MD2034 Revisions to the GLA investment strategy for 2016-17

Type of decision: 
Mayoral decision
Date signed: 
30 September 2016
Decision by: 
Sadiq Khan, Mayor of London

Executive summary

This decision covers improvements and amendments to the investment strategy under the current Treasury Management Strategy Statement (MD1634) in order to improve fitness for purpose under challenging market conditions, such as those witnessed following the recent EU Referendum.



The Mayor approves the proposed revisions to the GLA Treasury Management Strategy Statement for 2016-17 (MD1634).

Part 1: Non-confidential facts and advice

Introduction and background

a.    The GLA’s Treasury Management Strategy Statement (“TMSS”) for 2016-17 is prepared in accordance with the Treasury Management in the Public Services Code of Practice (“the Code”) of the Chartered Institute of Public Finance and Accountancy (“CIPFA”) and guidance issues by the Department for Communities and Local Government (“DCLG”).

b.    The TMSS sets out an Annual Investment Strategy, however, in line with best practice set out by DCLG and CIPFA, the TMSS is a ‘living document’ subject to continual review and revision.

c.    The GLA operates a shared service for Treasury Management for LFEPA, MOPAC, LLDC and the London Pensions Fund Authority (“LPFA”). Active discussions are currently underway with several London Boroughs seeking to join the shared service.

d.    The GLA has pioneered diversification and continual improvement of risk-adjusted investment returns as one of the first Local Authorities to invest directly in corporate bonds, Treasury Bills and more recently, high-quality UK residential mortgage backed securities (“RMBS”).

e.    A cornerstone of the GLA’s shared service offer is the GLA Group Investment Syndicate (“GIS”), a collective investment scheme allowing participating Authorities’ (“the Participants”) cash balances to be invested on a pooled basis, leading to economies of scale, greater bargaining power, increased ability to diversify and more stable average balances, enabling longer term investment to secure better returns and public value for money. The GIS has consistently outperformed relevant wholesale interbank deposit rates since inception, while maintaining an overall level of risk of loss no greater than a one year deposit with a typical AA- rated bank. The GLA is the investment manager for the GIS, with this function being discharged day to day by the Chief Investment Officer.

f.    The GLA regards maintaining a market-leading investment strategy as essential to the attractiveness of its shared service and hence access to the benefits of pooled resources, viz. improved investment outcomes, opportunities for intra-group lending and shared funding of a resilient, specialised team.

g.    The GIS investment strategy must be compatible with each participating body’s individual investment strategies. For expediency, and in common with the approach used by all GIS Participants, the TMSS sets out the GIS investment strategy and notes the GLA may additionally invest directly in any way permitted for the GIS. Additionally investments made in the GLA’s own name are not subject to the current GIS weighted average maturity limit of 91 days. This report amends the GIS investment strategy with the intention that it will apply to the GLA on the same basis.

h.    The GLA adjusted the GIS and its own name investment positions to reduce risk in the approach to the EU referendum of 23 June 2016. These considerations, together with ongoing concerns around excessive concentration of investments in the banking sector and the impact of general market nervousness on some of the inputs to the GLA’s counterparty limits suggested opportunities for improvement and the need for clarification of certain delegations and reporting requirements.

i.    Appendix 1 sets out the proposed changes together with explanatory notes.


Objectives and expected outcomes

a.    The Investment Strategy seeks to provide a framework to support the following objectives:

i.    Public funds are not lost

ii.    Cash is available for essential expenditure as and when it falls due

iii.    Returns are maximised, so far as the above constraints allow, to offset the impact of inflation on the spending power of public funds held by the GLA.

b.    Appendix 1 represents the GIS Strategy in the style of a mandate to an external manager, followed by explanatory notes in case required for public or non-specialist internal use. The purposes of this are to:

i.    Streamline the document for use as a working tool by the GLA’s Group Treasury officers; and
ii.    Facilitate sharing with external managers to ensure they can easily align their proposals for the sub-portfolios they are appointed to manage with the overall strategy.
c.    Key improvements are summarised as follows:

i.    Reporting ambiguities relating to breaches are eliminated and the levels of discretion for both breach resolution, suspension of counterparties and use of Credit Default Swap (“CDS”) data are now set out clearly.

ii.    Provisions relating to the duties and discretions of external managers are made clear.

iii.    The risk appetite implied by the previous strategy is stated explicitly.

iv.    Practical arrangements for the exercise of the Chief Investment Officer’s discretions are set out explicitly along with the arrangements for exercise of discretion in that officer’s absence.

d.    A number of minor changes and simplifications are also made:

i.    Permitted durations for certain types of bond, including UK Gilts, have been reduced. A uniform limit of 2 years applies for internally managed investment and 5 for externally managed.

ii.    The use of covered bonds and repurchase agreements has been added. These instruments offer additional security but the enforcement of such security does involve operational risks, therefore a prudent view has been taken in respect of limits: 

•    In general no counterparties may be used who do not themselves meet GIS investment criteria, however their exposure limits may be increased by up to 10% to reflect the additional level of security. 

•    Unrated counterparties may be used for repo transactions of less than one year provided the repo is appropriately over-collateralised with UK government securities. This is currently intended to unlock the opportunity to lend to pension funds engaged in liability management activities, with the limit per counterparty being 2.5% and an aggregate limit of 20%.

iii.    The framework for the use of RMBS is set out in greater detail.

iv.    The overall limit on non-financial corporate bonds (previously 20%) has been removed as it is redundant.

v.    Equivalence tables for ratings of funds and structured finance products, in addition to issuer credit ratings are set out

vi.    Preferential limits for UK banks in significant UK Government ownership have been withdrawn, due to the restrictions on state support for banks and the potential for mandatory losses for bank creditors arising from so called ‘bail in’ legislation.

Equality comments

None arising from the contents of this report


Other considerations

a.    The GLA’s role as a strategic funding body means it is exposed to high levels of investment and borrowing risk. The GLA therefore maintains a responsive stance to market conditions and invests in the management of treasury risks through a professional team subject to high audit and governance standards. Improved risk management, operational clarity and transparency are expected from the proposed changes.

b.    Shared services support Mayoral priorities of efficiency and cost savings, while the improved returns delivered through the GIS contribute to budgetary resilience. 

c.    There are no formal consultation requirements in respect of the contents of this report. All of the current Shared Service participants have been consulted on the investment strategy changes and have agreed to apply the revised strategy to pooled monies within the GIS.

Financial comments

a.    There are no additional treasury management costs arising from adoption of the revised investment strategy.

b.    However, adoption of the proposed revisions will provide a greater range of options to mitigate the financial risk of loss through default and revisions to the use of Credit Swap Data in setting limits may prevent unnecessary transactions, leading to reduced direct and opportunity costs. 


Investment and Performance Board

IPB approval is not required – treasury management matters are delegated to the Executive Director of Resources.

Planned delivery approach and next steps

All Participants will have approved similar revisions by end September 2016. The Group Treasury team is prepared to implement the revised strategy immediately on receipt of approval.


Appendices and supporting papers

Appendix 1 – Revised GIS Investment Strategy

MD1634 – TMSS for 2016/17

GLA Oversight Committee 10 March 2016 – Treasury Management Shared Service