What is the centralisation policy Department of Treasury and

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What is the centralisation policy Department of Treasury and Powered By Docstoc
					Centralised Investments Strategy

  What is the centralisation policy?
  A centralisation policy has been implemented to enforce tighter controls on government agencies’
  borrowings and investments. All borrowings and investments over $2m are to now be transacted with the
  Treasury Corporation of Victoria (TCV) and/or the Victorian Funds Management Corporation (VFMC).
  The Treasurer of Victoria has introduced the policy, which was complemented by Direction 4.5.6 issued by
  the Minister for Finance under the Financial Management Act 1994 (FMA). Subject to several exceptions,
  the Direction gives legal force to the policy.

  Who are the TCV and VFMC and what functions do they have within
  State Government?
  TCV was established in January 1993 as the centralised treasury for the State. Part of its charter is to ensure
  that the State sources funds at the lowest possible cost and effectively manages the financial risks
  associated with the public sector debt. TCV manages borrowings and short-term deposits, facilitates
  financial arrangements to hedge, protect or manage the value of assets and liabilities, and executes the
  associated transactions.
  VFMC was established under the Victorian Funds Management Act 1994 to provide investment and funds
  management services to Victorian public sector agencies. VFMC provides tailored investment management
  services to various Victorian public sector and related organisations established under State legislation.
  VFMC manages long-term investments, advises and/or implements diversified investment strategies, and
  executes the associated transactions.

  Is the State Government concerned about the credit strength of APRA
  regulated banks, building societies and credit unions?
  No. The Government has implemented a $2 million investment exception which will enable agencies to
  continue investing and transacting with APRA regulated banks, building societies and credit unions within
  this limit. In addition agencies are also permitted to maintain transactional banking arrangements with an
  Authorised-deposit Taking Institution (ADI) without limitation. Non-transactional deposits above $2 million
  are deemed to be of a wholesale nature. The Government has decided that such balances are to be
  invested centrally in order to make more effective use of its balance sheet.
  By centralising all investments, the Government can limit its call on financial markets which represents a
  more prudent and cost effective method for managing its balance sheet. The savings generated are then
  available for the benefit of all Victorians.
Are the Treasury Corporation of Victoria (TCV) and Victorian Funds
Management Corporation (VFMC) equipped to deal with low value high
volume transactions?
The exclusion of transactional balances and amendments to increase the exception limit to $2 million with
an ADI will reduce the number of low value high volume transactions carried out by both TCV and VFMC,
ensuring sufficient resources are available to meet customer demand.

Will the universities that also offer TAFE courses, such as RMIT, be
forced to separate their finances to accommodate the new policy?
The Federal Government is responsible for university education, while the State oversees TAFE education.
Those universities which have both education functions will be captured by this new policy and will need to
address their borrowing and investment arrangements to ensure their TAFE finances comply with the
policy. This policy is designed to ensure Victorian taxpayers’ funds are invested appropriately in order to
reduce the State’s call on financial markets. TAFEs manage high value funds and should be treated the
same as other Victorian Government agencies, regardless of their affiliation with a university.

Does the policy apply to those agencies which derive borrowing or
investment powers from their own legislation?
Yes. The policy applies to all public sector agencies irrespective of their governing legislation and they
should comply with the policy by June 30, 2011 unless exempt.

Why is there also a Ministerial Direction (4.5.6) governing investments
by public agencies?
Ministerial Direction 4.5.6 acts to support the Centralisation Policy. This Ministerial Direction in effect
provides force of law to the Centralisation Policy for those agencies currently subject to the Financial
Management Act 1994.
Agencies will be required to certify that they are compliant with the Direction in accordance with the
Whole of Government Financial Management Framework by June 30, 2011.

What about private money held on trust (‘exempt trust money’)?
Do they need to be invested centrally?
No. They are included as a specific exception to the policy and therefore do not need to be invested with
TCV/VFMC (although are not precluded from doing so). Funds deposited with TCV carry an explicit Victorian
Government guarantee. Funds invested with VFMC, will not be guaranteed by the State due to their link to
fluctuating market values. However, agencies that invest outside of the centralised arrangements will not
have automatic recourse to Government assistance should their investments fail or deteriorate significantly
in value.
What constitutes private money held on trust or exempt trust money?
Exempt trust money is money, other than money held on trust for the State or a public sector agency,
invested pursuant to a statutory function to hold it on trust for a known beneficiary. Consequently these
funds are sourced from an entity or person external to the State of Victoria, and must be returnable to this
source. Examples include aged care accommodation bonds invested on behalf of aged care residents,
lawyers trust funds invested on behalf of clients or private funds held by State Trustees as executor or
trustee. This exemption will not cover funds that are used in the operating business of the agency or funds
that are consolidated into the Whole of State balance sheet.
Donations, gifts or bequests, are not automatically classed as private money held on trust. Funds of this
nature that are used in the operating business of the agency and consolidated into Whole of State balance
sheet will not automatically be considered private monies held on trust.

Can public agencies seek to be exempt from the policy?
Yes, the Treasurer can grant an agency an exemption to a part or all of this policy.
Agencies seeking to operate outside of the central model must present a strong business case to do so and
must first obtain the written support from their relevant portfolio Minister before applying for the
Treasurer’s approval.
Where an exemption is granted, the agency will need to report semi-annually to the Department of
Treasury and Finance on the performance of its investments. These semi-annual reports will need to
include a comprehensive list of the agency’s investment balances and returns for the period. The
Department of Treasury and Finance will provide guidance material for this reporting.

What factors will be considered by the Treasurer in granting an
exemption to the policy?
Exemptions will only be considered where there is a compelling rationale for not investing funds in
accordance with the policy. Examples of factors that may be taken into account include:
       significant losses may be realised if the policy requires investments or deposits to be transferred to
        TCV/VFMC prior to their maturity. In this case, a temporary approval may be considered to enable
        the investment to continue possibly until maturity, and avoid a loss; and
       where an agency can demonstrate that abiding by the policy would likely result in significant loss of
        income sources (such as donations).
Exemptions requested solely on the basis of chasing higher yields will not be granted.

Will schools, hospitals and TAFEs still be able to access the Westpac
High Yield Investment accounts?
Yes, as long as the investment threshold amount of $2 million with an ADI is not exceeded. Analysis by DTF
suggests that the vast bulk of schools, a number of smaller hospitals and TAFEs will be able to continue with
the current banking arrangements largely unchanged.
Does the policy apply to cemeteries and crematoria?
Yes. All cemeteries and crematoria will need to abide by the policy (after a suitable transition period to
accommodate long term investments), unless a specific exemption has been granted. It is important to
note that under the policy, cemeteries and crematoria will be able to continue their existing transactional
banking arrangements, and other investment arrangements with an ADI up to the $2 million threshold.

What types of assets are considered ‘investments’ for the purposes of
this policy?
Investments are financial assets as defined by AASB 132 excluding trade receivables, loans and advances
receivable. Investments may include the following asset classes:
       cash;
       equity instruments;
       debt securities;
       contractual rights to enter into and perform financial arrangements in circumstances that are
        potentially favourable to the agency;
       certificates of deposit;
       bills of exchange; or
       managed investment schemes.
Investments in physical assets such as land and buildings are not considered to be an investment for the
purpose of this policy however units or rights in a property trust are included.

Will an agency have to invest with TCV or VFMC immediately if it
breaches the $2 million immediate exception for non-transactional
investments with an ADI?
No. The policy will be administered pragmatically. Agencies will be able to continue their current
arrangements until their average daily non-transactional investment balances with an ADI exceed
$2 million over a six month period. As agencies approach the threshold, they should commence discussions
with TCV in the first instance as to their investment strategy and set up arrangements to become regular
clients of the TCV or VFMC.

Once an agency’s non-transactional investments with an ADI exceed the
$2 million exception does it have to invest the whole amount centrally,
or only the amount above $2 million?
In principle, only the amounts above the non-transactional $2 million exception will need to be invested
centrally, although agencies are not precluded from investing the entire amount with TCV or VFMC.
However, agencies will also need to transact with either TCV or VFMC in wholesale quantities, such as $200
000, which may result in their balances outside the centralised arrangements dropping below $2 million.
What is the shortest period of time I can invest funds with TCV and
TCV can provide investments for time periods to suit client needs, including overnight deposits. VFMC is
developing a range of investment products to meet smaller client needs for longer term investments (i.e. at
least three years).

Is there a date by which we need to be compliant with the policy?
The policy is effective immediately. Those agencies with investments not satisfying the immediate
exceptions should commence transferring funds to TCV or VFMC if they have not already done so. Such
agencies are expected to be fully compliant with the policy by 30 June 2011.
Some agencies may have fluctuating balances, where non-transactional cash balances with an ADI only
infrequently exceed the $2 million exception. In such instances, agencies should actively monitor these
investments to ensure that surplus funds are invested centrally in accordance with the policy.
Special consideration may be provided for fixed term or illiquid investments, where losses may be incurred
if the investment or term deposit is terminated. In such instances, agencies will be provided with a
temporary exemption from the policy to enable the investments to be transferred across progressively.

What are the contact details for TCV and VFMC?
Queries about TCV product list can be directed to TCV Treasury Client Services:
       Phone: (03) 9650 7577
       Email:
VFMC Client Services, contact details:
       Phone: (03) 9207 2900
       Email:

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