Chapter

3. The Public Debt Management Guidelines

Author(s):
International Monetary Fund;World Bank
Published Date:
March 2015
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1. Debt Management Objectives and Coordination

1.1 Objectives

10. The main objective of public debt management is to ensure that the government’s financing needs and its payment obligations are met at the lowest possible cost over the medium to long term, consistent with a prudent degree of risk.

1.2 Scope

11. Debt management should encompass the main financial obligations over which the central government exercises control.

1.3 Coordination with monetary, fiscal, and financial sector policies

12. Debt management should be anchored in sound macroeconomic and financial sector policies to ensure that the level and rate of growth in public debt are sustainable.

13. Debt managers, fiscal and monetary authorities, and financial sector regulators should share an understanding of the objectives of debt management, fiscal, monetary, and financial sector policies given the interconnections and interdependencies between their respective policy instruments.

14. In principle, there should be a separation of debt management policy and monetary policy objectives and accountabilities.

15. Debt managers and fiscal and monetary authorities should share information on the government’s current and future cash flow needs.

16. Although the responsibility for ensuring prudent debt levels and conducting debt sustainability analysis lies with fiscal authorities, debt managers should monitor any emerging debt sustainability problems based on portfolio risk analyses and market reactions observed when conducting debt management operations, and inform the government on a timely basis.

2. Transparency and Accountability

2.1 Clarity of roles, responsibilities, and objectives of government institutions responsible for debt management

17. The allocation of responsibilities among the ministry of finance, the central bank, or a separate debt management agency for debt management policy advice and for undertaking primary debt issues, secondary market arrangements, depository facilities, and clearing and settlement arrangements for trade in government securities should be publicly disclosed.

18. The objectives for debt management should be clearly defined and publicly disclosed, and the measures of cost and risk that are adopted should be explained.

2.2 Public availability of information on the reporting of debt management strategies and operations

19. Materially important aspects of debt management operations should be publicly disclosed.

20. Easy public access to the documentation describing the legal basis for debt management policy and operations should be ensured.

21. The legislature and the public should be informed, through an annual report, on the context in which debt management operates and on the outcomes of the debt management strategy.

22. The debt manager/government should regularly publish information on the outstanding stock and composition of its debt liabilities and financial assets, and, where they exist, contingent liabilities, including their currency denomination, maturity, and interest rate structure.

23. If debt management operations include derivatives, the rationale for their use should be disclosed, and aggregate statistics on the derivatives portfolio should be published periodically, conforming to recognized accounting practices. The government is likely to benefit from a function within the debt management office that deals regularly with the main debt stakeholders and produces investor-friendly reports with debt statistics and other relevant information.

2.3 Accountability and assurances of integrity by agencies responsible for debt management

24. Debt management activities should be audited annually by external auditors. Information technology systems and risk control procedures should also be subject to external audits. In addition, there should be regular internal audits of debt management activities, and of systems and control procedures.

3. Institutional Framework

3.1 Governance

25. The legal framework should clarify the authority to borrow and to issue new debt, to hold assets for cash management purposes, and, if applicable, to undertake other transactions on the government’s behalf.

26. The organizational framework for debt management should be clearly specified and the mandates and roles well articulated.

3.2 Management of internal operations and legal documentation

27. Operational risks should be managed according to sound business practices, including well-articulated responsibilities for staff, and clear monitoring and control policies and reporting arrangements.

28. Staff involved in debt management should be subject to code-of-conduct and conflict-of-interest guidelines regarding the management of their personal financial affairs.

29. Debt management activities should be supported by an accurate and comprehensive management information system with proper safeguards.

30. Sound business recovery procedures should be in place to mitigate the risk that debt management activities might be severely disrupted by theft, fire, natural disasters, social unrest, or acts of terrorism.

31. Debt managers should ensure that they have received appropriate legal advice and that the transactions they undertake incorporate sound legal features.

32. Collective action clauses in bond contracts could help to achieve a more orderly and efficient resolution, in case of a sovereign debt restructuring (see Box 2).

4. Debt Management Strategy

33. The risks inherent in the government’s debt structure should be carefully monitored and evaluated. These risks should be mitigated to the extent feasible, taking into account the cost of doing so.

34. In order to help guide borrowing decisions and reduce the government’s risk, debt managers should consider the financial and other risk characteristics of the government’s cash flows.

35. Debt managers should carefully assess and manage the risks associated with foreign currency, short-term, and floating rate debt.

36. There should be cost-effective cash management policies in place to enable the authorities to meet their financial and budgetary obligations as they fall due.

5. Risk Management Framework

37. A framework should be developed to enable debt managers to identify and manage the trade-offs between expected cost and risk in the government debt portfolio.

38. To assess risk, debt managers should regularly conduct stress tests of the debt portfolio on the basis of the economic and financial shocks to which the government and the country more generally are potentially exposed.

5.1 Scope for active management

39. Debt managers who seek to manage actively the debt portfolio to profit from expectations of movements in interest rates and exchange rates, which differ from those implicit in current market prices, should be aware of the risks involved and be accountable for their actions.

5.2 Risks arising from the use of derivatives, credit risk, and settlement risk

40. When derivatives are used to manage debt portfolio risk positions, debt managers should be aware of the financial cost and redemption scenarios that could arise, as well as of the potential consequences of derivatives contracts (e.g., in case of a downgrade of a market counterparty).

41. Credit risk should be assessed and managed consistently by debt and cash managers.

42. Settlement risk should be controlled by having clearly documented settlement procedures and responsibilities and by placing limits, if appropriate, on the size of payments flowing through any one settlement bank.

5.3 Contingent liabilities

43. Debt managers should ensure that the impact of risks associated with contingent liabilities on the government’s financial position, including its overall liquidity, is taken into consideration when designing debt management strategies.

6. Development and Maintenance of an Efficient Market for Domestic Government Securities

44. In order to minimize cost and risk over the medium to long term, debt managers should take adequate measures to develop an efficient government securities market.

6.1 Portfolio diversification and instruments

45. The government should strive to achieve a broad investor base for its domestic and foreign debt instruments, with due regard to cost and risk, and should treat investors equitably.

6.2 Primary market

46. Debt management operations in the primary market should be transparent and predictable. To the extent possible, debt issuance should use market-based mechanisms, including competitive auctions and syndications.

6.3 Secondary market

47. Governments and central banks should promote the development of resilient secondary markets that can function effectively under a wide range of market conditions.

48. The systems used to settle and clear financial market transactions involving government securities should reflect sound practices.

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