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Risk management

In its daily operations as a debt manager, the DSTA faces a number of risks, such as interest rate risk, credit risk, foreign exchange risk, concentration risk, settlement risk, legal risk and operational risk. How the DSTA manages a number of these risks is discussed below.

Interest rate risk

Risk management of the DSTA is aimed at financing the state debt at the lowest possible cost, with an acceptable interest rate risk to the budget. In 2008 a new risk management framework was implemented with a benchmark as the control variable for risk management of the State debt. The benchmark indicates how the DSTA should finance itself. A benchmark contributes to a transparent way of accounting for debt policy and to an efficient economic operation. A 7-year constant maturity portfolio was chosen as the benchmark for the period 2008-2011. Issuance in the benchmark is done on a continuous basis in the 7-year maturity segment. The actual funding strategy will deviate from what the benchmark prescribes and will involve a combination of instruments. Issuance policy and risk management are treated separately. By means of interest rate swaps, the issuance and funding policy can be separated from the risk management strategy. Swaps are a main instrument for the management of interest rate risk. The 7-year point on the interest curve is seen as the optimal trade-off for the Dutch State. In principle, interest rate risk of the State debt is independent from the maturity profile of the outstanding debt. More information on the benchmark and the results in relation to the benchmark can be found below.

For the period 2012-2015, the 7-year constant maturity portfolio was continued as the DSTA's benchmark, albeit with the possibility to deviate from the benchmark's risk profile. Chapter 4 of the Outlook 2012 explains the risk management framework in more detail (see document below).

Credit risk

Credit risk is the risk of loss due to a debtor’s non-(re)payment of its contractual obligations. The DSTA is exposed to credit risk when depositing cash with counterparties. To minimize this risk counterparties have to comply with strict requirements regarding their creditworthiness, such as a minimal level of their credit ratings. Furthermore, credit risk is restricted by minimizing uncollateralized deposits and by limiting cash deposits for longer periods.  Buy-sell-back transactions (reverse repo’s) are the preferred instrument, since collateral is provided to the DSTA. If a counterparty is not able to fulfill its contractual obligations, the DSTA can use the collateral to cover the loss. In response to the credit crisis, the DSTA decided to strengthening the rules to mitigate credit risk. To illustrate, uncollateralized deposits are only allowed for overnight transactions. The DSTA also engages in transactions with Debt Management Offices from a number of different countries on a regular basis.

When concluding interest rate and foreign exchange swaps, the DSTA is also exposed to credit risk. Therefore, swaps can only be concluded with Primary Dealers and Single Market Specialists that meet minimum requirements of creditworthiness and with whom an ISDA agreement (International Swap & Derivative Association) including a CSA (Credit Support Annex) is signed. During the maturity of a swap transaction, the counterparty is obliged to post collateral with the DSTA if the market value of the swap – which is monitored on a daily basis - is positive for the DSTA. The Dutch State does not post collateral with counterparties.  

Concentration risk

Concentration risk can be defined as the probability of loss arising from heavily lopsided exposure to one or a small group of counterparties. The DSTA manages concentration risk by setting maximum credit limits on the exposure vis-à-vis individual counterparties. This limit determines how much and by means of which instruments money can be put with a certain counterparty. The limit depends on the creditworthiness and size of the counterparty.

Foreign exchange risk

In addition to issuance in euro, the DSTA also issues in foreign currencies. Commercial Paper is issued in euros, in US dollars, British pounds and Swiss francs. In the Outlook 2010, the DSTA also announced that it will consider launching a US dollar denominated bond, provided that this will result in lower funding costs vis-à-vis comparable funding in euros. All issues in foreign currencies are swapped to euros, to safeguard the DSTA against foreign exchange risk. As a result, the funding costs in euros are fixed when the transaction in foreign currency is executed.

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