Payment transfer system

1. Payment transfer system Keijo Kettunen 29.6.2011

2. Contents of presentation Payment transfer system • Roles of treasury and each government agency (accounting units) • Payment transfers (electronic payments) • Cash management of General government (liquid assets)

3. Roles of Treasury and each government agency (accounting agency) • The state budget economy is divided into accounting agencies • are responsible for cash management and bookkeeping (SBD* section 23) • 63 at the moment • on the proposal of the ministry concerned, the Ministry of Finance specifies which government agencies - in addition to the office of the President of Finland and ministries- act as accounting agencies (SBD* section 24) SBD* = State Budget Decree

4. Roles of Treasury and each government agency (accounting agency) Ministry of Finance • Ministry of Finance is responsible for Government decree, where provisions of State’s cash management are issued • The Ministry of Finance has the right to issue accounting agencies with stipulations on the date of paying out government expenditure when the said date is discretionary. • If the Government’s current account in the Bank of Finland or the Government's general revenue account accumulates more cash than is necessary for the management of the State's transactions, the Ministry of Finance shall decide on the deposit or other investment of these assets in an interest-bearing manner.

5. Roles of Treasury and each government agency (accounting agency) Ministry of Finance . • On conditions set by it, the Ministry of Finance may delegate the investment operations referred to above either wholly or in part to the Treasury.

6. Roles of Treasury and each government agency (accounting agency) State Treasury • Issues the necessary stipulations and instructions on the systems to be used in cash management • Supervises the cash management of the State • Controls accounting agency’s applications connected to bank services so that it’s filled right and confirms to the bank the names of the users of every single bank account • Checks that the application has been made by the persons entitled to it (authorised signature in the application) • Issue further stipulations on the emptying of Governments accounts and the transfer of financial cover as necessary. The Government’s general revenue account and the Government’s general expenditure account are managed by the Treasury

7. Roles of Treasury and each government agency (accounting agency) State Treasury • The Government’s current account is kept in the European Central Bank and is managed and used by the Treasury. • Takes care about liquidity forecasts • Make investment operations in money markets

8. Roles of Treasury and each government agency (accounting agency) Accounting agency • Unless otherwise provided, the accounting agency shall be responsible for the collection of revenues and remittance of payments in its own operating sector. • Accounting agency approves the users of government transaction accounts • Accounting agencies also make estimates about expenditures and incomes for coming 12 months

9. Payment transfers (electronic payments) • Finland ranks among the most advanced countries in the world when it comes to banking technology. • Finnish payment transaction services utilise widely the development of information technology and telecommunications. • Most part of the Accounting agencies’ transactions are electronic, payments are transmitted electronically up to nearly 100 % • New practices of automatic invoicing and payments have been taken in use in an increasing measure (SEPA)

10. Payment transfers (electronic payments) Procedure concerning payment of expenditures Vision: Afterpurchasedecision, wholepurchaseprocessshallbeautomated Supplier Government Order bypurchase management system Market place Confirmation of order Acceptanceincl. posting Productcatalogues of differentsuppliers Order Electronic invoice acceptance system (Rondo) Delivery acceptanceinspection Transfer of orderinformation to Rondo Einvoice Automaticbalancing Bank Automatictransfer Operator /Itella PersonalLedger of accountpayable feedback HO

11. acceptance inspection • Payment transfers (electronic payments) • -procedure Case approval approval E-invoice Personal Ledger of accounts payable List of outgoing payments Sending payments to bank

12. Payment transfers (electronic payments) • Nowadays an order must be accepted by person who, due to accounting agency’s financial regulation, is entitled to do that • When receiving the delivery of the product, a person must do acceptance inspection, • After that the supplier will send an einvoice • Terms of payment are 21 days • We demand einvoices from the beginning of year 2010 • All invoices are sent to our operator (Itella), who will, if needed, convert the invoice to standard the agency is using • In service center the invoice is posted and sent electonically for acceptance in the agency

13. Payment transfers (electronic payments) • After acceptance the invoive will be transferred to personal ledger of accounts payable. • Every day a person in the service center will run a list of invoices which become due, a person controlls essentially the list ( all invoices are valid) and if they are, she will run the final list and makes a note to the list that everything is ok.

14. Payment transfers (electronic payments) • Payments are transferred to bank by two persons (controll that amounts are right). • The transfer has to be electonically signed by two persons who are recogniced by the bank • accounting agency’s financial regulation contain more instructions on the procedure for making out payments

15. Payment transfers (electronic payments) • Person in service center will get feed back information from the bank about payment transactions they have received • Person in service center has to check that the material they have sent match to that the bank has received • Finally the bank will send bank statement which will be posted in service center. Entries from statement will be posted to interim accounts . The balance in interim accounts has to be zero after that.

16. Payment transfers (electronic payments) Future: • The agencies are introducing during 2010 – 2011 new purchase management system, which enables automatic balancing between order and the invoice • If they match, no manual acceptance is needed and the invoice is automatically transferred to personal ledger of accounts payable and there from to paying

17. Payment transfers (electronic payments) Current account in ECP vs. accounts in intermediary banks Money markets State’s current account Is not allowed to have negative saldo at the end of the day Non interest bearing Nordea State’s net account Pohjola State’s net account Consolidated account (use via other accounts) Sampo Consolidated account (use via other accounts) Nordea has given quarantees about covering possible deficit State’s general paying-in account State’s general paying-out account State’s general paying-in account State’s general paying-in account Consolidated account (use via other accounts) Aa’s general paying-in account Aa’s general paying-in account Aa’s general paying-out account Aa’s general paying-in account Payment transaction account Payment transaction account Payment transaction account Payment transaction account Payment transaction account Payment transaction account Payment transaction account Payment transaction account

18. Payment transfers (electronic payments) The State’s consolidated account • Agreement between Ministry of Finance and three Banks • Includes about 800 accounts • Different accounts for incomes and expenditures • Turnover about 135 billion Euro • Consolidated account includes three levels at the most

19. Payment transfers (electronic payments) The State’s consolidated account • State’s current account is in ECB • Transactions caused by money market operations and by bond markets take place through state’s current account • The state’s current account is daily covered/ emptied by treasury • Other accounts are emptied and covered daily by banks due to timetable the participants have agreed

20. Payment transfers (electronic payments) The State’s consolidated account • Only state’s main account in banks is allowed to have positive saldo at the end of the day, a negative saldo is possible only in Nordea (agreement about credit limit) • if saldo is positive, state will get contractual interest and in case of negative saldo state will pay contractual interest to Nordea

21. Cash management of General government (liquid assets) The State’s consolidated account • Only state’s main account in banks is allowed to have positive saldo at the end of the day, a negative saldo is possible only in Nordea (agreement about credit limit) • if saldo is positive, state will get contractual interest and in case of negative saldo state will pay contractual interest to Nordea

22. Cash management Risk management Liquidity management Providing for liquidity Forecasting cashflows and follow up Providing for capital Investments on money markets Currency management Bank relations management Working capital management Payment traffics Outgoing invoices Incoming invoices

23. Liquidity management Parliament • Decides about borrowing State Treasury • Responsible for liquidity providing (cashflow forecasting and follow up, capital providing and investments on money markets)

24. Liquidity management-forecasting cash flows and follow up = information ST AAs MF Paymentsystem Bank Incomes Limits to bank accounts Vertaaminen limiittiin Veloitukset ja hyvitykset tileiltä RAHAKAS ST VK Expenditure Päivänsisäiset operaatiot Liquidity position Investments on money markets - borrowing Maksu-aineisto VK MF ST AAs Borrowing from money markets Forecasting system

25. Cash assets

26. Cash management of General government (liquid assets) • Liquid assets are invested in taking into account following principles: • High ranked counterparts – credit rating • Decentralization within limits • Investments on other EU - countries (depositions, t-bills) • Repo agreements • Investment period up to 12 months • Credit risk must be minimized

27. Funding

28. Funding strategy “Maintaining a globally diversified investor base by geography and investor type” • Euro benchmarkbondcurvenow to 15 years • Two syndicated bonds per year: • New 5 and 10 year bonds • Going forward expect “Quarterly” auctions • Liquidity in focus – Primary Dealers and 4 inter-dealer platforms • EMTN issuance complements Euro bonds Benchmark bonds outstanding

29. Primary Dealerships 2011 Nordea HSBC Pohjola Barclays RBS Danske Bank Morgan Stanley Deutsche Bank Crédit Agricole JP Morgan Credit Suisse BNP Paribas BAML Citigroup Société Générale

30. Central government gross borrowing2008 - 2015 EUR bn Source: Ministry of Finance, State Treasury

31. Gross borrowing, estimate EUR bn Source: State Treasury

32. EMU gross borrowing in bonds EUR bn Sources: Royal Bank of Scotland, State Treasury

33. Funding plan 2011 • Gross borrowing in 2011 estimated EUR 27 bn • Long-term debt issuance estimated at EUR 16 bn, the rest in short-term debt • Two syndicated euro benchmarks • Quarterly tap auctions • Currency MTNs a supplementary funding tool (public or private) • Treasury bill stock around EUR 10 bn at year end, expect constant window issuance to continue

34. Treasury Bills • Discount instrument, maturities 1-364 days • Flexible funding tool, issuance depends on Treasury’s liquidity • Daily tapping on existing lines • Similar to ECP (Euro commercial paper) programmes, the programme will be updated in 2011 • EUR and USD issuance • One maturity date per each calendar month • Gross volume in 2010 EUR 22.7 bn • 17 bn in EUR (75%) and 7.5 bn in USD (25%) • Indicative levels on Reuters pages: SUVM, SUVL, SUVJ • Pricing comparables: France, The Netherlands

35. 10 yrs Bond Yield Spreads to Germany Source: Bloomberg January 2011

36. Thank You HO