SAFA, CREDIT AND INTEREST RATE RISK

In reply to Mr HAMILTON-SMITH (Waite—Leader of the Opposition) (25 June 2008).

The Hon. K.O. FOLEY (Port Adelaide—Deputy Premier, Treasurer, Minister for Industry and Trade, Minister for Federal/State Relations): I have been provided the following information:

The South Australian Government Financing Authority (SAFA) uses derivatives as part of its fundraising and asset and liability management activities to lower funding costs; facilitate diversification of funding sources; reconfigure interest rate risk profiles consistent with debt management strategy; and convert foreign currency exposures into Australian dollars.

The main derivative instruments used by SAFA are Australian dollar interest rate swaps that are used to manage Australian interest rate risk. Foreign currency derivatives are used to manage foreign exchange risk.

SAFA undertakes derivative transactions with approved creditworthy Australian and offshore financial institutions. All of SAFA's derivatives are on balance sheet.

Information on derivative instruments used by SAFA is included in the disclosure notes to SAFA's annual financial statements.

Interest rate risk limits apply for all portfolios managed by SAFA.

Where the portfolio is managed on behalf of a client, the limits are set by the client.

The limits for portfolios residing on SAFA's balance sheet are endorsed by the SAFA Advisory Board and approved by the Under Treasurer and Treasurer.

The key portfolio on SAFA's balance sheet used to fund loans to clients holds liabilities, assets and hedging instruments (including derivatives) and is run on a basis where mismatches between assets and liabilities are managed within tight risk parameters as shown in the table below.

¹Basis point sensitivity (PV01).

As well as the risk parameters depicted in the table above, the portfolio has a value-at-risk limit of $500,000.