty as to interest rate cost on an agreed principal
amount for an agreed period, commencing at a future point in time.

Futures contract: a financial contract obligating the buyer to purchase an asset (or the
seller to sell an asset), such as a physical commodity or a financial instrument, at a
predetermined future date and price.

In the money options: options which have intrinsic value of the security built into them. Call
options are in the money when the strike price is lower than the price of the underlying stock,
allowing one to buy the stock at a price lower than the market price. Put options are in the
money when the strike price is higher than the price of the underlying stock, allowing one to
sell the stock at a price higher than the market price.

Interest rate cap (ceiling): an interest rate derivative contract which has a maximum value
(cap) – on a floating rate of interest on a specified notional principal amount for a specific
term.

Interest rate collar: a security which simultaneously combines the purchase of an interest
rate cap and the sale of an interest rate floor to specify a range in which an interest rate will
fluctuate. The security insulates the buyer against the risk of a significant rise in a floating
rate, but limits the benefits of a drop in that floating rate.

Interest rate floor: an interest rate derivative contract which has a minimum value (floor) –
on a floating rate of interest on a specified notional principal amount for a specific term.

19
Interest rate option: a specific financial derivative contract whose value is based on interest
rates and its value is tied to an underlying interest rate. Interest rate options give buyers the
right, but not the obligation, to synthetically pay (in the case of a cap) or receive (in the case
of a floor) a predetermined interest rate (the strike price) over an agreed period.

Interest rate swap: a financial derivative instrument in which two parties agree to exchange
interest rate cash flows, based on a specified notional amount from a fixed rate to a floating
rate (or vice versa) or from one floating rate to another;

Liquidity: external term loans plus committed debt facilities plus available cash / cash
equivalents divided by external debt.

Net external debt: total external debt less cash / cash equivalent investments.

Net interest expense: the amount equal to all interest and financing costs less interest
income for the relevant period.

Operating income: earnings from rates, government grants and subsidies, user charges,
interest and other revenue and excludes non-government capital contributions (e.g.
developer contributions and vested assets).

Options: contracts that give the holder the right but not the obligation to buy or sell a
specific security at a pre-determined price on a pre-determined date. The two kinds of
options are call and put options.

Options on a swap (Swaption): the option to enter into an interest rate swap. In exchange
for an option premium, the buyer gains the right but not the obligation to enter into a
specified swap agreement with the issuer on a specified future date.

Out of the money options: have no intrinsic value built into them. Call options are out of
the money when the strike price is higher than the price of the underlying stock. Put options
are out of the money when the strike price is lower than the price of the underlying stock.

Put option: a financial instrument that conveys the buyer the right, but not the obligation, to
sell a specified quantity of a security at a set strike price on or before an agreed upon
expiration date.

Spot price: the current market price of a product, usually a commodity, currency or rate, for
the immediate delivery of said product.

Strike price: the price at which a derivatives contract can be exercised - the strike price is
independent of the spot price and is agreed upon by the parties entering the contract.

Swap: a derivative in which two counterparties exchange cash flows of one party's financial
instrument for those of the other party's financial instrument. The benefits in question
depend on the type of financial instruments involved.

20
Appendix 2: Delegated Authorities

Activity Delegated Authority *Limit

1 Approving and changing Operations and Finance Unlimited
Treasury Management Policy Committee
2 New annual borrowing as set Operations and Finance Within the
out in the Annual Plan/Long Committee prescribed limits
Term Plan set out in the
Financial Strategy
3 Approval for charging assets Operations and Finance Subject to the
as security over borrowing Committee requirements of
Debenture Trust
Deed
4 Acquisition and disposition of Council Unlimited
investments other than
financial investments
5 Approving transactions outside Council Unlimited
Treasury Management Policy
6 Re-financing existing debt Chief Executive Subject to Policy
7 Negotiate bank facilities Chief Executive (or) Subject to Policy
Group Manager, Corporate
Services
8 Manage cash / liquidity Chief Executive (or) Per risk control
requirements Group Manager, Corporate limits
Services
9 Approving counterparty credit Chief Executive Within the
limits prescribed limits
set out in the
Treasury
Management
Policy
10 Adjust interest rate risk profile Chief Executive delegated Fixed rate debt
to the Group Manager, ratio as per risk
Corporate Services; each control limits;
adjustment individually Fixed rate maturity
signed off by the Chief profile limit as per
Executive risk control limits
11 Managing funding and Chief Executive Per risk control
investment maturities in Group Manager, Corporate limits
accordance with the Council’s Services
approved facilities
12 Maximum daily transaction Council Unlimited
amount (borrowing, investing Chief Executive $30 million
and interest rate risk
Group Manager, Corporate $15 million
management) excludes roll-
Services
overs on existing debt and
interest rate swaps CFO (delegated) $5 million

21
 Activity Delegated Authority *Limit
13 Authorising lists of signatories Chief Executive Unlimited
Group Manager, Corporate
Services
14 Opening/closing bank Chief Executive Unlimited
accounts Group Manager, Corporate
Services
15 At least triennial review of Group Manager, Corporate N/A
Treasury Management Policy Services
16 Ensuring compliance with Group Manager, N/A
Treasury Management Policy Corporate Services

*All activity limits in the above table are subject to the limits contained in the Council
approved Long Term Plan / Annual Plan. The Council can approve changes to the limits.

22
Appendix 3: Current approved interest rate instruments

Category Instrument

Cash management and 1. Bank overdraft

borrowing 2. Committed cash advance and bank accepted bill
facilities (short term and long term loan facilities)
3. Uncommitted money market facilities
4. Retail and Wholesale Bond and Floating Rate
Note (FRN) issuance
5. Commercial paper (CP) / Promissory Notes
6. NZD denominated Private Placements

Investments 1. Call and short term bank deposits

2. Bank bills
3. Bank registered certificates of deposit (RCDs)
4. Treasury bills
5. LGFA borrower notes / CP / bills / bonds/ FRNs
6. LGFA Redeemable Preference Shares (RPS)

Interest rate risk 1. Forward rate agreements (“FRAs”) on:

management • bank bills
2. Interest rate swaps including:
• forward start swaps
• amortising swaps (whereby notional principal
amount reduces)
• swap extensions and shortenings
3. Interest rate options on:
• bank bills (purchased caps and one for one
collars)
• interest rate swaptions (purchased only)

Foreign exchange 1. Spot foreign exchange

management 2. Forward exchange contracts

23