Institutional Setting

“In practice, debt and asset management is fragmented between the DMO, public sector entities managing assets and the CB, with potential conflicts between the different agencies’ objectives.  Information exchange between the relevant agencies is thus important for an effective management of all public assets and liabilities” (Rawdanowicz et al., 2011). 

Clearly defined roles and objectives between the front, middle, and back offices must be established in order to effectively manage risk and to operate efficiently.  The front office can be understood as the portfolio management team. The front office is generally responsible for cash flow projections, executing trades, and foreign and domestic currency transactions.  The middle office is usually responsible for risk management.  This can include risk management for the government’s debt portfolio as well as compliance issues.  The back office or treasury operations, handles trade confirmations and transactional support such as loan documentation.  While each of these offices has been tasked with specific duties, within the SALM framework there must be cohesion between them in order to maximize the benefit of the SALM framework.  For example, the middle office must be able to effectively communicate and have confidence the front office will execute the transactions for the defined risk management strategy.  Implementation of SALM in a practical and functional manner is completely dependent on the operational capabilities of these entities (front, middle, and back offices).

Just as there are many versions of SALM, there are many institutional frameworks in which it may be implemented.  More importantly than if SALM is implemented in an ALMO or DMO, or some other combination thereof, there are institutional factors that are required for SALM to be effective:

• Transparency: there must be a willingness to provide information that is necessary to effective decision making.  This goes beyond statutory requirements but should include any information that can inform policymakers.  This is of critical importance regarding contingent liabilities (“CL”) as accounting rules often do not legally require them to be disclosed or even assessed.

• Accountability: institutional arrangements must clearly define objectives and lines of responsibility.  This may be achieved through the use of strategic benchmarks.

• Efficiency: checks and balances must be used to ensure appropriate safeguards are in place while redundancy between agencies and functions must be minimized.

• Cooperation: understanding of broad organizational mission and objectives.  This will reduce conflict between different functions that may result from conflicting roles (i.e. risk management versus portfolio management).

• Communication: information must be shared and entities must not withhold items from policymakers in order to defend perceived territorial threats.  As much of the success of SALM is determined by information sharing and raising awareness of risks that may not have been identified organizationally, an environment that welcomes discourse must be encouraged.

• Integration: whether or not there is a consolidation of balance sheets, SALM requires some level of integration amongst agencies and policymakers.

The degree to which there is centralization of balance sheet management will impact the institutional framework necessary for effective SALM.  In instances in which balance sheets are managed independently there will be much less interaction between these units and the central government.  To be successful with this arrangement, the sovereign must have strong institutions beyond the central government and a clear understanding of its risk profile.  Decentralized balance sheet management in an environment that lacks a risk averse culture, transparency, and the sufficient resources will be ineffective.  For this reason, centralized schemes are the more common practice in developing nations.  In instances where there are agencies competing for similar resources (i.e. credit guarantees) there is standardization in the information submitted to the central government.  This allows the central government to evaluate the proposals in a more uniform manner.  Understanding the institutional culture will be just as important in implementing the appropriate SALM framework as developing one based on economic objectives and risk preferences.