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CategoryFinance
TypePolicy
Approved byCouncil, 8 March 2022
Date Policy Took Effect8 March 2022
Last approved revision13 June 2023
SponsorChief Financial Officer
Responsible officerTreasury, Assets and Insurance Accountant

Purpose

The Treasury Management Policy provides a framework within which the University can effectively manage its financial resources and minimise risk arising from treasury activities, and ensures investments and borrowings are made in accordance with legislative requirements including the Crown Entities Act 2004, the Education and Training Act 2020 and the Public Finance Act 1989.

The Policy includes:

  • Treasury responsibilities and delegation provisions (clause 1 and 2)
  • Policy and process relating to University borrowing and investment (clause 3 and 4)
  • Provisions relating to transactional banking (clause 5)
  • Policy and processes relating to management of relevant risk, comprising:
    • Counterparty credit risk (clause 6)
    • Foreign exchange risk (7)
    • Funding risk (8)
    • Interest rate risk (9)
    • Liquidity risk (10)
    • Operational risk (11)
  • Treasury reporting and performance management (clause 12)
  • Provisions relating to extraordinary events (clause 13)
  • Policy review provisions (clause 14)

Organisational scope

The policy applies to the University of Otago parent.

Definitions

Authorised Signatories
Chief Financial Officer (CFO), Chief Operating Officer (COO), Financial Controller and Treasury Assets and Insurance Accountant.
Core debt
Debt that is expected to remain outstanding for a period of greater than one year.
Counterparty Credit Risk
Risk of significant financial losses due to counterparty failure.
EBIT
Earnings before interest and taxes.
EBITDA
Earnings before interest, taxes, depreciation, and amortisation.
Finance leases
Tools that allow the accumulation of debt-like obligations with an embedded interest cost.
Fixed rate interest
For the purposes of this policy includes all known interest rate obligations on forecast gross core debt, including where hedging instruments have converted floating rate obligations into firm commitments.
Floating rate interest
For the purposes of this policy includes any interest rate obligation subject to movements in the applicable reset rate.
Foreign Exchange Risk
The risk of an adverse impact on New Zealand dollar expenses and purchases due to foreign exchange rate movement.
Funding Risk
For the purposes of this policy, the risk arising from debt facilities, and drawdowns under those facilities, not being rolled over and renewed in a timely manner or at a fair price.
Interest Rate Risk
Financial risk arising from adverse changes in interest rates.
Liquidity Risk
Risk of an inability to meet cash flow requirements when due.
Operational Risk
Risk of loss as a result of human error or fraud, system failures or inadequate procedures and controls; this includes legal and accounting risks.
Tertiary Education Commission (TEC)
The organisation responsible for funding and monitoring tertiary education providers in New Zealand.
University Council (Council)
The governing body of the University of Otago. The Council has specific responsibility under the Education and Training Act 2020 to ensure that the University acts in a financially responsible manner that ensures efficient use of resources and maintains the University's long term viability.

Content

Some commercially sensitive sections of this Policy have been redacted.

Ask a question about this Policy

  1. Treasury management responsibilities

    1. The University Council has ultimate responsibility for ensuring that there is an effective framework for the recognition, management and reporting of treasury risks. This includes:
      1. deciding the level and nature of treasury risks that are acceptable, given the underlying objectives of the University of Otago and the Council's financial responsibilities and Section 281(1)(e) of the Education and Training Act 2020, and
      2. approving the Treasury Management Policy, including any substantive amendments to the policy.
    2. The Vice-Chancellor has overall responsibility for treasury management through delegation from the Council. This includes approving authorised signatories and delegated authorities in respect of treasury dealing and banking activities (consistent with financial delegations approved by the Council where relevant – see clause 2(b) below).
    3. The Chief Financial Officer ( CFO ) is responsible for the management of treasury activities through delegation from the Vice-Chancellor. This includes:
      1. in conjunction with the Vice-Chancellor, developing the annual financial budget and long-term financial strategy/plans
      2. reporting to the Council's Finance and Budget Committee on treasury matters, and advising the Vice-Chancellor and Finance and Budget Committee of significant treasury events
      3. recommending to the Vice-Chancellor authorised signatories and delegated authorities in respect of all treasury dealing and banking activities
      4. having primary responsibility for managing bank relationships
      5. negotiating bank funding and financial market dealing facilities in accordance with this policy
      6. recommending changes to this policy to the Finance and Budget Committee, including advising on borrowing, treasury investment and risk management provisions, following consultation with the Vice-Chancellor, and
      7. monitoring and reviewing the performance of the treasury function in terms of achieving its objectives.
    4. The Finance and Budget Committee has responsibilities as outlined in its Terms of Reference as listed on the Finance and Budget Committee webpage.

  2. Delegation of authority and authority limits

    1. Overarching delegated authority and authority limits are set out in the Council Delegations Schedule.
    2. Treasury management duties and responsibilities outlined in this policy are reinforced through the delegated authorities listed in the Schedule of Financial Delegations.
    3. All delegated authorities and signatories will be reviewed at least annually to ensure that they are still appropriate and current.
    4. Whenever a person with delegated authority on any account or facility leaves the University, all relevant banks and other counterparties will be advised in writing in a timely manner to ensure that no unauthorised instructions are accepted from such persons.
    5. Annually, banks will be provided with a list of personnel with the delegated authority to undertake transactions, standard settlement instructions and details of personnel able to receive confirmations.

  3. University borrowing

    1. The objective of the University's borrowing management is to provide on-going liquidity and funding support to enable the University to achieve its strategy. In the management of its borrowing, the University is required to manage costs and risks and to comply with financial ratios and limits on a current and prospective basis.
    2. The Council retains authority to review and approve all new loans and borrowing facilities, including the refinancing of existing lending facilities.
    3. Under section 282(4)(d) of the Education and Training Act 2020 the University is required to obtain written approval from the Secretary of the Ministry of Education to borrow funds. Therefore, any future borrowing requirements must be identified well in advance of the date they will be required to allow for the approval process.
    4. The University will prepare regular financial reports and medium to long-term rolling cash flow and debt forecasts which enable it to identify its borrowing requirements.
    5. [REDACTED]
    6. Finance leases are tools that allow the University to accumulate debt-like obligations with an embedded interest cost. Alternatively, the University may be able to obtain a cheaper source of funds through its banking relationships. All proposed finance lease arrangements must include a 'lease or buy' assessment prior to any contract being approved.
    7. As a form of borrowing, finance leases must be within the Ministerial determination of 2014 and approved by the Council or, if outside the University's approved borrowing consent, require the approval of the Secretary for Education through the TEC . For further information and the full requirements refer to Finance lease information on the TEC website.
    8. Once borrowing is in place, renegotiations of any new debt or facility should commence 12 months prior to the maturity date of the existing facility. New facilities should be executed at least one month prior to expiry of the existing. This renegotiation will follow the University's procurement policies and procedures, with reference to the terms of the relevant consents received from the Secretary for Education.
    9. Where TEC and bank financial covenants are in place and require ongoing compliance, covenant risk is mitigated through ongoing monitoring and regular reporting to the Finance and Budget Committee and Council (see also clause 12 of this Policy).
    10. The University does not offer security on its borrowing and derivative activity.

  4. Investment management

    1. The University's investment management aims to protect the value of the investment, provide liquidity and within this optimise the investment return of working capital for an agreed level of risk. Investments must be made in accordance with legislative requirements including Crown Entities Act 2004 and Education and Training Act 2020. For completeness, the provisions of the Crown Entities Act 2004 which apply to the University are listed in schedule 4, part 1.
    2. Accurate cash flow forecasts will be maintained to ensure sufficient levels of liquidity to meet both planned and unforeseen cash requirements, and to assist borrowing decisions.
    3. The University has a commitment to ethical and socially responsible investing. Therefore, any equity and bond investment made must consider social good as well as financial return. The University should not invest directly in companies that are primarily involved in the production or distribution of alcohol, tobacco or munitions, or in the exploration and extraction of fossil fuels. A measured approach should be taken with materiality issues considered.
    4. Investments permitted by legislation
      The Public Finance Act 1989 (section 65I – Investment of public money) requires that the University, as a Crown Entity, invests funds in accordance with the rules applying to the University's investment of public money. This allows Crown Entities to invest in bank deposits (whether in New Zealand or elsewhere) approved by the Minister of Finance for the purpose; or in public securities or other securities that the Minister may approve for the purpose. The Minister can grant exemptions to these criteria (see 4(e) below).
    5. Investments permitted by exemption to legislation
      Subsequent to an exemption granted by the Minister of Finance, on 2 May 2011, to the University under section 65I of the Public Finance Act 1989 and section 203(4) of the Education Act 1989, investments can be made by the University in debt or equity securities in companies, in New Zealand or overseas, that are developing and commercialising intellectual property created by or on behalf of the University. This is subject to the following:
      1. The aggregate face value of all these investments (either in cash or cash equivalent) shall not exceed 2 per cent of the equity of the University group, measured against the most recent audited group financial statement for the University.
      2. There must be no contingent liabilities associated with any investment by the University, either by way of uncalled shares, guarantees or otherwise.
      3. Investments made by the University under this exemption must be approved by the Vice-Chancellor up to the limit of the Vice-Chancellor's delegated financial authority for capital expenditure and by the Council for amounts above this.
    6. Investments permitted as not covered by legislation
      The Office of the Auditor General, Treasury and the TEC have agreed that equity holdings or loans in companies involved primarily in providing teaching and research-related activities are not “investments” under the Public Finance Act 1989. The University shall rely on this arrangement to make such investments. Investments made by the University under this arrangement require approval by the Vice-Chancellor up to the limit of the Vice-Chancellor's delegated financial authority for capital expenditure, and by the Council for amounts above this.
    7. Investments in companies
      Equity investments and loans to companies that are not subsidiaries of the University must only be made if they comply with the conditions and approvals outlined in clauses 4(e) or 4(f) above.
    8. Investments in bank term deposits
      Bank term deposits are subject to relevant provisions in this this policy, including credit risk management (see clause 6 below) and requirements around banks approved under the Public Finance Act 1989 (as per clause 4(d)). The following additional provisions also apply:
      1. A new bank account may only be opened, and an existing bank account may only be closed, with the approval of both the Chief Financial Officer and the Vice-Chancellor.
      2. Investments of University working capital in bank call and term deposits beyond six months must be approved by the Chief Financial Officer. If the Chief Financial Officer is not available then this may be approved by either the Vice-Chancellor or in their absence, a Deputy Vice-Chancellor.
      3. Investments held in working capital should be managed so that the balance held matches future expected outgoings as far as practicable with surplus funds being invested in call or term deposits.
      4. Investment instructions provided to the banks must follow the format on the Term Deposit Instructions Form. Investments are approved by two authorised signatories.
      5. Term deposit rates should be sought from the registered banks meeting the ratings set out in clause 6(b) of this policy, and the best rate should be accepted for the University within the framework for investment in bank deposits set out in clause 6 of this policy.
      6. To ensure appropriate separation of duties, staff members placing funds on deposit should not be responsible for reconciliations of bank funds on hand.

  5. Transactional banking management

    1. The treasury function requires a centralised management of transactional banking and risk management. Transactional banking must be provided by an institution which complies with the terms of the Crown Entities Act 2004. Bank account operation and reconciliation requirements are detailed in the Bank Accounts Procedure.

  6. Counterparty credit risk management

    1. The primary objective of managing credit risk is to ensure that the University does not suffer losses due to counterparty failure that significantly impacts the financial performance of the University.
    2. The University will manage its credit exposure to its liquidity, treasury investment and derivatives activity by only transacting with approved bank counterparties. Unless otherwise approved by Council, counterparties will be New Zealand registered banks with a credit rating at least equivalent to one of:
      1. Standard & Poor's (“S&P”) A
      2. Fitch A
      3. Moody's A2
    3. The below limits are relevant for all treasury investment, interest rate risk and foreign currency management activity:
      Counterparty/IssuerMinimum S&P (or equivalent) long term/short term credit ratingTotal derivative limit per counterparty ($million)Total investment limit per counterparty ($million)Total maximum combined limit per counterparty ($million)
      NZ GovernmentAA+UnlimitedUnlimitedUnlimited
      NZ Registered Bank (per bank)AA/AA-25.02550
      NZ Registered Bank (per bank)A15.01530
    4. In determining the usage of the gross limits under clause 4(c) above, the following weightings will be used:
      1. Treasury investments (e.g. bank term deposits and call account balances) = Transaction principal amount.
      2. Interest rate risk management (e.g. swaps, Forward Rate Agreements ( FRA s) = Transaction Notional x Maturity (years) x 3%.
      3. Foreign Exchange Risk (e.g. Forward Exchange Contract) = Transaction Face Value amount x ((square root of the maturity (years)) x 15%).
    5. Counterparties exceeding the gross limits in clause 6(c) will be reported to Council (normally through Finance and Budget Committee), along with a recommended strategy to move back into policy compliance.

  7. Foreign exchange risk management

    1. The primary objective of managing foreign exchange risk is to mitigate against the adverse impact on New Zealand dollar ($NZ) expenses and purchases from foreign exchange rate movement.
    2. The University will hold foreign currency received from goods and services sold in a foreign currency in a denominated New Zealand bank account (the 'foreign currency account') up to an amount that covers:
      1. all forecast and known purchases of goods and services in the calendar year that the foreign currency is received, and
      2. any known, foreign currency liabilities and purchases that are unavoidable and will be paid anytime in the twelve month period following the receipt of the foreign currency (the natural hedge).
    3. The funds held in the foreign currency account may be sold where the University has a demand for cash.
    4. The University will sell forward all sales of goods or services denominated in foreign currency and not required for the natural hedge immediately when the sale becomes an unavoidable asset to the University.
    5. The University will purchase forward cover for all individual purchases of goods or services denominated in foreign currency and not covered by the natural hedge immediately when the purchase becomes an unavoidable liability or purchase to the University and exceeds$NZ50,000 in value. Purchases under $NZ50,000 may be hedged at the discretion of the contract authorisers.
    6. The University will purchase forward cover for all liabilities denominated in foreign currency and not covered by the natural hedge immediately when the liability becomes an unavoidable liability to the University.
    7. For the purposes of clauses 7(e) and (f), any purchase or liability which is:
      1. included in the budget approved by University Council, or
      2. is recurring in nature and has been included in the budget approved by Council in each of the last five years, and is included in the budget that has been approved by the Vice-Chancellor but has not yet been approved by Council
      will be considered to be an unavoidable liability.
    8. When the settlement dates for foreign exchange purchase agreements are not able to be met, and the unavoidable liability still exists, the University will purchase the contracted currency and deposit those funds into its foreign currency account to be used when the liability falls due.
    9. The following approved foreign currency instruments will be used to manage purchase amounts in excess of goods and services sold:
      1. foreign currency deposit account amounts
      2. spot foreign exchange contracts
      3. forward foreign exchange contracts
      4. foreign currency swaps.
    10. With respect to Foreign Exchange Contracts:
      1. The value of foreign exchange contracts in place will not exceed the value of funds to be paid or received.
      2. Approved individual purchase orders for purchases in foreign currencies over NZ$50,000 should be hedged where practicable. The approved purchase order, currency type, amount and estimate of the date of payment should be provided to the Treasury Asset and Insurance Accountant, Financial Services Division as soon as the purchase order has been approved. The Treasury Asset and Insurance Accountant will purchase a hedging contract with the bank and forward the details back to the relevant Department. This is the price the Department will be charged for the purchase of the goods.
      3. For regular annual expenditure items, such as library book purchases, membership fees and standard consulting fees, where the total of forecasted purchases is over NZ$50,000 in any one currency, the contracts will be purchased by the Treasury Asset and Insurance Accountant when the budget is approved.
      4. When the forecast dates for external foreign exchange settlements are not able to be met, the University will still purchase the contracted currency and will place the funds purchased in a foreign exchange bank account until the purchase is able to be made. Any interest gained on holding these foreign balances will not be available to Departments.
    11. For the avoidance of doubt, transactions of a speculative nature where there is not a legitimate underlying business cash flow being managed are not permitted.

  8. Funding risk management

    1. The primary focus of funding risk management is to ensure that debt facilities and drawdowns under those facilities can be rolled over and renewed in a timely manner and at a fair price.
    2. As far as is practical, the University will stagger the maturity dates of bank facilities in order to mitigate the risk of raising new or re-financing existing debt facilities thereby reducing exposure to adverse circumstances which may impact the availability or price of such funding. See also clause 3(h) on renegotiation.
    3. When actual debt amounts are at $20 million or above it is mandatory that the following limits apply for managing funding risk. The maturity profile of the total committed funding in respect to all core debt and committed debt facilities is to be managed within the below limits:
      PeriodMinimum %Maximum %
      0 to 3 years2575
      3 years plus2575
    4. A funding maturity profile that is outside the above limits, but self corrects within 90-days is not in breach of this Policy. However, maintaining a maturity profile outside of policy limits beyond 90-days requires specific approval of Council.
    5. Approved working capital and debt facilities include bank overdraft and committed bank debt funding facilities.

  9. Interest rate risk management

    1. The primary objective of managing interest rate risk is to mitigate the negative impact of adverse changes in interest rates on the University's budgeted interest revenue and interest expense amounts.
    2. When actual core debt amounts are at $20 million or above it is mandatory that the interest rate exposures are managed according to the limits detailed in the following table. The University's forecast gross debt amounts must be within the following interest fixed/floating rate limits:
      Debt interest rate policy parameters (calculated on rolling monthly basis)
      Debt period endingMinimum fixed rateMaximum fixed rate
      Current40%90%
      Year 140%90%
      Year 235%85%
      Year 330%80%
      Year 425%75%
      Year 520%70%
      Year 60%65%
      Year 70%60%
      Year 80%55%
      Year 90%50%
      Year 100%45%
    3. A fixed rate maturity profile that is outside the above limits, but self corrects within 90-days is not in breach of this Policy. However, maintaining a maturity profile that is outside the above limits beyond 90-days requires specific approval by Council.
    4. Interest rate hedging activity with a maturity of fewer than or equal to five years with a value of $0 to $10m and within the risk parameters in clauses 6(b) of this policy must be approved by the Vice-Chancellor or any two Authorised Signatories.
    5. Interest rate hedging activity with a maturity of greater than five years, or over $10m and within the risk parameters in clauses 6(b) of this policy must be approved by the Vice-Chancellor or any two Authorised Signatories, one of whom must be either the Chief Financial Officer or the Chief Operating Officer.
    6. Any hedging with a maturity beyond five years or which is outside the risk parameters in 6(b) shall require Council approval.
    7. Approved interest rate instruments that may be used in managing interest risk are the following interest rate swaps:
      1. forward start swaps
      2. swap shortening and extensions (must be approved by two Authorised Signatories, one of whom must be either the Chief Financial Officer or the Chief Operating Officer) and
      3. interest rate options on:
        • Bank bills (purchased caps and one for one collars)
        • Interest rate swaptions (purchased only)
      The forward start period on swaps and collars must be no more than 36 months from the deal date, except where the forward start swap/collar starts on the expiry date of an existing swap/collar and has a notional amount which is no more than that of the existing swap/collar.
    8. Any other interest rate instrument not listed in clause 6(f) must be specifically approved by Council. Such approval shall be on a case-by-case basis and may only be applied to the one singular transaction being approved.
    9. Credit exposure on these interest rate instruments is restricted by specified counterparty credit limits.
    10. For the avoidance of doubt, transactions of a speculative nature where there is not a legitimate underlying business cash flow being managed are not permitted.

  10. Liquidity risk management

    1. The primary objective of managing liquidity risk is to ensure that sufficient funds are available to meet the University's financial commitments when required. Management must include allowance for unforeseen events which may curtail cash flows and cause pressure on liquid assets. The possible causes of a crisis in liquidity include:
      1. unexpected reduction in revenues
      2. unexpected increase in operating expenses
      3. unexpected capital expenditure
      4. business disruption
    2. [REDACTED]
    3. Committed bank facilities are only executed with those banks that have a long-term credit rating of at least A by S&P (or equivalent Moody's or Fitch) ratings.

  11. Operational risk management

    1. The University will have controls in place to minimise operational risks arising from human error, fraud, systems failures or inadequate procedures and controls. These will include:
      1. dealing authorities and limits – transactions will only be executed by those persons and within limits approved under formal delegation by University Council or the Vice-Chancellor
      2. segregation of duties – no single person shall be permitted to deal/transact, authorise and confirm a treasury transaction
      3. regular management reporting
      4. regular risk assessment, including review of procedures and controls as directed by the Finance and Budget Committee, and
      5. Organisational, systems, procedural and reconciliation controls to ensure:
        • all cash management, borrowing, treasury investment and risk management activity is bona fide and properly authorised
        • checks are in place to ensure accounts and records are updated promptly, accurately and completely
        • risk positions are updated, reviewed and reported on a regular basis
        • the matching of third-party confirmations with immediate follow-up of anomalies, and
        • any unresolved discrepancies are to be immediately advised to the Chief Financial Officer who will determine and/or approve any consequent action to remedy the discrepancy.
    2. The University will minimise legal risks (e.g. the unenforceability of a transaction due to an organisation not having the legal capacity or power to enter into the transaction or deficiencies in documentation) by ensuring all transactions are permissible under legislation and all significant legal documentation is reviewed and endorsed by legal counsel.
    3. Where the University uses derivative instruments for the purpose of reducing its exposure to fluctuations in financial market pricing, the accounting treatment for such instruments will follow PBE accounting standards or the equivalent for the public sector.

  12. Treasury reporting and performance management

    1. In order to determine the effectiveness and success of the University's treasury management function, compliance and performance benchmark measures will be reported by the Chief Financial Officer to the Vice-Chancellor, Finance and Budget Committee and University Council. These shall include:
      1. A monthly Treasury Dashboard Report, comprising:
        • Asset management
          • Income, expenditure and funds available
          • Liquidity risk position including availability
        • Risk management
          • Borrowing and interest rate risk position
          • Treasury investment maturity risk position
          • Credit and counterparty risk
          • Foreign currency risk
          • Financial covenants and TEC limit reporting
          • Market commentary and strategy update
          • Performance benchmarking
          • Exceptions Report
          • Derivative valuations
        • Cash and borrowing forecast.
      2. A biannual Foreign Exchange Report, including details of:
        • foreign currency cash holdings
        • foreign exchange risk positions and contracts, and
        • policy compliance.
      3. A report to each ordinary Finance and Budget Committee meeting on the University's investment portfolio in terms of compliance with this policy.
    2. The Chief Financial Officer shall receive and monitor a weekly cash forecast report.

  13. Responding to extraordinary events

    1. Where internal or external issues are identified outside of the normal budget cycle which have a capacity to materially impact the University's financial sustainability, the Finance and Budget Committee may revisit strategies in this policy and make recommendations to the Council to facilitate alignment and achievement of the University's operational and strategic plans.

  14. Policy review

    1. This Treasury Management Policy shall be reviewed on an annual basis. This shall include a check for currency and fitness-for-purpose every year, with a more in-depth fundamental review completed every second year.
    2. The Chief Financial Officer has the responsibility for preparing a review report that is presented to the Vice-Chancellor and Finance and Budget Committee. The report may include:
      1. recommendation as to changes, deletions and additions to the policy
      2. overview of the treasury management function in achieving the stated objectives, including a summary of breaches and one-off approvals to highlight areas of tension
      3. analysis of bank and lender service provision, and share of financial instrument transactions
      4. comments and recommendations from the internal/external auditors on the treasury function, particularly internal controls, accounting treatments and reporting
      5. review of the treasury spreadsheets/monitoring tools and procedures, and
      6. an assessment on the performance of any specialist external support.
    3. Amendments to the Policy require Council approval taking into account advice from the Finance and Budget Committee.

Contact for further information

For all queries related to this Policy, please contact:

Treasury, Assets and Insurance Accountant
Financial Services Division
Email fsd.treasury@otago.ac.nz

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