As instructed by the Ministry of Finance, the AFFA strictly adheres to a risk-averse business policy as the treasury of the Republic of Austria. In executing its duties, it must enter into certain financial-market-specific risks. Risk minimisation generally takes priority over earnings targets and cost minimisation targets.
The risk policy of the AFFA is defined through a series of risk management guidelines that are approved by the Supervisory Committee of the AFFA. Compliance with these risk management guidelines is monitored and documented on an ongoing basis by permanent risk controlling processes. Thanks to its thorough data preparation for the Ministry of Finance, the AFFA also makes an important contribution to assessing the Republic’s risk-bearing capacity. In this, the AFFA orients itself towards the international best practice standards for sovereign debt management offices and the current regulations for the financial sector.
Risk Management Process
The AFFA applies the following five-stage risk management process:
1. Risk identification
2. Risk measurement
3. Risk limitation (assignment of limits)
4. Risk monitoring (monitoring of limit utilisation)
5. Reporting and validation
Risk Categories
The most important risks that are relevant for the financial portfolio managed by the AFFA in the name of and for the account of the federal government are listed below.
Interest Rate Risk
Interest rate risk includes the specific risks of interest payment risk, in other words the risk of rising interest payments for existing and future financing (cash flow at risk), and market value risk, in other words opportunity risk for long-term bond issues with fixed coupons when interest rates fall (value at risk).
Credit Risk
Credit risk arises primarily from two sources:
- Credit risk from investments
The liquidity reserve is invested on a short-term basis in order to have as ready access to the funds as possible. Even though these short-term investments are made with top-rated institutions, there is still credit risk that needs to be managed.
- Credit risk from derivative transactions
When dealing in derivative transactions, there is credit risk arising from the possibility of counterparty default. Derivatives are entered into with a term of up to 30 years. Credit risk from derivatives is mitigated substantially by concluding collateral agreements.
Liquidity Risk
Liquidity risk is the risk that the liquidity reserve will prove insufficient to fully cover the payment obligations of the Republic in the event of a crisis and that it will not be possible to obtain the required funds on the market, or that it will only be possible to obtain them at unacceptably high costs.
Operational Risk
Operational risk is the risk of loss due to the inadequacy or failure of internal processes or unforeseeable external events such as natural disasters.
Reputational Risk
Reputational risk is the risk that the reputation of the Republic will be adversely affected by public reporting on specific transactions and business partners or certain business practices in the AFFA.
Foreign Currency Risk
Foreign currency risk applies to all transactions that are not denominated in euros or whose underlying agreements include an open and unhedged exchange rate component. Of the total debt in the portfolio, 98 per cent is denominated in euros.
Legal Risk
Legal risk is the potential obligation to pay fines, penalties or compensation for damages. There are external risk factors (such as lack of legal certainty in certain jurisdictions, non-consideration of statutory frameworks or applicable legal amendments and lack of knowledge of enforcement options in relation to contracts based on foreign law) and internal risk factors (such as a lack of staff training, lack of documentation of contracts and insufficient counsel from external legal advisors).