Processes, People and Infrastructure
Corporate Objective – Optimise the performance of WATC in accordance with theand the risk appetite of WATC’s Board.
WATC is committed to maintaining and continually improving its high quality systems, capabilities, processes and practises that support the achievement of WATC’s corporate vision and objectives, now and into the future.
Key highlights for the 2016/17 financial year were:
Further refinement of WATC’s strategy to transition to a lower funding risk profile that is less reliant on short-term funding
The successful management of risks during a year where the global environment continued to present risk management challenges
Continued implementation of the Leadership Development Program to cultivate and embed desired leadership behaviours for all WATC employees
An upgrade to WATC’s core treasury system, Summit
Development of an online platform for clients to interact and transact with WATC.
Risk management is an integral and fundamental part of WATC’s business operations and activities. The focus of risk management within WATC is to identify all material risks faced by WATC and to reduce those risks to levels acceptable to the Board. This is achieved by promoting and embedding sound risk management practices and culture across WATC, while providing risk exposure reporting to senior management and the Board. WATC’s goal in managing risk is not to eliminate risk at any cost, but rather to balance the portfolio of risks it faces.
The following is a summary of significant developments and how key risks were managed.
WATC’s largest credit exposures arise from the need to maintain a portfolio of liquid investments in order to manage liquidity and funding risk and to support the market in WATC’s own debt paper. Managing the credit risk associated with WATC’s investment portfolio requires various controls, including a rating-based system that reduces WATC’s credit limits to a counterparty if its credit rating deteriorates. WATC will not invest with banks or corporations whose credit rating falls below a minimum level set by the WATC Board. Application of diversification and tenor limits further reduce this risk.
Another source of credit risk is the use of derivatives to manage the market and liquidity risks associated with WATC’s funding activities. However, collateral posting arrangements with derivative counterparties allow WATC to reduce this credit risk to minimal levels.
The global credit environment continued to present concerns in 2016/17. Systemic risk continued to build in China as corporate and sub-sovereign debt levels rose, capital exited the country and foreign currency reserves declined. It is unclear how these systemic imbalances will be resolved in the longer-term. The credit environment stabilised in most other Asian economies. The European credit environment improved, with the resolution of several distressed banks in Italy and Spain and a further bailout of the Greek government. Systemic risk, however, remains in parts of the Eurozone, and Brexit could be an additional destabilising influence. The US banking system is now relatively robust and the expected normalisation of US interest rates has not caused any significant credit issues to date.
Australia’s household debt levels continued to rise against a background of weak income growth. While this has yet to flow through to impairment rates in the banking system, arrears did increase, indicating that the national credit environment may be deteriorating. The Australian banking system, however, does maintain capital levels that should be able to withstand a cyclical upswing in impairment rates. Effective macro-prudential actions will likely be required to constrain household debt levels in the longer-term.
In this environment, WATC’s credit risk management remained focused on:
During 2016/17, of WATC’s 73 bank and government counterparties, 14 suffered downgrades by Moody’s or Standard & Poor’s and nine were upgraded. No counterparty failed to meet its financial obligations to WATC.
WATC’s exposure to market risk arises primarily from movements in interest rates on borrowing, lending and hedging instruments. Exposure to foreign exchange is minimised through hedging of all overseas borrowings. WATC’s market risk controls are primarily based on Board-approved daily value at risk (VaR) limits and are complemented by regular portfolio stress testing analysis.
In 2013/14, the WATC Board endorsed a strategy aimed at reducing funding risk in response to concerns at that time regarding WATC’s relatively high reliance on short-term funding. The strategy involved using longer-term funding for WATC’s liquidity portfolio and increasing the term profile of client lending portfolios. The phased implementation of this strategy commenced during 2014/15. During 2016/17 this funding strategy was further refined, with the Board approving the purchase of longer-dated liquid assets to balance VaR and reduce the cost of carry impacts.
Market volatility in 2016/17 initially decreased following the upswing accompanying the June 2016 Brexit vote and then remained relatively stable throughout the year. WATC’s calculated portfolio VaR followed this pattern. New 2024 and 2026 benchmark bonds were issued in November 2016 and June 2017 respectively, resulting in WATC now having ten liquid benchmark bonds out to 2027. Furthermore, new 2020 and 2022 floating rate notes were issued simultaneously in August 2016. All these issuances have reduced net market exposure and will also support ongoing efforts to reduce funding and client lending maturity mismatches.
Liquidity and Funding Risk
WATC’s liquidity and funding risk is managed through a combination of maintaining a diverse range of funding sources and a level of liquid assets, adjusted in accordance with balance sheet size and cash flow projections. WATC’s key liquidity risk control is to maintain a liquidity portfolio sufficient to cover WATC’s net outflows for at least the next 30 calendar days, which is broadly in line with standards set by the Australian Prudential Regulation Authority and the Basel Committee on Banking Supervision. The WATC Board has also adopted funding risk controls that limit the amount of debt maturing within 12 months of year-end and define liquidity coverage in respect of those maturities.
Market liquidity was satisfactory during 2016/17 and WATC was able to access short- and long-term funding to ensure sufficient liquidity coverage throughout the year, including the period preceding the maturity of WATC’s March 2017 floating rate note.
Like all financial entities, WATC must plan for operational risk events such as settlement failure, fraud, system outages, loss of key personnel and loss of access to its business premises. WATC’s Operational Risk Management Policy ensures regular assessment of operational risks and the placement of treatment plans to reduce this risk to an acceptable level.
During 2016/17, operational risks were monitored and WATC’s managers were provided with education and support to assist with the identification and control of risks. There were no significant operational risk events during the year.
Business continuity planning prepares WATC to respond to, and recover from, a disruptive event that could have an impact on WATC’s ability to deliver critical business outcomes such as meeting scheduled principal and interest payments. Component elements of WATC’s Business Continuity Plan are reviewed and tested on an annual basis.
Risk Capital Requirements
Table 2 compares WATC’s average and peak capital provisioning requirements by risk category during 2016/17 with those for the previous two financial years.
Table 2: Required Risk Capital
|Source of Risk||Average 2016/17
* The peak Total Capital figures are not the sum of the three peak risk components.
A key initiative for WATC is building capacity to ensure it has a workforce and work environment capable of delivering on current strategic and operational business goals, while also preparing for future developments.
Acknowledged by clients and stakeholders, WATC’s workforce possesses a high level of professional experience, technical skill and capability. WATC builds upon this capability through supporting staff with learning and development opportunities. During 2016/17, WATC supported six people undertaking post graduate tertiary studies, with one staff member undertaking a PhD. Additionally, two staff were accepted into the Committee for Economic Development of Australia’s Copland Leadership Program. All staff are encouraged to undertake ongoing professional development.
The annual employee engagement survey saw a decrease of five per cent in the overall engagement score to 46 per cent. The participation rate remained extremely high at over 95 per cent. Work continues on the strategic approach to improve employee engagement, encouraging and developing all staff with self-leadership, accountability and continuous improvement aligned to WATC’s vision, objectives and values.
A key initiative for WATC is to affect cultural change through the implementation of a Leadership Development Program. The ongoing program recognises, develops and encourages desired leadership behaviours for all WATC employees at all levels of the organisation. The Leadership Development Program has three components:
The focus for 2016/17 was on the Leading Others component of the program, which introduced WATC’s managers to theories and concepts of leading others through a series of workshops and coaching sessions facilitated by leadership specialists Modal. In 2017/18, Leading Self and Leading Others will be refreshed and enhanced to further develop and embed learnings and leadership behaviours into the workplace.
Information and Communications Technology
WATC’s Information and Communications Technology (ICT) function is focused on ensuring that business applications and information technology systems and infrastructure continue to meet WATC’s current and evolving business needs in a reliable, efficient and cost-effective manner. ICT security remains a constant focus and in 2016/17, particular attention was paid to firewall infrastructure, and email and virus scanning.
During the year, work continued on streamlining reporting through the development of an enterprise data warehouse to calculate and store government guarantee fees, and produce invoices and reports. This project has expanded the data warehouse for client reporting and storage of information.
A major project for 2016/17 was the construction of a client-focused portal, anticipated to culminate in the first quarter of 2017/18. The development of the client portal required upgrading a number of systems to cloud services, including the movement to online versions of Exchange, SharePoint and CRM. These upgrades will enhance WATC’s systems’ integration with the client portal.
WATC also implemented Promapp process mapping software to capture, standardise and centralise all WATC processes within a controlled environment, which is easily assessable to all staff. At 30 June 2017, more than 90 business processes have been published, with this number expected to grow to 200 during 2017/18. Within this framework, there are opportunities to review and improve processes, which includes input from business units involved in end-to-end processes.
During the year, work commenced on a major project to upgrade Summit, WATC’s core treasury management system. While Summit continues to provide the basis for WATC’s operations and management of the State’s finances, the upgrade will ensure that the system is maintained at the highest level of support and functionality. During 2016/17, the system continued to operate smoothly and reliably.
As the core treasury system, Summit is fundamental to WATC’s central operations and it is essential to ensure the system will continue to meet WATC’s current and future business requirements. It is of critical importance that WATC undertakes a regular review to assess Summit against these criteria and evaluate it against other comparable products.
Furthermore, WATC is reviewing all on-premise ICT infrastructure including storage, compute and communications. This review coincides with the State Government’s GovNext initiative, which is pushing for the uptake of cloud facilities and services. This initiative will also have an impact on the facilities and services provided through on-premise delivery. The requirements of the GovNext program are still being evaluated.
Business continuity is also an essential aspect of WATC’s ICT function. WATC continued to monitor, test and maintain its current remote business continuity facilities on a regular basis, ensuring the services are available in the event of a threat to business continuity. Future business continuity planning options will focus on moving from the existing site and the uptake of a new site with cloud facilities.