Financial risks

Financial risks is a collective name for a number of risks. The financial risks managed continuously by the Debt Office are market risk, credit risk and liquidity risk.

Financial risks arise in the management of the central government debt because, for example, changes in interest rates and currency exchange rates affect the value and costs of the central government debt.  How much the value and costs of the debt are affected depends on the composition of the debt. The Debt Office determines the composition of the debt by setting benchmarks and limits based on the Government's overall guidelines.

Central government payment systems manage financial risk through internal and external policy documents and continuous monitoring and follow-up.

Financial risks that arise in central government guarantees and loans are consequences of decisions taken by the Government and the Riksdag and this means that the Debt Office cannot itself decide if the risk is to be taken.

Market risk

The Board of the Debt Office decides on the size of  market risks that may be taken in the management of the central government debt expressed as benchmarks and deviation intervals. There is daily monitoring of how risks relate to these criteria. The purpose of this monitoring is both to check that the debt does not deviate from what is permitted and to see what transactions need to be carried out to steer the debt. Any deviations are reported to senior management and the Board.

The Debt Office does not set benchmark and limits in its guarantee and credit activities.

Credit risk

To control credit risks demands are made on the credit rating of the counterparty. The Debt Office only does business with counterparties that have a high credit rating. There are also limits for the maximum permitted credit exposure to each counterparty.

In derivative transactions the Debt Office also demands agreements that limit risk. In line with market practice, the Debt Office requires agreements on netting, the exchange of security to cover exposures (Credit Support Annex, CSA) and agreements that enable the Debt Office to terminate the transactions if the counterparty's credit rating falls below a certain level (rating-trigger).

Liquidity risk

Liquidity risks mainly arise in the management of the central government debt when new loans are to be raised to cover deficits in the central government budget and when maturing loans need to be replaced with new loans.  This type of liquidity risk is often called financing and refinancing risk. One way of controlling the liquidity risk in the long term is to spread maturities over time, i.e. to have an even maturity profile.  Short-term liquidity risks are handled by liquidity planning using short placements and short-term borrowing as tools.