The AOFM’s activities are focused on delivering to the following policy outcome:
the advancement of macroeconomic growth and stability, and the effective operation of financial markets, through issuing debt, investing in financial assets and managing debt, investments and cash for the Australian Government.
The AOFM aims to achieve the outcome through the following objectives:
- meeting the budget financing task while managing the trade offs between cost and risks for the cash and debt portfolios over the medium‑long term;
- facilitating the government’s cash outlay requirements as and when they fall due; and
- being a credible custodian of the Australian Government Securities market and other portfolio responsibilities, including the Australian Business Securitisation Fund (ABSF) and the Structured Finance Support Fund (SFSF).
The AOFM manages a portfolio of debt and financial assets on behalf of the Australian Government. It issues Treasury Bonds, Treasury Indexed Bonds and Treasury Notes to manage the government’s funding task to finance budget deficits. It also manages the government’s cash in the Official Public Account (OPA) which is surplus to immediate requirements to manage the within‑year financing task. It undertakes the administration, financial and operational risk management, and financial reporting of its portfolio of debt and assets.
Financing the budget
In the absence of budget deficits debt issuance by the AOFM had previously been used to maintain the Treasury Bond and Treasury Bond futures markets. Since the onset of the Global Financial Crisis in 2008‑09 the AOFM has had to significantly increase debt issuance and intensify its engagement with investors (including overseas investors) and intermediaries.
In 2018‑19, the Australian Government general government sector recorded a net operating balance surplus of $8.7 billion, the first surplus since 2007‑08. However, the outbreak of the Covid‑19 pandemic has created a significant deterioration in global economic conditions, arising from government policy responses to protect the health of citizens and to support their economies. In March and April 2020, the Australian Parliament passed measures to implement the Government’s economic response to the spread of the coronavirus. A significant weakening of the fiscal position has required pronounced increases in debt issuance to meet funding requirements. There remains a high degree of uncertainty about the extent of the impact of the pandemic on the Australian economy and therefore the extent to which increased debt issuance will be required is also uncertain.
The short‑term and long‑term net issuance program rose from $14 billion as announced in the 2019‑20 Budget, to an actual net issuance program of $142 billion (in face value terms) in 2019‑20. Gross issuance rose from $68 billion at Budget to $220 billion.
The cost and risk of the debt portfolio is managed through debt issuance and (where appropriate) investment activities. Since early 2009, budget deficits have required debt issuance volumes that have exceeded those necessary to maintain liquidity in Treasury Bond and Treasury Bond futures markets, affording the AOFM with a greater level of flexibility in setting its issuance program against an overarching objective of minimising cost over time subject to acceptable risk. In recent years the AOFM has lengthened the duration of its Treasury Bond portfolio through longer term issuance as a means of reducing refinancing risk and the variability of debt servicing costs over time. The Treasury Bond yield curve extends to 27 years as at 30 June 2020 (an extension of 15 years since 2011). At the start of the Covid‑19 pandemic the AOFM was well‑advanced in achieving the issuance program it announced following the 2019‑20 MYEFO, and which represented a continuation of the debt issuance strategy conducted in recent years (being one of long‑term debt portfolio management). From early April 2020 issuance was conducted with volume a primary objective so as to manage liquidity risk in the cash portfolio.
The AOFM manages the overall level of cash in the OPA to ensure that the government is able to meet its financial obligations as and when they fall due. To this end, it makes short term borrowings by issuing Treasury Notes and invests OPA cash surplus to immediate requirements in term deposits with the RBA, although it is not restricted to this approach. The AOFM holds continuing balances of highly liquid assets to allow it to respond flexibly and quickly to meet unexpected expenditure requirements and disruptions in the markets. Consistent with the AOFM’s expectations as to where market access would be most readily available in a time of crisis, a material increase in Treasury Notes issuance was used to complement a rapid increase in issuance of short‑maturity Treasury Bonds to meet the government’s cash requirements from early April 2020.
The OPA is recorded in the Department of Finance’s financial statements and is not reported by the AOFM.
Australian Business Securitisation Fund (ABSF)
In November 2018 the Government announced the establishment of the Australian Business Securitisation Fund (ABSF) to foster competition in the small and medium enterprise (SME) lending market with the aim of improving access to, and over time reducing the cost of finance to SMEs.
In April 2019, the Australian Business Securitisation Fund Act 2019 was passed by Parliament and received Royal Assent. The Act is supported by the Australian Business Securitisation Fund Rules 2019 and the Australian Business Securitisation Fund Investment Mandate Directions 2019.
The ABSF consists of:
- the ABSF Special Account; and
- investments in authorised debt securities.
A Special Account is a legal construct for hypothecating expenditure for specific purposes and for setting financial limits on that expenditure. The ABSF Special Account is to be credited over a period of 5 years (in accordance with a schedule set out in the Act) with $2 billion to meet the purposes set out in the Act. The ABSF Special Account received its first credit of funding on 1 July 2019 for an amount of $250 million. It received a further $250 million credit on 1 July 2020. The final tranche of funding will be credited on 1 July 2023.
All eligible expenditure of the ABSF is to be made from the ABSF Special Account. Eligible expenditure comprises investments in authorised debt securities and costs incurred exclusively in connection with the ABSF. For each of its eligible investments, the AOFM (on behalf of the Commonwealth of Australia) enters into an agreement with the issuer to provide a level of commitment for a period of time, subject to the continued satisfaction of warranties, representations and conditions precedent.
All receipts of the ABSF (such as interest earned and proceeds from the redemption and sale of investments) must be credited to the ABSF Special Account. This allows the ABSF to reinvest associated capital and earnings.
An authorised debt security comprises a debt security issued:
- by a trustee of a trust or a special purpose vehicle;
- expressed in Australian dollars;
- relating to amounts of credit of less than $5 million (secured or unsecured) provided predominantly for business purposes;
- where the credit is not provided by a major bank (as defined in the Major Bank Levy Act 2017) or a subsidiary of a major bank; and
- that is not a first loss security.
The AOFM has responsibility for administering the ABSF and over the past year has been working to operationalise it. In 2018‑19 the AOFM received additional departmental funding to conduct this initiative. In June 2020 the AOFM made its first investment in which it committed $250 million to SME warehouse financing facilities.
Structured Finance Support Fund (SFSF)
In March 2020 the Australian Parliament passed the Structured Finance Support (Coronavirus Economic Response Package) Bill 2020. Its purpose is to ensure continued access by smaller lenders (ADIs that do not have access to the term funding facility offered by the RBA and non‑ADI lenders) to funding markets to mitigate any impacts arising from the economic effect of the Covid‑19 pandemic. This was achieved by the AOFM making targeted investments in the structured finance market.
The Act is supported by the Structured Finance Support (Coronavirus Economic Response Package) Rules 2020 and the Structured Finance Support (Coronavirus Economic Response Package) (Delegation) Direction 2020.
The Act established the Structured Finance Support Fund (SFSF) which consists of:
- the Structured Finance Support (Coronavirus Economic Response) Fund Special Account; and
- investments, being authorised debt securities or other investments prescribed by the Rules.
The SFSF Special Account was credited with $15 billion on the commencement of the Act. All receipts of the SFSF (such as interest receipts and proceeds from the redemption and sale of investments) must be credited to the SFSF Special Account. All eligible expenditure of the SFSF is to be made from the SFSF Special Account. Eligible expenditure comprises investments and costs incurred exclusively in connection with administering the SFSF.
The AOFM has responsibility for administering the SFSF and expects to receive additional departmental funding in the 2020‑21 Budget to conduct this initiative. During the period from April 2020 to June 2020 the AOFM invested in $1,839 million of debt securities issued by way of public term ($1,239 million) and private warehouse ($600 million) capital market securitisation offerings. In relation to the private warehouse transactions conducted, as at 30 June 2020 total committed support to these facilities was $935 million.
The AOFM’s borrowing and portfolio management activities comply with applicable legislative requirements. The key legislative mechanisms that governed these activities during the reporting period were as follows:
- the Commonwealth Inscribed Stock Act 1911 represents the Australian Government’s primary vehicle for the creation and issuance of stock, including Treasury Bonds, Treasury Indexed Bonds and Treasury Notes. It also provides a standing authority to the Treasurer to borrow in Australian currency;
- On 20 March 2020 the Treasurer issued a direction under section 51JA of the Act permitting the AOFM to borrow up to $850 billion in total face value of stock and securities. The decision repeals and replaces the 2017 decision which previously set the maximum at $600 billion;
- the Loans Securities Act 1919 includes provisions relating to overseas borrowings, securities lending, repurchase agreements and other financial arrangements;
- the Financial Agreement Act 1994 formalises debt consolidation and redemption arrangements applying since 1 July 1990 between the Australian Government and the State and Northern Territory Governments;
- section 58 of the Public Governance, Performance and Accountability Act 2013 allows the Treasurer to invest public money in authorised investments;
- the Australian Business Securitisation Fund Act 2019 provides for investments in authorised debt securities and other eligible expenditures to meet the purposes of the Act; and
- the Structured Finance Support Fund (Coronavirus Economic Response Package) Act 2020 provides for investments in authorised debt securities and other investments and other eligible expenditures to meet the purposes of the Act.