King & Shaxson Treasury Solutions
King & Shaxson Treasury Solutions has been set up to enhance and complement our
existing services to the building society sector. Effective treasury management
is achieved by making well-informed decisions, within a robust control environment,
with effective risk management and reporting to senior management. We are aware
that it is often not cost effective to have a fully resourced treasury function
with expertise in all areas of treasury. With this in mind King & Shaxson Treasury
Solutions offers the following services:
All services are provided on an individual basis and tailored to the requirements
of the client.
Interest rate forecasting and
economic reviews (Top)
Information is key when making treasury investment and funding decisions in
the money markets. To give the Society the ability to make informed decisions
we provide economic reviews and regular forecasts of both short- and long-term interest
rates. Our forecasts are based on a theoretical overview of economic fundamentals
and our practical understanding of current and future market behaviour. To
allow the Society to receive a balanced view of the world we provide commentary
on, and assessment of, other economic commentators forecasts.
We would attend the Societys ALCO/Board meetings at least quarterly to present these
reviews and forecasts. This provides a strong basis from which senior management
can form the Societys own view of interest rates. A view on interest rates
is essential if the Society is to maximise the returns on its liquid assets and
minimise its costs of funding. In addition we would attend quarterly meetings
with the Societys executives and senior management to address any treasury issues
facing the Society.
While a strategic view on the direction of interest rates is a powerful overall
planning tool, it is often necessary to assess likely movements in the short term.
As part of our overall service, each Monday morning we provide our clients with
an assessment of the upcoming economic indicators during the week and our opinion
on their likely effect on interest rates in the short-term.
We write and distribute a Quarterly Economic Review to all clients. These
reviews tend to focus on specific areas that are affecting the market at the time.
We also provide market updates on topical issues.
Investment and funding advice
As active participants in the financial markets and using our significant experience
and expertise, we can advise the Society regarding investment opportunities and
strategies. We can assist in planning the structure of your investments, taking
into account 8-day and prudential liquidity limits.
We can review your liquidity stress testing & scenario analysis policies to
ensure they remain relevant, or advise on the use of different scenarios.
We have helped several societies to design their liquidity stress testing policies
in the recent past.
We provide advice on the range and quality of instruments available for use by the
Society. This is particularly important as the regulatory emphasis on liquidity
moves towards investments in securities rather than cash. Investments such
as Treasury Bills, Floating Rate Notes, Medium Term Notes, and Supranational Bonds
will have a significant role in the future. Post Basel II, money market funds
will also be an important part of the armoury.
As part of our overall service we can advise on funding opportunities and assist
in developing an overall strategy and programme for wholesale funding activities.
Planning funding requirements through the year is important and we can activity
assist in this process. We can explore a wider range of funding sources with
you and introduce you to new and developing instruments. For example, covered
bonds raised on a club or syndicated basis, may become a vitally important way of
financing mortgage assets. In addition, we can introduce you to bilateral
funding suppliers to meet your standby facility requirements.
In a world where risk management is king, the greatest monetary risk that a treasury
function faces is the default of a market counterparty. To mitigate this risk
it is essential to assess the risk profile of all market counterparties. While
in an ideal world you would assess a counterparties risk attributes through individual
credit analysis, in reality this is not cost effective. Credit rating agencies
provide an efficient way of assessing individual counterparties risk levels.
To assist in this process we provide a service to monitor the output from these
rating agencies, informing you of any changes in the ratings of counterparties on
your authorised counterparty list. This ensures that your authorised counterparty
list remains current, reducing the possibility of lending to counterparties that
no longer meet your ratings criteria.
We can advice the Society on the most relevant credit ratings to adopt within their
liquidity policy statement. In addition we can offer guidance on the most
appropriate limit criteria to monitor and the minimum levels of ratings to use,
based on the Societys risk appetite and in view of levels used within your peer
On a monthly basis we provide an updated authorised counterparty list, highlighting
any changes in ratings that have occurred during the month, plus any counterparties
that no longer meet the Societys ratings criteria.
This service provides our clients with peace of mind in this high-risk area of treasury.
An example of an authorised counterparty list is shown below.
It is a requirement under FSA regulation to ensure that all individuals within the
Society gain competence in their specific operational areas and that they maintain
this competence on an on-going basis. At King & Shaxson Treasury Solutions
we can provide comprehensive and relevant training for all levels of staff to help
them gain the required competency levels and maintain it with subsequent refresher
training as required. We offer training which is tailored to the specific
needs of the individuals, from dealing procedures and reporting requirements for
staff involved in day-to-day operations, through to detailed instrument knowledge
and market mechanics for senior-management involved in strategic development.
Typical topics for which we have provided training in the past include:
An introduction to treasury management
Advanced treasury management issues
Risk management issues
The provision of training is included in the overall treasury consultancy service.
Alternatively, training can be provided on an individual basis to meet the specific
training requirement of the Society.
We are well aware that your treasury issues do not conveniently occur around the
timing of meetings. As a result there may be occasions when you require advice
and assistance to address ad hoc issues. We are available to deal with your
queries relating to treasury issues throughout the working day. These queries
could be anything from checking a quoted price on an instrument to getting confirmation
of the correct treatment of an instrument within the gap analysis.
Risk management advice
Interest rate risk is a major issue for all building societies, irrespective of
their selected approach to risk management. Whilst operating under the matched
and extended approaches to risk management exposes the Society to higher levels
of interest rate risk, through the offering of fixed rate products, there still
remains an element of risk on the administered approach with the ability to invest
liquid assets over long periods.
There are many approaches to managing interest rate risk. Some building societies
look to eliminate it as far as possible by matching off any fixed rate exposures
with appropriate hedges, whilst others will apply a view on the future direction
of interest rates and position their balance sheets accordingly.
At King & Shaxson Treasury Solutions we can work with the Society to develop
a strategy that suits your preferred approach to interest rate risk management.
We can help you assess and manage any emerging interest rate risk in line with your
approach. In addition, we can review your monthly gap analysis, where prepared,
and assist you in planning for your gap position before each month end to ensure
that no surprises materialise within the Societys reporting to the FSA.
An important element of risk management is ensuring that the individual and cumulative
gap limits, plus the overall sensitivity limit, remain relevant to the size, complexity
and risk appetite of the Society. We can advise the Society with regard to
appropriate limits, set in the context of accepted sector levels.
We can assist in timing of any interest rate hedges. The Society remains significantly
exposed to interest rate risk while waiting for either a pre-hedged position to
complete or a product to sell prior to hedging. A robust view of interest
rates in the short term can make the difference between achieving a margin and making
we can provide services for the arrangement of hedging transactions,
the Society is under no obligation to transact through King & Shaxson.
If fact, we can provide indicative pricing for comparison if you require
societies grow, and the challenge to retain margin intensifies, it is
often appropriate to move up the risk management scale. This can
benefit a society in several ways. A society moving from the administered
to the matched approach gains the ability to offer a wider range of
products allowing it to provide a better proposition to potential customers.
A society moving from the matched to the extended approach gains
the ability to run unhedged fixed rate positions, managing interest
rate risk across the whole balance sheet. In addition, the Society
can create a policy for the investment of its capital. We have
considerable experience in taking societies through this process.
This includes assisting them in changing policy statements, implementing
reporting procedures, devising product development processes and providing
societies moving to the extended approach, we can assist in evaluating
the output from risk management software packages and advise on the
most appropriate instruments to eliminate unacceptable interest rate
risk exposures, either now or in the future. Alternatively, we
can offer an outsourced bureau service for interest rate risk management
The other significant risk that societies face is operational risk. This has
become especially important with the imminent arrival of Basel II requirements under
the Capital Adequacy Directive. We can help the Society to assess and reduce
operational risks within the treasury function, which could contribute towards a
lower capital requirement.
Policy and procedures review (Top)
Most building societies review their liquidity and risk policies on a regular
basis to ensure they accurately reflect their strategic and tactical goals and take
account of the latest regulatory guidance. We can assist in reviewing the
Societys policy statements, having regard for other societies in your peer group,
the risk approach under which you operate, and current regulatory guidance.
It is important to develop policies that give the Society the ability to operate
efficiently and effectively, within a robust control environment.
As part of the overall treasury consultancy service, we can undertake a review of
your operational environment, assessing your procedures against accepted good practice.
This would provide senior management with an independent review of the Treasury
function, which should complement any work undertaken by Internal Audit. It
would also gives us a clear view of how you prefer to operate, allowing us to better
tailor the advice we would give you.
As part of our overall advisory service we can provide independent monthly valuations
of interest rate swap transactions. The valuations are provided clean, which
gives a clearer picture of exposure than the valuations provided by some software
packages. We also provide financial instrument valuations as required.
These valuations could include CDs, gilts, FRNs and other securities.
Through our position within the market we are well placed to advise on the development
of new products. We can help structure fixed, capped, floor, escalating and
de-escalating retail savings and mortgage products. Our knowledge and experience
can help to spot market opportunities and we are happy to discuss product ideas
with your marketing departments.
We can work with the Society in developing white-labelled products in partnership
with others. This can provide access to products and services that would be
uneconomic in isolation. We are currently working on ideas in this field relating
to ethical and Child Trust Fund accounts.
Appointment and implementation
of fund managers (Top)
As margins deteriorate and management expenses increase through, for instance, increased
regulation, societies are eager to find new ways to sustain an acceptable level
of profits. To this end, many societies have outsourced a proportion of their
liquidity management to cash and fund managers. There is strong evidence that,
over the long-term, fund managers can achieve significant gains in performance over
a passively managed portfolio.
Members of our team have helped many building societies utilise fund managers over
the last six years. The appointment process that we would adopt is outlined
below. We would provide the
Society with a long list of potential fund managers. This list has been compiled
over a number of years through experience of those managers that can provide the
appropriate service to building societies. We have built good relationships
with each to ensure that the process runs as smoothly as possible.
We would supply the Society with
a questionnaire to send out to potential fund managers. This questionnaire
has been devised to cover what we would consider are the important issues that need
to be addressed when choosing a fund manager.
Once the fund managers have submitted their responses we would analyse each using
our unique scorecard for objective assessment. Additionally, we would provide
a written assessment of each managers submission.
We would attend a meeting with
the Societys selection panel to choose a short list of fund managers for interview.
At the meeting we would review the written assessments and scorecards for each manager,
adding to this our experiences of each managers culture and methodology. The
number of short-listed managers selected will depend on the number of managers required.
Each of the short-listed managers
will be invited to give a presentation to the selection panel. We would attend
these presentations to assist the Society in interpreting any representations from
the managers and giving guidance as appropriate.
Fees can vary widely between managers.
We will be on hand to assist the Society in fee negotiations with the selected fund
In addition to taking the Society through the selection process, we can assist in
operational and policy issues. This would involve:
Assisting the Society with defining
the investment parameters within which the fund managers must operate. The
scope of the investment parameters must reflect the risk appetite of the Society.
It may be valuable to vary the investment parameters between managers depending
on their style of management.
A key element of the investment
parameters is the maximum weighted average duration. We can help the Society
to set appropriate individual and cumulative gap limits, and an overall sensitivity
limit, which accurately reflect this maximum weighted average duration.
Attending a meeting between the
Society and each fund manager to agree the investment parameters. It is important
that each manager agrees with their individual investment parameters and does not
see them as restrictive from a performance perspective.
Assisting the Society in revising
its liquidity and financial risk policy statements and helping review its procedures,
to reflect the outsourcing of liquidity management, the investment parameters and
appropriate controls. We can review legal documentation in the light of our
practical experience. However, this is in the context of our experience as
treasury advisers, not lawyers.
We can assist the Society in ensuring its compliance with section 5.8.1 of the Interim
Prudential Sourcebook, which sets out the controls under which you can outsource
Overall, we believe we can make any project for the outsourcing of liquidity management
a painless process. Our experience will help you avoid the many pitfalls that
can be experienced during the process and allow you to focus on the key issues.
Performance monitoring of fund
We offer a service to building societies that independently monitors fund manager
activities. On a quarterly basis we would deliver a formal written assessment
of the fund managers activities including a review of the economic environment.
This document would detail all the key events during the quarter that had affected
the markets, outlining the changes in interest rates across the yield curve.
Against this backdrop the activities of each fund manager are assessed, highlighting
their interpretation of the markets and how they translate this into investment
An important part of any fund manager review is the ability to benchmark the Societys
fund managers against others in the market. We receive performance figures
from all the major managers and can provide a detailed comparison on a quarterly
and annual basis.
We would attend regular review meetings between the Society and its fund managers
and provide briefing notes before each review meeting, including relevant questions
for each manager.
As building societies battle against falling margins and rising management expenses
there is an increased focus on growth to maintain profitability and management expense
ratios. This can lead to capital constraints as solvency ratios are put under
pressure. To alleviate this pressure a society may require capital funding.
The type of capital funding taken depends on a societies current capital profile.
Capital planning has become increasingly important with the Capital Requirements
Directive on the horizon. At King & Shaxson Treasury Solutions we can
assist you in assessing the Societys future capital requirement along with the level/tier
of capital required.
As well as advice we are able to source counterparties that will lend subordinated
capital to the Society. We can also advise on and arrange an issue of Permanent
Interest Bearing Shares.
Regulatory and Accounting issues
Despite the FSAs testimony that they are looking to reduce the regulatory burden
on firms, this does not seem to have materialised with the Treasury function.
The current regulatory burden comes from Basel II under the guise of the Capital
Requirements Directive. Although most building societies have at least started
their Basel II project, most are still battling with elements of the detailed guidance.
At King & Shaxson Treasury Solutions we can assist in interpreting the treasury
related guidance within the directive.
In addition to the regulatory issues that building societies currently face, there
are also changes to accounting standards, which although currently deferred, are
on the horizon. We can support the Society with its adoption of FRS26 Financial
Instruments: Measurement, as well as providing instrument valuations as required.
King & Shaxson Treasury Solutions can add significant value to your treasury
operations. We can assist you in gaining improved performance from your liquid
assets, within an enhanced control environment and in line with the risk appetite
of the Society. Through our experience and close contact within the financial
markets we can provide execution for all types of transactions and meet all your
Our fees are tailored to each individual client based on the type of the services
required and the size complexity of the building society.