Practical Considerations in Using Financial Instruments to Manage Risk in the Public Sector

Organisations need to understand the treasury management risks they are exposed to and they need to be clear about the actions they will take to manage those risks. Some risks can be managed by using specific financial instruments known as derivatives – the focus of this publication.

The publication describes and gives examples of possible uses of financial instruments, such as interest rate forwards, interest rate swaps, interest rate options, credit default swaps and foreign exchange forwards. It highlights the practical issues that authorities need to consider, such as using International Swaps and Derivatives Association documentation, using the Credit Support Annex, choosing a counterparty, how to enter into a transaction and accounting considerations.

Derivatives can be effective tools to manage risk, but they can be complex and introduce new and unforeseen risks. So it is essential that any local authority considering entering into a derivative contract is able to demonstrate that it has made an informed decision. The final chapter of this publication details the key areas that public sector organisations should consider, including ensuring they have the power to enter into such transactions and seeking proper advice so they fully understand the arrangements they are entering into and the associated risks.

This publication is available in book and PDF formats. Details of licensing arrangements for other categories of purchaser, which includes those organisations operating shared service arrangements, are available from CIPFA’s Publications Department.