Interest in Derivatives on the Up

Delegates at today’s CIPFA Treasury Management Seminar heard an anecdote about a local authority (LA) finance team who issued a bond and then crossed their fingers and prayed the markets didn’t go against them in the few hours between issue and pricing. A volatile market, not unheard of these days, could have cost them dear.

It’s the kind of story that usually gets LAs into hot water but in this case, the act of mitigating the risk they were exposed to for that brief time, would probably have attracted far worse publicity. Using derivatives, while commonplace for many corporate treasurers, remains an emotive subject for LAs and the ghost of Hammersmith & Fulham’s one-way bet on interest rate swaps in the late 80s, always makes its presence felt.

It seems though that CIPFA has received its fair share of enquiries recently from LAs who would like the option, no pun intended, of using derivatives for the purpose of hedging risk. Alison Scott, Assistant Director Local Government of CIPFA announced a series of “high-level principles” at today’s conference as a precursor to “something more practical in the near future.” Making any derivatives use part of the Treasury Management Strategy and “setting clear parameters” were top of the agenda.

Despite CIPFA’s willingness to engage in the subject, Birmingham City Council’s Martin Easton, currently working on the much anticipated CIPFA Risk Toolkit was quick to urge caution: “no one should go away thinking – hooray – we can start using derivatives now”.  Scott advised delegates to explore their legal position by referencing the judgment of the Hammersmith & Fulham case and concluded by making clear that the use of derivatives for the purpose of speculation was banned.