The New Zealand Debt Management Office, which runs a nearly NZD36 billion (USD23.5 billion) debt portfolio, is getting ready to use foreign exchange and interest rate options for the first time. The debt office has used fx and interest rate swaps (DW, 2/11/02) and is now looking at options to broaden its palette of funding instruments. "This will provide us greater flexibility, particularly in issuing euro medium-term notes," said Philip Combes, treasurer in Wellington.
"We've done quite a lot of work to get ourselves ready and, subject to ministerial approval, we're hoping to launch this in the next fiscal year," Combes noted. The agency is looking at using fx and interest rate options to hedge currency risk and reduce funding costs for its portfolio and on behalf of other government departments, he added, declining to elaborate on this point.
For example, the government body is considering issuing EMTNs, structured by derivative houses on behalf of the agency, with embedded interest rate options, Combes explained.
The debt management office has been eyeing options since last summer (DW, 6/23), but is now ready to approach the Minister of Finance in the coming weeks and hopes to start using the instruments in the new fiscal year, which begins in July. "This is not a rubber stamp process, it will hinge on our case being made showing that the benefits outweigh the risks," Combes explained. He is confident, however, the debt office will get approval.
The debt office's earlier plans to use options were delayed while it upgraded and tested its risk management systems. It has been speaking with both local and international houses to gain a firm grounding in option products, he noted, declining to name them.
Fiscal year-to-date the debt office has issued a total of NZD1.9 billion, all of which has been via the domestic market.
