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Legislative Assembly for the ACT: 1999 Week 3 Hansard (25 March) . . Page.. 932 ..

c) The major findings of the report in regard to arbitrage were as follows:

Arbitrage potentially involves a number of risks (interest rate risk, liquidity risk, credit risk and funding risk). We judge Treasury's current program as conservative and one which substantially reduces these potential risks.

On balance, we support the market presence rationale for maintaining the Treasury's current arbitrage program for commercial paper. However, we see no grounds for lifting the current ceiling or for extending arbitrage beyond CP. Indeed, if Treasury re-finances more maturing debt using CP rather than private placements, we recommend that the arbitrage activities continue to be effectively wound down.

We understand policy for arbitrage has been documented in various internal memoranda. This policy should be spelt out in the proposed Policy Statement.

We suggest also that the rationale for the arbitrage activities be formally reviewed each year.

d) A copy of the report has been provided to the Member.

(2) With regard to the arbitrage program:

a) There are no staff specifically dedicated to the management of the program. During 1997-98, 91 arbitrage transactions were undertaken. It is estimated that each transaction takes approximately forty five minutes to complete. The incremental increase to the Treasury Dealer's (ASO 6) duties is approximately 68 hours per year. The Treasury Dealer undertakes the majority of the administrative details in respect of these transactions including arranging the deal with external organisations however, under the existing policy, all arbitrage transactions must be approved in the first instance by the Director, Economic Management Branch.

All investment and borrowing portfolios managed within the CFU (including the components relating to arbitrage) are monitored by the Manager and Assistant Manager of the CFU.

b) There are no external managers as such involved with the arbitrage program.

Arbitrage trading is a process whereby the ACT issues commercial paper from its commercial paper program for maturities averaging approximately 80 days and then reinvests the proceeds in highly rated commercial paper, promissory notes or bank bills to the same maturity (minimum credit rating of A2 applies). In respect of the commercial paper program, the ACT has a dealer panel comprising Commonwealth Bank, National Bank, Bankers Trust and JB Were Capital Markets who arrange funding for the ACT when it wishes to issue commercial paper.

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