REPORT OF THE DIRECTOR OF CORPORATE SERVICES TO THE LEAD
MEMBER FOR CORPORATE SERVICES
MONDAY 18TH NOVEMBER 2002
SUBJECT : MONEY MARKET FUNDS AND DEBT MANAGEMENT
ACCOUNT DEPOSIT FACILITY
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1.1
PURPOSE OF REPORT
The purpose of this report is:(a) To recommend the use of the money market fund (MMF) providers listed
in Appendix 2;
(b) To recommend to add the Debt Management Account Deposit facility to
the list of approved investments and thereby give the Director of Corporate
Services the necessary approval to use this facility in accordance with the
limits stipulated and with the Treasury Management Policy and Strategy
Statement.
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MONEY MARKET FUNDS
2.1
New legislation allowed local authorities to invest in MMF’s with effect
from 1st April 2002. Members approved the addition of MMF’s to the
approved list of investments as part of the 2002/2003 Treasury Management
Policy and Strategy Statement, reported to Council on 20th March 2002. As
part of the treasury management strategy, investments can only be made with
AAA/P1 rated MMF’s, for a maximum of £10m for up to 3 months.
2.2
An MMF is a open ended investment fund that represents a diversified
portfolio of short term, high quality debt instruments. The size of the liquidity
pool, often hundreds of millions of pounds, means that the investor can be
offered the flexibility of overnight and call money combined with the
attractive returns of longer dated deposits.
2.3
Strict rules and criteria are laid down by the rating agencies so that the MMF
is awarded the highest triple A rating. It is not necessary for the funds to be
registered in the UK. There is only one UK registered fund and, as it is not
AAA rated could not be used. Most funds are administered from Dublin,
Luxembourg or the Channel Islands for tax purposes.
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2.4
TYPES OF FUND
2.4.1
There are two basic types of fund:

Stable Net Asset Value funds
In this case the Council would purchase units of, say £1 each, that will
maintain a constant value. Interest, declared daily, is credited to a separate
account and paid out at pre-determined intervals (typically one month).

Accumulating Net Asset Value funds
Units are purchased but rather than having a constant price, their value is
increase by interest earned. There is no differentiation between capital and
interest, as the two are combined into the value of an investor’s units.
2.4.2
As far as both types of fund are concerned, money can be invested and
withdrawn on any day for ‘same day’ settlement and up to a specific cut-off
time.
2.5
GUIDING PRINCIPLES
2.5.1
There are three guiding principals underlying the concept of money market
funds:
Safety and security of principal sum invested

Liquidity

Competitive returns
2.6.
SAFETY
2.6.1
The safety of funds is promoted by a number of requirements imposed by
credit rating agencies and are designed to ensure the fund receives top quality
(AAA) rating. Most important is the diversification of investment and the
overall quality of the counterparties.
2.6.2
In addition, units are held by a custodian, ensuring that there is no direct
exposure to the under-lying investment. This means that the Council’s funds
are ring fenced from the operator who will be unable to use the funds to
support its own business if it encountered difficulties.
2.6.3
Technically, if enough of the underlying assets defaulted then the fund would
be unable to repay the value of the units. It should be noted that this has never
happened to a rated US $ or sterling dominated MMF since this type of
investment began in the early 1970’s.
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2.7
LIQUIDITY
Overall weighted average maturity must be less than 60 days. The fund
manager will target a wide range of maturities in order to maximise returns,
and could invest for up to a year. However, the large amounts of money
involved, the number of different maturity dates and the spread of
counterparties used means that the Council would have daily access to its
funds.
2.8
COMPETITIVE RETURNS
Actively managing the fund to take advantage of the interest yield curve
means that the fund can offer overnight access to principal with interest paid
being similar to a longer period investment. A fee is payable, the amount
depending on the fund chosen and this is deducted from the interest payable.
For information Appendix 1 provides a comparison of five money market
funds yields against the average 7 day LIBID rate.
2.9
2.10
2.11
ADVANTAGES

Small deposits can be withdrawn at short notice.

Funds will have to be AAA rated

Wide spread of counterparties reduces risk

Indirect access to large organisations not currently available to the
Council because of the large minimum deposit size they require.

The size of the MMF enables it to negotiate attractive rates, resulting
in better returns, typically between the 7 day and 1 month rates.
DISADVANTAGES

Interest rate changes daily

The rate of interest is not known until after the deposit has been made.

Interest is not paid on maturity but at the end of the month.
SUITABILITY
MMF’s should be regarded as an addition to the instruments available to
manage short-term cash flows, up to 30 days. They should not be used to
manage longer-term portfolios.
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2.12
CHOICE OF FUNDS
2.12.1 In choosing an MMF the key differences between the funds are likely to be:

Returns (net of fees)

Cut off time for deals

Administration arrangements

Size of fund

Client base of fund
2.12.2 A list of suitable, potential providers is detailed in Appendix 2 attached. If the
use of these Funds is approved they will be added to the Council’s list of
approved investments and used as and when appropriate, consistent with
achieving the aims of the Treasury Management policy.
2.12.3 The funds have the highest available credit rating and therefore it would be
appropriate to afford them the same status as British clearing banks or the
largest building societies in the Council’s investment guidelines. On this basis
this would permit maximum investments of £10m for 364 days for each fund.
However as this type of investment is new to us, it is suggested that a limit of
£5m per fund be adopted initially.
2.12.4 The time limit of 364 days is inappropriate for these funds, which are
designed for shorter-term investments and therefore a maximum period of 30
days is to be adopted.
2.12.5 The use and performance of these funds will be reported in subsequent
Treasury Management reports and these limits will be reviewed periodically as
part of the Treasury Management strategy.
3.
DEBT MANAGEMENT ACCOUNT DEPOSIT FACILITY
3.1
This facility has been developed jointly by the UK Debt Management Office
(DMO) and the Public Works Loan Board (PWLB). The DMO is the Treasury
Executive Agency which manages Government debt and the Exchequer cash
flows and the PWLB is responsible for making loans to local authorities.
3.2
The DMO provides this service as part of its cash management operations and
is offered as part of a wider series of measures designed to improve the local
authorities’ investment framework. The key objective of the DMADF is to
provide Council’s with a flexible and secure facility to supplement their
existing range of cash management options, while saving interest costs for
central government.
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3.3
The facility enables local authorities to deposit surplus cash on flexible terms
and receive a market related rate of interest. The deposit is paid into the
DMO’s Debt Management Account (DMA) and therefore the official name of
the scheme is the DMA Deposit Facility. Since the money is held by the
Treasury, the scheme implicitly carries the Governments own sovereign AAA
credit rating, thus providing the highest available security.
3.4
A ‘pilot scheme’ was launched in April 2002 for a limited number of
Councils, to run from 3 to 6 months, during which time the demand for and
feasibility of an extended scheme would be assessed. As a result of the
positive feedback from participants and the extent of its usage the DMO
decided to place the scheme on a long-term footing. The ‘pilot scheme’
description was dropped and the facility was to be known as the DMADF
effective from 1st October.
3.5
The DMO wanted to make the scheme more widely available to local
authorities and the intention was to increase the number of local authorities
using the facility by about 100 to take the total involved to a maximum of 150.
The limit was set at this level to ensure that the DMO can continue to deliver
the DMADF service within its existing operational capacity.
3.6
Local authorities interested in participating in the scheme were invited to
apply to the DMO. The Council has made the appropriate application and has
been formally accepted to use the facility.
3.7
There are two types of deposits currently available:
Fixed Term Deposits
The DMO will quote market related rates for any fixed term deposits, ranging
from overnight to six months. Principal and interest will be returned on the
maturity date of the deposit. There is no maximum deal size; however the
minimum deal size depends on the length of the deposit and this ranges from
£1m up to and including 1 week, to £250k beyond 2 weeks.

Three Day Notice Account
A three-day notice account will also be available. This means that the investor
can withdraw deposits on or after the DMO receives three clear business days
‘notice of withdrawal’. The minimum deposit for this account is £250k. In
addition, so that further flexibility is provided, investors will be allowed to
withdraw from the three-day notice account, part or all of the principal
deposited in the account by giving notice by midday on the day of withdrawal.
Investors are only allowed to make three same day withdrawals per calendar
month although in exceptional circumstances further withdrawals may be
permitted, entirely at the DMO’s discretion. Same day withdrawals do not
incur any penalty regarding interest due. Interest on three-day notice accounts
will accrue on a daily basis, calculated on the days closing balance. Interest
will be paid on the first business day of each calendar month. The rate of
interest on three-day notice account is available on request from the DMO.
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The rate will vary according to market conditions and could change on a daily
basis.
4.
RECOMMENDATIONS
The use of MMF’S and DMADF will provide the Council with added
flexibility and a wider range of investment opportunities whilst maintaining
the highest levels of security. It is therefore recommended that :(a)
The money market funds (MMF) providers named listed in
Appendix 2 be included in the List of Approved Investments
and,
(b)
Cabinet is recommended to agree to the Debt Management
Account Deposit facility being added to the List of Approved
Investments, giving the Director of Corporate Services and Head
of Finance the necessary approval to use this facility
in accordance with the limits stipulated within the Treasury Management
Policy and Strategy Statement.
ALAN WESTWOOD
Director of Corporate Services
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JOHN SPINK
Head of Finance