14.1 Risk Management Framework

The Agency’s responsibility for both the issuance of new debt and the repayment of maturing debt, together with the management of the interest rate and currency profile of the total debt portfolio, makes the management of risk a central and critical element of the Agency’s business. The principal categories of risk arising from the Agency’s National Debt activities are liquidity, market, counterparty credit and operational risk. The Agency has a range of policies and procedures to measure and control the risks involved.

The Agency has approved the NTMA Risk Management Framework to ensure that the Agency manages its risk profile within its agreed risk appetite; that material risks are adequately identified and monitored; and that suitable and effective risk management arrangements are in place, alongside clearly defined and delineated roles and responsibilities. A related suite of risk management policies establishes and maintains limits consistent with the Agency’s risk appetite and commensurate with its strategic goals.

The Agency’s Risk Management Framework is predicated on the three-lines-of-defence model, and its organisational structure and risk committee structure are aligned in order to establish clear ownership and accountabilities for risk management. As the first line of defence, the Agency’s Business Units and Corporate Functions are primarily responsible for managing risks on a day-to-day basis, taking into account the NTMA’s risk tolerance and appetite, and in line with its policies, procedures, controls and limits. The second line, which includes the Agency’s Risk Management, Compliance and other control functions, is independent of operations and first line management, and its role is to challenge decisions that affect the organisation’s exposure to risk and to provide comprehensive and understandable information on risks. The Agencies Internal Audit Function, which is part of the third line of defence, provides independent, reasonable, risk based assurance to key stakeholders on the robustness of the NTMA’s risk management system, governance and the design and operating effectiveness of the internal control environment.

A number of NTMA Committees and Risk sub-committees support the Agency in discharging its responsibilities in relation to risk management.

Agency Risk Committee (ARC)

The ARC reviews the NTMA’s overall risk identification and assessment processes. It sets a standard for the accurate and timely monitoring of critical risks and reviews reports on any material breaches of risk limits and the adequacy of any proposed action.

Agency Audit Committee

The Audit Committee assists the Agency in the oversight of the quality and integrity of the Agency’s financial statements and reviews and monitors the effectiveness of the systems of internal control, the internal audit process and the compliance function, and reviews and considers the outputs from the statutory auditor.

Enterprise Risk Management Committee (ERMC)

The ERMC is a management committee which oversees the implementation of the NTMA’s overall risk appetite and senior management’s establishment of appropriate systems (including policies, procedures and risk limits) to ensure enterprise risks are effectively identified, measured, monitored, controlled and reported, and ensuring that any portfolio concentrations are identified and managed appropriately.

Counterparty Credit Risk Committee (CCRC)

The CCRC oversees and advises the EMRC on counterparty credit risk exposures. It provides dashboard reporting of relevant counterparty credit risk exposures and details to the ERMC. It formulates, implements and monitors compliance with the NTMA Counterparty Credit Risk Management Policy and ensures that all appropriate actions are taken in respect of relevant Policy, or any breaches.

Market and Liquidity Risk Committee (MLRC)

The MLRC oversees and advises the ERMC on market and liquidity risk exposures. It provides dashboard reporting of relevant market risk and liquidity risk exposures and details to the ERMC. It formulates, implements and monitors compliance with the NTMA Market and Liquidity Risk Management Policies and ensures that all appropriate actions are taken in respect of relevant policy, or any breaches.

Operational Risk and Control Committee (ORCC)

The ORCC reviews and recommends to the ERMC for approval the operational risk management framework and associated operational risk policies. The ORCC monitors, reviews and challenges the NTMA’s operational risks and reports on operational risk management to the ERMC.

A key objective of the Agency is to ensure that the Exchequer has sufficient cash to meet all obligations as they fall due. Ensuring that the Exchequer has sufficient liquidity is one of the Agency’s most critical tasks. Liquidity risks related to the National Debt can arise either from domestic events or, given the high level of linkage between markets, from events outside Ireland. The Agency manages liquidity risk primarily by maintaining appropriate cash buffers, by limiting the amount of liabilities maturing in any particular period of time and by matching the timing and volume of funding of market funding with the projected requirements. This is reinforced by the Agency’s activities in maintaining a well informed and diversified international investor base, with a presence in all major capital markets and a broad range of debt instruments which can be issued.

Market risk is the risk of loss or increased costs resulting from changes in the value of assets and liabilities (including off-balance sheet assets and liabilities) due to fluctuations in risk factors such as interest rates, foreign exchange rates or other market prices. The Agency must have regard both to the short term and long term implications of its transactions given its task of managing not only the immediate fiscal debt service costs but also the present value of all future payments of principal and interest. The exposure to interest rate and currency risk is controlled by managing the interest rate and currency composition of the portfolio in accordance with the Agency’s risk appetite. Specific limits are in place to control market risk; exposures against these limits are reported regularly to senior management. As conditions in financial markets change, the appropriate interest rate and currency profile of the portfolio is reassessed in line with periodic limit reviews. The Agency seeks to achieve the best trade-off between cost and risk over time and has in place a hedging programme to manage interest rate and exchange rate risks and to protect the Exchequer from potential volatility in future years. More information on the use of derivatives is set out in Derivatives (Note 15).

Counterparty credit risk is the risk of financial loss arising from a financial market transaction as a result of a counterparty failing to fulfil its financial obligations under that transaction and with regard to the National Debt mainly arises from derivatives, deposits and foreign exchange transactions. The level of counterparty credit risk is managed in accordance with the Agency’s risk appetite by dealing only with counterparties of high credit standing. Procedures provide for the approval of risk limits for all counterparties, and exposures are reported daily to management. A review of all limits is undertaken periodically to take account of changes in the credit standing of counterparties or economic and political events. In order to mitigate the Exchequer’s exposure to market counterparties while at the same time ensuring that Ireland has efficient market access for its hedging activities, the Agency may enter into credit support arrangements with the market participants with which it wishes to trade – this involves the receipt and posting of collateral to offset the market value of exposures. More information on the use of credit support arrangements is set out in Derivatives (Note 15).

Controls have been established to ensure that operational risks are managed in a prudent manner. These controls include the segregation of duties between dealing, processing, payments and reporting.

14.2 National Debt – Currency Composition

The Agency hedges the foreign currency risk of the National Debt through the use of forward foreign exchange contracts and currency swaps. The currency composition of the National Debt, and related currency hedges, are as follows:

14.3 National Debt – Maturity Profile

The residual maturity profile at year-end of the Medium/Long Term Debt, taking into account the treasury management transactions entered into by the Agency, is as follows:

¹ It is assumed for State Savings that 10% of the total outstanding at the beginning of the period matures in each year, for five years, with the final 50% maturing in the sixth year.