The AOFM is responsible for the efficient management of the Australian Government's financing task and debt portfolio. Its operations influence the broader Australian financial market by providing pricing benchmarks for the financing of state governments and corporate sectors. More generally, the efficiency and resilience of the Australian Government Securities (AGS) market acts as an important signal to international investors on the maturity of the country's financial markets.
Separate to the assets the AOFM holds for cash management and debt defeasance, the agency
has occasionally been directed to manage discrete or stand-alone investments. These have included managing assets set aside for purposes like the
Communications Fund, created to fund regional telecommunications infrastructure, and the Australian Residential Mortgage-Backed Securities (RMBS) portfolio, established by the agency to support domestic mortgage competition at the height of the global financial crisis (GFC) and now being divested in accordance with government direction.
The AOFM was established in 1999 as a separate agency within the Treasury portfolio. The Secretary to the Treasury delegates powers under the Public Service Act 1999 (Cwlth) to the Chief Executive Officer (CEO) so that the AOFM may fulfil its brief and operate daily in an autonomous capacity. The CEO is the accountable authority under the Public Governance, Performance and Accountability Act 2013 (Cwlth) (PGPA Act).
The portfolio strategy for the AOFM is determined on the basis of government financing requirements as established through the Budget and confirmed annually by memorandum to the Treasurer setting out the proposed mix of nominal and indexed bonds for the year ahead. The detailed issuance of the securities is then the subject of an Annual Remit, discussed by the Advisory Board and determined by the Treasury Secretary.
This arrangement is comparable to that of other debt management offices around the world, although the scope of activities undertaken by individual offices varies, as do their structural and governing arrangements.
For much of its time before 2008, the AOFM managed the debt portfolio using derivatives, particularly interest rate and foreign exchange rate swaps, with a view to balancing cost and risk. Following a review in 2008 and as a consequence of the GFC, which led to a significant growth in issuance from around $5 billion in 2007–08 to around $87 billion in 2013–14, the AOFM was directed to cease using derivatives as a primary management tool. It has since managed the costs and risks of the portfolio through its issuance decisions, including the selection of bond maturities.
The AOFM has six business groups (Figure 2). This structure and associated roles and responsibilities consider the need for appropriate segregation of duties and reporting lines into front, middle and back office functions.
Figure 2: AOFM organisational structure (October 2015)
The AOFM needs to operate with a high level of independent, objective and transparent behaviour. It must demonstrate its values of integrity, impartiality, responsiveness and clarity in its day-to-day dealings.
AOFM staff require specialist skills in financial reporting, risk management, investment and debt management. As a consequence, their remuneration is higher than most staff across the APS at the same level. This has resulted in comparatively strong retention rates and limited internal career opportunities. Most of the Executive Group—comprising the
CEO and heads of the six business groups—have been with the AOFM for many
All 41 staff are based in Canberra except for two on overseas deployments, one in Papua New Guinea and one in the Solomon Islands who are both transferring knowledge of and skills in debt and cash management to those countries. Recruits come from private and public sector backgrounds and are concentrated in the APS 5 to Executive Level (EL) 1 range. The average age of staff is comparatively low at 38.7 years and current average annual staff retention since the AOFM was created is 83 per cent. Sixty per cent of staff are male. One of the six business heads is female.
Key stakeholders include:
- financial market intermediaries such as domestic and investment banks
- AGS investors, both domestic and offshore, including fund managers, pension fund managers, insurers, sovereign wealth fund managers, hedge fund managers and those working in central banks
- the Treasury which provides policy direction and a range of corporate services such as information and communications technology (ICT) and payroll
- the Department of Finance with government cash management requirements
- the Reserve Bank of Australia (RBA) which works principally with AOFM in managing the cash portfolio
- contractors providing registry and treasury accounting systems; and, industry groups like the Australian Financial Markets Association and Australian Securitisation Forum.
The AOFM measures each of the agency's core objectives against the targets in Figure 3.
Figure 3: AOFM performance targets and measures 2015–16
Meeting the budget financing task in a cost-effective manner subject to acceptable risk
- The financing task is met (difference in volume ($) between actual issuance and planned issuance announced at the Budget and subsequent releases)
- Debt issuance is cost effective (compare cost of funds (total accrual interest costs as a percentage of the average stock of debt) with the cash rate and the average 10-year bond rate or other appropriate indicators) and
- Debt issuance is targeted to market demand and the capacity of the market to absorb issuance (difference between the yields at tender with yields in the secondary market)
Facilitating the Government's cash outlay requirements as and when they fall due
- Efficient cash management (number of business days usage of the overdraft facility)
Being a credible custodian of the AGS market and other portfolio responsibilities
- Secondary market for Treasury Bonds and Treasury Indexed Bonds is liquid and efficient (annual turnover in the secondary market of Treasury Bonds and Treasury Indexed Bonds as a proportion of the average volume of stock on issue; and monitor usage of AOFM securities lending facility)
Ensuring the AOFM is a well-managed organisation
- The AOFM financial management operations are efficient and cost effective (compare the AOFM's departmental and administrative costs to the debt stock issued and managed)
- The AOFM is a risk mature organisation (compare actual risk management capability with risk management capability targets)
- The AOFM meets its legislative requirements (number of reportable breaches of legislative requirements) and
- The AOFM is a financially strong organisation, operating within its financial constraints (difference between actual agency expenses and agency revenue; and difference between actual agency capital expenditure and the approved same in the original Budget to Parliament).
The AOFM's 2014–15 agency budget appropriation was $11.2 million. Approximately two-thirds of this is spent on staffing and the remainder on purchasing services and meeting administrative costs. The agency has regularly achieved a small surplus.