The Investment Framework

1

• The Investment Framework
• The English Perspective
• Chris Anthony
• Butlers

2
Investment Regulations - A Brief History

• Original Enablement identified as
• Section 111 L.G. H. Act 1974
• Allowed fairly free hand.
• Revised tightened
• L.G. H. Act 1989
• Concept of Approved Investment Instruments.
• Latest Parameters
• ODPM Guidance to fit in with L.G. Act 2003
• Effective April 2004 with full Power to
  Invest.

3
The Approved Investment System

• Designed to
• Manage risks
• Promote
• Legality
• Debt repayment.
• Penalised Debt Authorities.
• Debt Free Authorities given free hand.

4
The Approved Investment Instruments

• Bank Deposits CDs.
• Building Society Deposits CDs.
• Treasury Bank Bills.
• Gilt-Edged Securities.
• Supranational Securities (issued listed on
  LSE).
• Loans to Councils, Police etc.
• (Must be denominated, repayable or redeemable
  within 1 year)

5
The New System Investment Guidance

• Minimal Regulation.
• All Councils Treated Equally.
• Designed to Promote
• flexibility
• Responsibility in a prudential environment.

6
The Basic Principles

• Quality.
• Liquidity.
• Yield.

7
The Instruments

• All Instruments with some exceptions
• Off balance sheet products ultra vires.
• Share loan capital of corporate bodies are
  discouraged safety aspect (pooled products
  permitted).
• Borrowing purely to on-lend.
• Non-sterling instruments a grey area.

8
Quality Control

• Investments to be categorised into
• Specified identified as
• high security/high liquidity
• Requiring minimal procedural formalities.
• Non-Specified seen as greater potential risk
  requiring a more formalised control regime.

9
Specified Investments

• Instruments that offer high security high
  liquidity
• Sterling denominated
• Have a maturity of less than 1 year.
• Subject to the above
• investments in UK Government, local authorities
  parish councils qualify automatically.
• Others must have a high credit rating.

10
Non-Specified Investments

• All other securities investments.
• Each Authority must set out clearly its own
  guidelines limits.
• These requirements form part of the Annual
  Investment Strategy.

11
The Requirements

• All authorities are required to draw up a
  comprehensive Annual Investment Strategy (for
  membership approval).
• Establish the appropriate Prudential Indicators
  which take into account all investment activity
  (i.e. to include that of external managers, where
  appropriate).
• Establish and maintain a comprehensive
  counterparty list.

12
Annual Investment Strategy

• Must cover the following areas
• Specified Investments
• Define
• The instruments
• high credit rating
• Specify frequency of credit rating monitoring.
• Non-Specified Investments
• Set out procedures to determine which investments
  to use.
• Identify which investments fit prudent
  requirement.
• State maximum holdings of investment types.
• Liquidity
• Set out procedures to determine maximum
  investment periods (to incorporate use of FRAs).
• State minimum amounts to be held in short term
  investments.

13
The English Experience

• Freedom flexibility
• Opened up opportunities to boost internal
  performance.
• Flexibility has enabled active use of
• Long-term deposits (generally up to 5yrs).
• Forward fixing (dovetails with cash flows).
• Fuller range of conventional products.
• Structured products, including
• Escalators/de-escalators
• BOLOs
• Reverse floaters.

14
The Opportunities - Rate History
15
The Opportunities Yield Curve
16
The Results

• Internal Management
• enhanced returns in low risk environment
  reports of 3 4yr term deposits gt 5.5!
• Wider use of structured instruments.
• External Management
• little benefit to date, but changes are afoot
  notably in the area of pooled products.

17
The Pitfalls

• Inadequate provisioning for non-specified
  investments in AIS.
• The Cash Flow Trap the siren call of high long
  yields.
• The FRA Trap
• Investment terms
• Counterparty limits (legal obligations etc).

18
Conclusions

• Authorities have
• Embraced changes with reasonable enthusiasm
• Adopted a more adventurous approach.
• Returns have improved, courtesy of the new
  parameters market movements.
• There are some niggling inconsistencies
  inconveniences which require a more pragmatic
  approach by the ODPM.