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INVESTMENT POLICY
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POLICY NO: DCS 9 - CL
MORELAND CITY COUNCIL INVESTMENT
POLICY
Date Resolved by Council:8 February 2012
Commencement Date:8 February 2012
Review Date:March 2015
Responsible Department:Corporate Services
This policy has been authorised and is included on Council’s Website.
Peter Brown
Chief Executive Officer
8 February 2012
1INTRODUCTION
1.1Purpose
1.2Legislative Scope
1.3Government Deposit Guarantee
2ETHICS AND CONFLICTS OF INTEREST
2.1Prudent Person Standard
2.2Ethics and Conflicts of Interest
2.3Delegation of Authority
3INVESTMENT OBJECTIVES
3.1 Preservation of Capital
3.2Maintenance of liquidity
3.3Return on Investments
3.4Comparison of Performance
4PORTFOLIO IMPLEMENTATION
4.1Authorised Personnel
4.2The Role of the Audit Committee
4.3Internal Controls
5INVESTMENT GUIDELINES
5.1Prohibited Investments
5.2Money to be transferred using the General Bank Account
5.3Factors to consider when investing
5.4Term to Maturity of Investments
5.5Quotation on Investments
5.6Maximisation for Investment Return
6REPORTING ON INVESTMENTS
1INTRODUCTION
This policy is intended to provide guidance on the effective and responsible utilisation of Council’s surplus cash funds within the government legislative framework and will conform to applicable Federal and State regulations.
Particular emphasis is directed towards investment decisions that limit unnecessary exposure to risk and optimise return on investment whilst ensuring sufficient liquidity for Council’s on-going operating commitments.
1.1Purpose
The purpose of Council’s investment policy is to ensure that:-
- All funds are invested in accordance with legislative and Council requirements.
- Effective internal controls are in place to minimise investment risk and unauthorised appropriation of Council funds.
- All investment transactions are appropriately authorised and documented.
- Investment decisions are based on the security of funds by limiting unnecessary exposure to risk.
- The financial yield is enhanced through prudent investment of funds whilst ensuring sufficient liquidity for Council’s day to day operational commitments.
- Legally restricted funds are appropriately invested so as to earn a reasonable income towards their purposes (whilst limiting unnecessary exposure to risk).
1.2Legislative Scope
All investments shall comply with the Victorian Local Government Act 1989, relevant regulations and guidelines or directions issued by the Victorian Local Government Minister or Local Government Victoria.
Section 136 of the Local Government Act 1989 specifies the ‘Principals of sound financial management’ for local government:
1A Council must implement the principles of sound financial management.
2The principles of sound financial management are that a Council must:
(a)Manage financial risks faced by the Council prudently, having regard to economic circumstances;
(b)Pursue spending and rating policies that are consistent with a reasonable degree of stability in the level of the rates burden;
(c)Ensure that decisions are made and actions are taken having regard to their financial effects on future generations, and
(d)Ensure full, accurate and timely disclosure of financial information relating to the Council
Section 143 of the Local Government Act 1989 states:
A Council may invest any money –
a)In Government securities of the Commonwealth;
b)In securities guaranteed by the Government of Victoria;
c)With an authorised deposit-taking institution;
d)With any financial institution guaranteed by the Government of Victoria;
e)On deposit with an eligible money market dealer within the meaning of the Corporations Act;
f)In any other manner approved by the Minister after consultation with the Treasurer either generally or specifically, to be an authorised manner of investment for the purposes of this section.
The Minister for Local Government Victoria authorised the following investments for the purpose of section 143(f) in July 2007:
- Certificates of deposit and bills of exchange
- Investments in the Treasury Corporation of Victoria
- Investments in managed investment schemes with a rating of AAm or AAf from Standard and Poors Australian Ratings
- Fixed interest securities of an Australian Authorised Deposit Taking Institution and Shares listed on the Australian Stock Exchange, subject to certain conditions. These conditions include compliance with the Prudential Statement issued by the Minister for Local Government and approval of such investments under an appropriate plan by the Department of Treasury and Finance.
Moreland City Council will only invest in term deposits and cash at call. It will not use any of these Minister authorised investments unless specifically approved by Council.
1.3Government Deposit Guarantee
On Sunday, 12 October 2008, the Australian Government announced its intention to guarantee deposits in Australian banks, building societies, credit unions and Australian subsidiaries of foreign-owned banks.A threshold of $1 million was announced in late October 2008 for the deposit guarantee, over which a fee will be charged to receive the benefits of the deposit guarantee.
On 7 February 2010, the Australian Government announced that effective 31 March 2010, the guarantee on deposits of over $1 million would be progressively withdrawn. This announcement did not impact deposits of under $1 million, which continued to be guaranteed free of charge under the Financial Claims Scheme (FCS).
On 11 September 2011 the Australian Government provided further details on the progressive withdrawal of the FCS. Effective 1 February 2012 the guarantee will be reduced to a new permanent cap of $250,000 per customer per authorised deposit-taking institution (ADI), with transitional arrangements for term deposits. Effective 12 October 2011, foreign currency deposits are no longer covered.
2ETHICS AND CONFLICTS OF INTEREST
2.1Prudent Person Standard
The standard of prudence is to be used by investment officers when managing the overall portfolio. Investments will be managed with the care, diligence and skills that a prudent person would exercise in managing the affairs of other persons. This includes having in place appropriate reporting requirements that ensure the investments are being reviewed and overseen regularly.
Investment officers are to manage the investment portfolios not for speculation, but for investment in accordance with the spirit of the Policy. Investment officers are to avoid any transaction that might harm confidence in Moreland City Council. They will consider the safety of capital and income objectives when making an investment decision.
2.2Ethics and Conflicts of Interest
Investment officers/employees shall refrain from personal activities that would conflict with the proper execution and management of Moreland City Council’s investment portfolio. This includes activities that would impair the investment officer’s ability to make impartial decisions.
The Policy requires that employees and investment officials disclose to the Chief Executive Officer any conflict of interest on any investment positions that could be related to the investment portfolio.
2.3Delegation of Authority
Authority for implementation of the Policy is delegated by the Council to the Chief Executive Officer in accordance with the Victorian Local Government Act 1989.
Authority for the day-to-day management of the Council’s investment portfolio is delegated by the Chief Executive Officer to the Director Corporate Services, Manager Finance and Business Systems, the Coordinator Management Accounting and the Coordinator Financial Accounting.
3INVESTMENT OBJECTIVES
Moreland City Council’s overall objective is to invest its funds at the most advantageous rate of interest available to it at the time, for that investment type, and in a way that it considers most appropriate given the circumstances.
In priority, the order of investment priority shall be preservation of capital, liquidity, and return.
3.1 Preservation of Capital
Preservation of capital shall be the principal objective of the investment portfolio. Investments are to be performed in a manner that seeks to ensure security of principal of the overall portfolio. This includes managing credit and interest rate risk within given risk management parameters and avoiding any transactions that would prejudice confidence in Moreland City Council or its associated entities.
3.2Maintenance of liquidity
In addition to the balances held in its bank account for routine operating requirements, the investment portfolio will maintain sufficient liquidity to meet all reasonably anticipated operating cash flow requirements of Moreland Council, as and when they fall due, without incurring significant transaction costs due to being required to sell an investment.
3.3Return on Investments
The portfolio is expected to achieve a market average rate of return and take into account Moreland City Council’s risk tolerance and current interest rates, budget considerations, and the economic cycle.
3.4Comparison of Performance
Moreland City Council should ensure it achieves value-for-money or a competitive price after considering the costs of the investment.
4PORTFOLIO IMPLEMENTATION
4.1Authorised Personnel
The Investment Officers are authorised to invest Moreland City Council’s operating funds at their discretion in investments consistent with the Policy and legislation.
The Manager Finance and Business Systems will report to Moreland City Council’s Audit Committee for investment guidelines and investment activities for the purpose of the Policy.
4.2The Role of the Audit Committee
To ensure separation of duties, The Audit Committee will:
- Oversee the development and update of the Policy and its guidelines;
- Recommend to the Council modification to the Policy;
- Monitor compliance with the Act; and
The Audit Committee is not allowed to direct daily investment decisions, or become involved in the daily operations of the portfolio. Its role is to review the policy, processes and refer investment decisions to the Council if required.
4.3Internal Controls
The Manager Finance and Business Systems will establish internal controls and processes that will ensure investment objectives are met and that the investment portfolios are protected from loss, theft or inappropriate use.
The Audit Committee is responsible for maintaining the investment guidelines.
To minimise the potential for investment risk and unauthorised appropriation of Council funds, the following internal controls will apply:
- All placement and redemption of investments must be authorised by any two of the Investment Officers.
- The investment authorisation process must be carried out in accordance with any other relevant policies and procedures – such as the Accounts Payable and Electronic Funds Transfer (EFT) processes.
- Each transaction will require written confirmation by the Financial Institution.
5INVESTMENT GUIDELINES
5.1Prohibited Investments
This Investment Policy prohibits any investment carried out for speculative purpose, including the following:
- Derivative based investments;
- Principal only investments or securities that provide nil or negative cash flow;
- Stand alone securities issued that have underlying futures, options, forward contracts and swaps of any kind;
- Any securities issued in non-Australian currency; and
- ‘Enhanced cash Funds’ or similar products that fall within the definition of a Collateralised Debt of Obligation (CDO).
In general, Council will only invest in term deposits and cash at call. Other types of investment will need specific Council resolutions and need to comply with the relevant legislative requirements.
5.2Money to be transferred using the General Bank Account
- Funds may be transferred electronically or via cheque and will be authorised by two officers who are authorised signatories on the general bank account.
- Interest earned on investments being rolled over must be redeemed to Council’s general bank account at the time of maturity
- All funds that are being redeemed, or interest being paid, must be directly credited to Council’s general bank account.
- After ensuring all directions detailed in this policy have been met, the quote, which delivers the best value to Council, shall be successful.
5.3Factors to consider when investing
In order to meet investment objectives, the Council must take into consideration all of the following factors when carrying out investment functions:
5.3.1Existence of Guarantee and security
Determine whether the investment is guaranteed by the Institution, or by the Government. Note the Commercial / Bank Bills guaranteed by the Institution, although guaranteed, rank as an unsecured creditor in the event of winding up.
5.3.2Credit Rating of Institution and Portfolio Investment Parameters
Council will not invest in any investment arrangement with an S&P credit rating of BBB or lower. The following table shows the credit ratings and counterparty limits for Moreland City Council:
S&P Long Term Rating / S&P Short Term Rating / Individual Counterparty Limit / Total LimitAAA / A-1+ / 33% / 100%
AA / A-1 / 33% / 100%
A / A-2 / 25% / 60%
Where the aggregate of the portfolio decreases resulting in funds with an institution exceeding the limit, the Investment Officers will restructure the portfolio within a reasonable period (7 days after the existing investment matures).
The Director Corporate Services is authorised to allow variations of the above limit from time to time, on a short-term basis, to enable maximisation of return on investments with the minimisation of risk.
Council should keep a current list of Short and Long Term paper ratings of all institutions being not more than six (6) months old. If an existing Council investment falls below the minimum rating level, Council will withdraw funds within a reasonable period (7 days after the existing investment matures).
5.3.3Liquidity of the investment institution
Liquidity Ratio is a class of financial metricsthatis usedto determine a company's ability to pay off itsshort-term debts obligations.Generally, the higher the value of the ratio, thelarger the margin of safetythatthe company possesses to cover short-term debts. Common liquidity ratios include the current ratio,the quickratioand the operating cash flow ratio.
The Australian Prudential Regulation Authority (APRA) has clarified the treatment of highquality liquid assets it will apply when implementing the new global liquidity standard announced by the Basel Committee on Banking Supervision (Basel Committee) in December 2010.
The new global liquidity standard — known as the Liquidity Coverage Ratio (LCR) requirement — aims to ensure that banking institutions hold a stock of high quality liquid assets sufficient to survive an acute stress scenario lasting for one month.
The Basel Committee defines two categories of assets that can be included in this stock:
Level 1 assets are limited to cash, central bank reserves and highest quality sovereign or quasisovereign marketable instruments that are of undoubted liquidity, even during stressed market conditions; andLevel 2 assets (which can comprise no more than 40 per cent of the total stock) are limited to certain other sovereign or quasisovereign marketable instruments, as well as certain types of corporate bonds and covered bonds, that also have a proven record as a reliable source of liquidity even during stressed market conditions.
APRA has determined that, at this point of time the only assets that qualify as Level 1 assets are cash balances held with the Reserve Bank of Australia, and Commonwealth Government and semigovernment securities; and there are no assets that qualify as Level 2 assets
APRA is responsible for allocating individual Liquidity Coverage Ratios for each ADI. Council will require that ADIs that are used for the investment of funds have a liquidity ratio at least 2% to 5% or higher than the approved level Liquidity Ratio set for them by APRA.
5.3.4Capital Adequacy ratio of the investment institution
The Australian Prudential Regulation Authority (APRA) sets the Prudential Capital Ratio (PCR) and all ADIs must maintain this risk based ratio as set by the regulator.
A measure of the capital strength of an ADI is the capital adequacy ratio which is the amount of an ADI’s regulatory capital expressed as a percentage of its risk-weighted assets. Prudential Standard APS 110 ‘Capital Adequacy’ sets out the three main elements that determine an ADI’s capital adequacy. These are:
- Credit risk associated with exposures;
- Market risk arising from trading activities; and
- The form and quality of capital held to support these exposures.
Prudential Standard APS 111 ‘Capital Adequacy – Measurement of Capital’ also sets out the various classes of instruments to qualify for inclusion in the capital base of an ADI for assessing capital adequacy.
All incorporated ADIs must maintain at all times a capital ratio of total regulatory capital to total risk-weighted exposures of at least 8 per cent or such higher level as determined by APRA.
5.3.5Interest Rate
Council’s aim is to invest funds to obtain the best return possible with the least risk however consideration must be given to:
- Any fees applicable to transferring funds between Institutions.
- Given Council’s Cash Flow Forecasts and the philosophy that investment funds should be reasonably accessible and not have maturity dates that are too long term, the maximum maturity permitted is 2 years.
5.3.6Ethics
Any investment institution must indicate their commitment to core values of integrity, trust, customer service and the highest ethical standards along with their strong commitment to Corporate Social Responsibility (CSR).
5.3.7Sustainability
Community involvement is important and shows an institution commitment to inclusion and sustainability. This can be shown through Community Stakeholder partnerships, Social Accountability Charters, philanthropic support to community organisations or the operation of Sustainability committees.
5.4Term to Maturity of Investments
The term to maturity of any Council direct investment may range from “at call” to two years.
5.5Quotation on Investments
Not less than three (3) quotations shall be obtained from authorised institutions whenever an investment is proposed. The best quote on the day will be successful after allowing for administrative and banking costs, as well as having regard to the limits set above.
5.6Maximisation for Investment Return
Council should aim to maximise where possible, favourable returns that do not jeopardise the security of funds invested. It would be anticipated that returns would exceed the Bank Bill Swap Rate (BBSW).
6REPORTING ON INVESTMENTS
- Investment activities and results must be reviewed on a monthly basis by the Manager Finance and Business Systems and reported to the Director Corporate Services in the form of an Investment Activity Report.
- A register of investments will be maintained together with an investment file containing all letters of advice from financial institutions.
- Investment will be brought to account and valued at fair value plus transaction costs directly related to the acquisition of the financial asset in accordance with IFRS.
- Interest revenue will be recognised as it is earned.
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