Debt Management Offices
Annual Meeting of the INTOSAI
Working Group on Public Debt
22.10.2014 | ASF | WGPD
Seoul, Korea
October 22-24, 2014
Content
1.
2.
3.
4.
5.
6.
Background information
Effective Debt Management
Location and organizational
structure of DMO
Main issues and problems
related to DMOs
Best practices in the DMO
Conclusions
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1. Background information
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1. Background information
Negative consequences of a poorly managed public debt
Discourage private
investment
Restrict future access
to financial markets
Affect taxpayers of
other countries
Be a source of
financial volatility
Financial crisis,
inflationary expansions
and chronic low growth
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1. Background information
Managers of public debt and
public officers must supervise:
 Level of indebtedness
remains on a
sustainable path.
 Risk management
strategy to avoid
excessive debt levels.
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2. Effective Debt Management
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2. Effective Debt Management
Effective Debt Management
Office Functions are:
1. Executive Debt
Management
2. Operational Debt
Management
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2. Effective Debt Management
Executive Debt Management
Main purpose:
Establishing a normative
framework overseeing any
kind of debt acquired by
the goverment.
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2. Effective Debt Management
Executive Debt Management
Responsible for the executive
functions:
A group of high-ranking
officials
called
the
Executive Board on Debt
Management (EBDM).
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2. Effective Debt Management
Executive Debt Management
Executive debt management
functions include:
i) Policy function
ii) Regulatory function
iii) Resourcing function
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2. Effective Debt Management
Executive Debt Management
i) Policy function
Involves the formulation of
national debt policies and
strategies in agreement
with a country’s overall
macroeconomic policy.
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2. Effective Debt Management
Executive Debt Management
ii) Regulatory function
The establishment and
review of the administrative
and legal framework, rules
and procedures of the debt
management units.
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2. Effective Debt Management
Executive Debt Management
iii) Resourcing function
• Ensure the existence of
qualified personnel.
• Supply maintenance and
technical support for the
debt management system.
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2. Effective Debt Management Operational Debt Management
Main purpose:
To perform the operational
functions within the guidelines provided by the
EBDM.
EBDM: Executive Board on Debt Management.
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2. Effective Debt Management Operational Debt Management
Responsible for the operational
functions:
The DMO perform the
basic operational debt
managements functions:
iv) Recording, analyzing
and operating
DMO: Debt Management Office.
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2. Effective Debt Management Operational Debt Management
Responsible for the operational
functions:
The DMO’s senior staff
ensures that the guidelines issued by the EBDM
are applied and followed.
v) Controlling, coordinating
and monitoring functions
DMO: Debt Management Office.
EBDM: Executive Board on Debt Management.
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2. Effective Debt Management Operational Debt Management
iv) Recording, analyzing and
operating functions
Recording:
Collect
and
provide
detailed information on
debt on a loan-by-loan
basis.
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2. Effective Debt Management Operational Debt Management
iv) Recording, analyzing and
operating functions
Analyzing:
Macroeconomic analysis to
explore available options
through given economic
and market outlook.
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2. Effective Debt Management Operational Debt Management
iv) Recording, analyzing and
operating functions
Operating:
All activities related to
borrowing,
such
as
negotiating, utilization of
loan proceeds and debt
service.
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2. Effective Debt Management Operational Debt Management
v) Controlling,
coordinating
and monitoring functions
Supply substantive feedback to the EBDM for the
implementation,
evaluation and revision of the
debt strategy.
EBDM: Executive Board on Debt Management.
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3. Location and organizational
structure of DMO
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3. Location and organizational
structure of DMO
Location of the DMO
The DMO’s physical location in the national organizational set-up is linked
to the role that the office
has been given.
DMO: Debt Management Office.
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Location of the DMO
3. Location and organizational
structure of DMO
Most frequent models of location of the DMOs are:
i)
Office at the Central
Bank
ii)
Office at the Ministry of
Finance
iii) Autonomous
Office
Debt
DMO: Debt Management Office.
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3. Location and organizational
structure of DMO
Location of the DMO
i) Office at the Central Bank
Operational debt management functions have been
located inside the Central
Bank given the interface
between monetary policy
and debt management.
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3. Location and organizational
structure of DMO
Location of the DMO
i) Office at the Central Bank
Nevertheless,
literature
suggests a conflict of
interests when the Central
Bank has a dual mandate
for conducting monetary
and debt policy.
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3. Location and organizational
structure of DMO
Location of the DMO
i) Office at the Central Bank
Reasons to separate the DMO
from the Central Bank:
Since the main function of
the Central Bank is to
implement the monetary
policy, debt management
policy could be seen as an
instrument to reinforce the
price stability objective.
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Location of the DMO
3. Location and organizational
ii) Office at the Ministry of Finance
structure of DMO
This location has a clear
system of delegation of
authority from the Minister
to the Head of the unit in
charge of the debt.
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Location of the DMO
3. Location and organizational
ii) Office at the Ministry of Finance
structure of DMO
Advantages:
Gives an explicit emphasis
to public policy objectives
in public debt management,
including the development
of the domestic debt
market.
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Location of the DMO
3. Location and organizational
ii) Office at the Ministry of Finance
structure of DMO
Risk:
Facing political pressure to
use debt management as a
vehicle for opportunistic
reductions in debt servicing
costs and in the budget
deficit in the short term.
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Location of the DMO
3. Location and organizational
ii) Office at the Ministry of Finance
structure of DMO
Risk control:
Political risk could be
substantially reduced if the
EBDM sets a clear strategy
and goals for the government’s debt management.
EBDM: Executive Board on Debt Management.
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3. Location and organizational
structure of DMO
Location of the DMO
iii) Autonomous Debt Office
Autonomous Debt Management Offices (ADMO) are
located outside the Ministry
of Finance or the Central
Bank.
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3. Location and organizational
structure of DMO
Location of the DMO
iii) Autonomous Debt Office
Reasons to establish an ADMO:
• To achieve greater sophistication of debt management, given the growing
emphasis on the control of
risk.
• To overcome problems of
recruiting and retaining
staff with special expertise.
ADMO: Autonomous Debt Management Office.
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3. Location and organizational
structure of DMO
Location of the DMO
iii) Autonomous Debt Office
Advantage:
• The ADMO will force the
rationalization of public debt
management and will set up a
clear governance and report
structures.
• ADMOs are more efficient because they follow market oriented principles and create an
appropriate environment for
quick decision-making.
ADMO: Autonomous Debt Management Office.
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3. Location and organizational
structure of DMO
Location of the DMO
iii) Autonomous Debt Office
Risks:
The agency risk.
Coordination
becomes
increasingly difficult when
the ADMO is further from
the Ministry of Finance.
ADMO: Autonomous Debt Management Office.
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3. Location and organizational
structure of DMO
DMO’s organizational structure
Issues concerning DMO
organization are whether if
it is a centralized or a
decentralized system and
its organizational chart.
DMO: Debt Management Office.
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3. Location and organizational
structure of DMO
DMO’s organizational structure
i) Centralized and decentralized
Centralized system
When the functions are
performed either by the
Ministry of Finance, or by
an autonomous body.
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3. Location and organizational
structure of DMO
DMO’s organizational structure
i) Centralized and decentralized
Decentralized system
When a central DMO
gathers information from all
decentralized participants
of the system.
DMO: Debt Management Office.
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3. Location and organizational
structure of DMO
DMO’s organizational structure
ii) Organizational charts
The debt office can be
organized by geographical
units, loan sources, or
specific tasks.
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3. Location and organizational
structure of DMO
DMO’s organizational structure
ii) Organizational charts
Geographical units
Officers are responsible for
all creditors within an
assigned country or region,
while other staff members
are responsible for multilateral organizations.
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3. Location and organizational
structure of DMO
DMO’s organizational structure
ii) Organizational charts
Loan sources
The organizational chart
for this kind of model is
divided into various offices
specialized in the different
types of loans.
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3. Location and organizational
structure of DMO
DMO’s organizational structure
ii) Organizational charts
Specific tasks
According to this organizational chart, one section of
the DMO is focused on
disbursements and the
others on repayments, loan
contracts and reporting.
DMO: Debt Management Office.
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3. Location and organizational
structure of DMO
DMO’s organizational structure
iii) Organization Structure of the DMO
All the operative processes
should be integrated in a
vertical manner that clearly
define roles, responsibilities, and reporting channels.
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3. Location and organizational
structure of DMO
DMO’s organizational structure
iii) Organization Structure of the DMO
The organization of a DMO
Front-Office
EBDM
Executive Debt Management
DMO
Operational Debt Management
Middle-Office
Back-Office
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3. Location and organizational
structure of DMO
DMO’s organizational structure
iii) Organization Structure of the DMO
The Front-Office
Is responsible for funding
transactions and relations
with investors underwriters
and banks.
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3. Location and organizational
structure of DMO
DMO’s organizational structure
iii) Organization Structure of the DMO
The Middle-Office
The middle office performs
two functions: analytical
and risk analysis.
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3. Location and organizational
structure of DMO
DMO’s organizational structure
iii) Organization Structure of the DMO
The Back-Office
Back office’s objective is to
create and maintain a highquality up-to-date database
of the debt portfolio.
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4. Main issues and problems
related to DMOs
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4. Main issues and problems
related to DMOs
The principal- agent problem
and the governance on DMO
The principal-agent problem
The interests of the principal
(Ministry of Finance) and the
agent (DMO) diverge, and it
is either too expensive or
too difficult to effectively
monitor the behavior of the
agent.
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4. Main issues and problems
related to DMOs
The principal- agent problem
and the governance on DMO
The principal-agent problem
could be solved with:




Benchmarks
Incentives
Monitoring and control
Audits
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4. Main issues and problems
related to DMOs
The principal- agent problem
and the governance on DMO
Benchmarks
They have two key roles:
1. Provide guidance for the
management of costs
and risk.
2. Define a framework for
assessing portfolio performance in relation to
cost, return, and risk.
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4. Main issues and problems
related to DMOs
The principal- agent problem
and the governance on DMO
Incentives
The principal establish an
incentive-compatible contract so that the agent will
make the necessary efforts
and perform well.
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4. Main issues and problems
related to DMOs
The principal- agent problem
and the governance on DMO
Monitoring and control
The principal set up an
independent risk control department and internal auditing department reporting
directly to the EBDM within
the DMO.
DMO: Debt Management Office.
EBDM: Executive Board on Debt Management.
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4. Main issues and problems
related to DMOs
The principal- agent problem
and the governance on DMO
The Role of Audits
The role of the Supreme
Audit Institutions is to go
from routine practices to
best practices, but this
process cannot be isolated
from the macroeconomic
framework of each country.
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The principal- agent problem
and the governance on DMO
4. Main issues and problems
related to DMOs
Audits performed by Superior
Audit Institutions are:
i)
Regularity Audits
ii)
Management Audits
iii) Human resources audits
iv) Information systems audits
v) Performance audits
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5. Best practices in the DMO
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5. Best practices in the DMO
The practices contributing
to a sensible sovereign
debt management include:
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5. Best practices in the DMO
Establishing debt management clear objectives.
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5. Best practices in the DMO
Balancing costs
faced risks.
versus
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5. Best practices in the DMO
Separating goals and responsibilities of fiscal and
monetary policies managers.
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5. Best practices in the DMO
Establishing limits to debt
expansion.
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5. Best practices in the DMO
Creating an institutional
structure in order to reduce
operative risk.
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5. Best practices in the DMO
Debt management paradigmatic
models:
 The case of United Kingdom
 The Case of Portugal
 The case of New Zealand
 The case of Canada
 The case of Norway
 The case of Mexico
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6. Conclusions
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6. Conclusions
Debt management could
be done in very different
ways and still offer good
results in terms of meeting
the needs of the government at the lowest cost
and risk levels.
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6. Conclusions
Each country should aim to
adopt the models of
advanced economies as
far as their market characteristics allow it.
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