The government’s cash management objective is to ensure that sufficient funds are always available to meet any net daily central government cash shortfall and, on any day when there is a net cash surplus, to ensure this is used to best advantage. HM Treasury and the Debt Management Office (DMO) work together to achieve this.
HM Treasury’s role in this regard is to make arrangements for a forecast of the daily net flows into or out of the National Loans Fund (NLF); and its objective in so doing is to provide the DMO with timely and accurate forecasts of the expected net cash position over time.
The DMO’s role is to make arrangements for funding and for placing the net cash positions, primarily by carrying out market transactions in the light of the forecast; and its objective in so doing is to minimise the costs of cash management while operating within the risk appetite approved by Ministers.
The government’s preferences in relation to the different types of risk taking inherent in cash management are defined by a set of explicit limits covering 4 types of risk which, taken together, represent the government’s overall risk appetite.
The risk appetite defines objectively the bounds of appropriate government cash management in accordance with the government’s ethos for cash management as a cost minimising, rather than profit maximising, activity and playing no role in the determination of interest rates. The DMO may not exceed this boundary, but, within it, the DMO will have discretion to take the actions it judges will best achieve the cost minimisation objective.