Treasury management strategy report 2016-17

We  use the creditworthiness service provided by our treasury management advisors. This service employs a sophisticated modelling approach utilising credit ratings from the three main credit rating agencies, Fitch, Moody’s and Standard and Poor’s. The credit ratings of counterparties are supplemented with the following overlays:

• credit watches and credit outlooks from credit rating agencies

• credit Default Swap (CDS) spreads to give early warning of likely changes in credit ratings

• sovereign ratings to select counterparties from only the most creditworthy countries

This modelling approach combines credit ratings, credit watches, credit outlooks in a weighted scoring system for which is then combined with an overlay of CDS spreads for which the end product is a series of colour coded bands which indicate the relative creditworthiness of counterparties. These colour codes are used by us to determine the duration for investments and are therefore referred to as durational bands. We will therefore use counterparties within the following durational bands:

• yellow (5 years)

• purple (2 years)

• blue (1 year - only applies to nationalised or semi nationalised UK Banks)

• orange (1 year)

• red (6 months)

• green (100 days)

• no colour (not to be used)

The creditworthiness service uses a wider array of information than just primary ratings and by using a risk weighted scoring system, does not give undue superiority to just one agency's ratings. All credit ratings will be monitored daily. We are alerted to changes to ratings of all three agencies through our use of the advisor's creditworthiness service:

• if a downgrade results in the counterparty/investment scheme no longer meeting our minimum criteria, its further use as a new investment will be withdrawn immediately

• in addition to the use of credit ratings, we will be advised of information in movements in credit default swap (where applicable) against the iTraxx benchmark and other market data on a weekly basis. Extreme market movements may result in downgrade of an institution or removal from our lending list

Sole reliance will not be placed on the use of this external service. In addition, we will also use market data and market information, information on government support for banks and the credit ratings of that government support. We will also consider using other local authorities when making fixed investments.

Country limits

We have determined that it will only use approved counterparties from countries with a minimum sovereign credit rating of AA- from Fitch Ratings (or equivalent from other agencies if Fitch does not provide).

Counterparty limits

In accordance with Treasury Management Practice (TMP) 4 – Approved Instruments, Methods and Techniques, a £7,000,000 counterparty limit will be used during 2016-17. This limit will not apply to the government's debt management account deposit facility offered by the Debt
Management Office.