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House of Assembly - Fifty-First Parliament, Third Session (51-3)
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GLOBAL FINANCIAL CRISIS

190 Dr McFETRIDGE (Morphett) (21 October 2008).

1. With respect to each of the South Australian Financing Authority, Funds SA and the South Australian Captive Insurance Corporation:

(a) what are current exposure of these agencies to US sub-prime mortgage market associated with the hedge of overseas equities investments and credit markets;

(b) what are their current percentage and dollar amount of international equities exposure;

(c) have any of these agencies or any other government agency or financial corporation invested or hedged any funds either directly or indirectly through the following hedge funds:

(i) Macquarie Bank's Fortress Funds;

(ii) Bear Stearns;

(iii) Basis Capital;

(iv) Goldman Sachs;

(v) Cheyne Finance;

(vi) Landesbank Sachsen;

(vii) BNP Paribas; or

(viii) any other hedge fund exposed to the US sub-prime mortgage market

and if so, what are the total values of hedge transactions recorded for each of these funds;

(d) do any of these agencies have an international credit risk on overseas financial assets and if so, what are the details; and

(e) do any of these agencies have an off-balance sheet credit risk from exposure to overseas financial instruments, including derivatives?

2. What is the Treasurer's current approved limit on measures of interest rate risk for SAFA's portfolios?

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:

Funds SA

(a) Funds SA has an exposure to the US sub-prime mortgage market of approximately $0.9m as at 30 November 2008 which represents 0.01 per cent of total assets under management.

(b) Funds SA has $2.6b invested in international equities portfolios, as at the end of November 2008 which represents 21 per cent of total assets under management.

(c) Funds SA does not have an exposure to any of the listed hedge funds, nor any hedge funds exposed directly to the US sub-prime mortgage market.

(d) Funds SA's international fixed interest investments total approximately 11.5 per cent of total assets under management as at the end of November 2008.

(e) Funds SA has exposure to credit risk associated with financial instruments used in hedging various exposures in the portfolio. These financial instruments are marked to market each month and incorporated within Funds SA's accounts in accordance with accepted accounting practices.

SAFA/SAICORP

(i)

(a) SAFA has no direct exposure to the US sub-prime mortgage market. SAICORP's funds now form part of SAFA following the amalgamation of SAFA and SAICORP on 1 July 2006. SAFA's insurance related investments are managed by Funds SA.

(b) SAFA does not have any exposure to international equities. As noted above, SAFA has its insurance related investments managed by Funds SA in its growth product. The exposure to international equities of this product is 32 per cent.

(c) SAFA has not invested in or hedged any of its funds either directly or indirectly through the following hedge funds: Macquarie Bank's Fortress Funds; Bear Stearns; Basis Capital; Goldman Sachs; Cheyne Finance; Landesbank Sachsen; BNP Paribas; or any other hedge fund exposed to that market.

(d) SAFA's investments must comply with stringent credit guidelines that are endorsed by the SAFA Advisory Board and approved by the Under Treasurer and Treasurer. The credit guidelines have been developed with reference to credit ratings assigned by Standard & Poor's credit rating agency and permit SAFA to invest with domestic and offshore counterparties that posses a strong capacity to meet their financial commitments, including the timely payment of principal and interest.

Information on SAFA's credit risk (disaggregated by asset class by country) appears in disclosure note 22.4 of SAFA's 2007-08 Annual Report.

(e) 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 SAFA's credit risk emanating from derivative transactions (eg. interest rate swaps) appears in disclosure note 22.4 of SAFA's 2007-08 Annual Report.

(ii) 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.

Primary LevelOutright & Yield Curve Risk¹$A Secondary LevelBasis Risk¹$A
Short (<1 year) ±5,000 500,000
Medium (1 to <5 years) ±5,000 500,000
Long (5 years and longer) ±5,000 500,000
Net outright risk ±5,000 -

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.

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