Managing risk on local money market (Part 1)

Investors’ Notebook-By Elias Mugabe

THE announcement of the new monetary policy by Reserve Bank of Zimbabwe governor Gideon Gono brought tighter regulations on asset management firms and indeed othe

r financial institutions.


Consequently, financial players have become vigilant in trying to keep abreast with inflation while adding value to investors’ wealth and managing risk that comes along with various securities.


The survival of the present asset managers highlights positive developments towards good governance and these have been augmented by the statutory rules that apply specifically to fund managers.


Previously, Imperial Asset Management has covered areas of safe investment houses and key ingredients of any investment policy and guidelines which cater for individual and institutional investors. Now we are going to get deeper by analysing how a fund manager/investor can manage risk when investing on the local money market.


The intention is to explain each tradeable financial instrument in detail followed by risk management strategies that can be adopted by the investor/fund in order to mitigate potential losses or mishaps.


Let us pose these simple questions: do you have at least $100 million invested in any money market instruments and don’t have custody of the underlying asset? If yes, does this mean that the fund/investors’ resources or placements are now secure in the hands of fund managers or financial institutions?


As Imperial Asset Management we have got a few words for you: “seek help from the fund manager that will make your assets sweat”, while the underlying assets are in your custody and ownership.


In order to help you answer some intriguing questions above, today we will be analysing how a fund or investor can manage risk when placing funds against various gilt-edged money market instruments, such as treasury bills, financial bills, grain bills, megawatt bills, petrofin bills and agro bills.


Treasury bills


Treasury bills are issued by the Reserve Bank on behalf of the government of Zimbabwe in order to raise money for short-term financing needs and are often referred to as near risk-free debt instruments. Since the likelihood of non-payment of the debt is very minimal and debt repudiation by the state is highly unlikely, the default risk is very low on treasury bills. In order to pay up its debts the state can roll over the maturities, collect additional revenue through taxes and this further reduces the default risk on treasury bills.


The market for these bills is well established and due to the treasury bills accounts being maintained at the Reserve Bank of Zimbabwe, transferability is by delivery alone, which further reduces the liquidity risk of the security. Treasury bills have high liquidity status and are considered risk-less as these financial instruments are used by the Reserve Bank to manage open market operations through the issuance of 91, 182, 365 or 728-day treasury bills.


Special treasury bills are issued by the central bank on a daily basis in managing excess liquidity for clearing banks. These bills are highly liquid and as such have low liquidity and default risk. Whenever a bank at the close of day is in a surplus position the central bank issues special treasury bills to mop up the surplus. These bills can be used as security on the interbank market and are drawn on the central bank itself and therefore the risk to the investor is quite negligible.


Treasury and financial bills counterparty risk management Outright deals: this involves the purchasing of a financial asset and matching its maturity date and value with an underlying deposit or funds. For example, if asset matures after 728 days the buyer also provides funds for 728 days. Therefore, the risk is transferred to the buyer upon delivery of securities and exchange of cash. The purchaser of the asset will rely on the strength of the paper and primary issuer of the paper.


* In order to manage risk efficiently, all investments must be marked to market and security duly lodged with the buyer’s treasury bills account at the central bank before a fund/investor releases funds to counterparty.

* When trading in outright deal the fund can purchase unlimited bills from any registered financial institution or fund manager as the underlying risk of the asset is driven from the primary issuer of the assets who in this case is the Reserve Bank of Zimbabwe.


*The fund must regularise its dealings with counterparties by signing standard security pledge forms to hedge against any mishap such as curatorship and/or liquidation.

* As a matter of prudence, the fund must ensure that before value has been parted with, the fund’s Reserve Bank treasury or financial bills account must have been credited with the full value of the aforesaid bills.


To be continued next week.


The author, Elias Mugabe, is the finance & risk director of Imperial Asset Management Company. He has over 12 years’ banking experience in the fields of corporate banking, asset management, treasury management, venture capital finance, share transfer services and bank administration. He is an Associate Member of the Institute of Bankers Zimbabwe. Mugabe can be contacted on 091 252 738, 774341(direct line), or email emugabe@im- peass.co.zw If you believe that you need to discuss some of these issues in detail, please feel free to contact the author or Shadreck C Vera on 791497, Reuben Alberto on 791499, Zororo Mukungunugwa on 773787 or any of our investment executives