AOFM Annual Report 2008 09

Australian Office of
Financial Management
Annual Report
2008-09
© Commonwealth of Australia 2009
ISBN 978-0-642-74542-2
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Printed by CanPrint Communications Pty Ltd.

1 October 2009
The Hon Wayne Swan MP

Treasurer
Parliament House
CANBERRA ACT 2600
Dear Treasurer
I have pleasure in presenting the Annual Report of the Australian Office of Financial
Management for the year ending 30 June 2009 for presentation to the Parliament.
The Report has been prepared in accordance with guidelines approved on behalf of the
Parliament by the Joint Committee of Public Accounts and Audit.
Yours sincerely
Neil Hyden
Chief Executive Officer
Treasury Building Langton Crescent CANBERRA ACT 2600 • Telephone: (61-2) 6263 1111 • Facsimile: (61-2) 6263 1222
AOFM ITS ROLE
The AOFM aims to advance economic growth and stability,

and the effective operation of financial markets, through
issuing debt, investing in financial assets and managing
debt, investments and cash for the Australian Government.
v
CONTENTS
Review by the Chief Executive Officer.......................................................................................xi

Treasury Bond market .....................................................................................................................xiii
Additional Treasury Bond issuance and investment of the proceeds....................................... xiv
Management of the portfolio ........................................................................................................... xv
Interest rate swap terminations...................................................................................................... xvi
Residential mortgage-backed securities ........................................................................................ xvi
Other changes ..................................................................................................................................xvii
Portfolio outcomes ..........................................................................................................................xvii
Public Register of Government Borrowings ...............................................................................xviii
Operational risk................................................................................................................................ xix
Cooperation with other debt managers ........................................................................................ xix
Staff .................................................................................................................................................... xix
Sovereign Risk Manager of the Year award .................................................................................. xx
Part 1: AOFM overview ............................................................................................................. 1

Role, function, outcome and output structure ................................................................................ 3
Organisational structure..................................................................................................................... 4
Part 2: Operations and performance ......................................................................................... 5

Introduction ......................................................................................................................................... 7
Treasury Bond issuance...................................................................................................................... 7
Investment of the proceeds of additional Treasury Bond issuance ............................................ 13
Cash management............................................................................................................................. 17
Minimising debt servicing costs subject to acceptable risk.......................................................... 20
Interest rate swap terminations....................................................................................................... 26
Credit management of interest rate swaps .................................................................................... 28
Residential mortgage-backed securities ......................................................................................... 29
Communications Fund ..................................................................................................................... 36
Operational risk................................................................................................................................. 36
Settlement operations ....................................................................................................................... 38
Information Technology operations ............................................................................................... 38
Cooperation with other debt managers ......................................................................................... 38
Agency financial performance......................................................................................................... 39
vii
Contents
Part 3: Management and accountability ................................................................................. 41

Corporate governance ...................................................................................................................... 43
Audit ................................................................................................................................................... 45
Operations.......................................................................................................................................... 47
Business continuity arrangements .................................................................................................. 47
Judicial decisions............................................................................................................................... 48
Management of human resources................................................................................................... 48
Assets management .......................................................................................................................... 51
Purchasing.......................................................................................................................................... 51
Consultants ........................................................................................................................................ 51
ANAO access clauses and exempt contracts ................................................................................. 52
Part 4: Financial statements .................................................................................................... 53

Statement by the Chief Executive Officer and Chief Finance Officer......................................... 57
Part 5: Other Information ...................................................................................................... 149

Structure of the AOFM’s portfolio ................................................................................................ 151
Funding ............................................................................................................................................ 152
Appropriations and other sources of funding............................................................................. 153
Advertising and market research.................................................................................................. 155
Grant programs ............................................................................................................................... 155
Freedom of information ................................................................................................................. 155
Ecologically sustainable development ......................................................................................... 157
Glossary ................................................................................................................................ 159
Acronyms .............................................................................................................................. 169
Index of compliance with requirements ................................................................................ 171
Contact details ...................................................................................................................... 174

Enquiries........................................................................................................................................... 174
Internet address............................................................................................................................... 174
Index ..................................................................................................................................... 175
viii
Contents
LIST OF TABLES
Table 1: Treasury Bond tender results — 2008-09......................................................................... 12
Table 2: Australian Government debt and assets administered by the AOFM ........................ 24
Table 3: Derivative counterparties by credit rating as at 30 June 2008 and
30 June 2009 ...................................................................................................................... 29
Table 4: RMBS Investments as at 30 June 2009 .............................................................................. 35
Part 3: Management and accountability ................................................................................. 41

Table 1: Operative and paid inoperative staff as at 30 June 2008 and 2009 ............................... 49
Table 2: AOFM salary ranges........................................................................................................... 50
Table 3: Consultancy contracts ........................................................................................................ 52
Table 4: Consultancy contracts of $10,000 or more let during 2008-09....................................... 52
Part 4: Financial statements .................................................................................................... 53
Part 5: Other Information ...................................................................................................... 149

Table 1: General Government Sector funding requirement and funding sources.................. 152
Table 2: AOFM gross appropriations and other funding .......................................................... 154
Table 3: 2008-09 non-campaign advertising expenditure $10,900 or more.............................. 155
LIST OF FIGURES
Part 1: AOFM overview ............................................................................................................. 1
Figure 1: AOFM organisational structure ........................................................................................ 4

Figure 1: Typical RMBS Structure ................................................................................................... 31
ix
Contents
LIST OF CHARTS
Chart 1: Treasury Bonds outstanding as at 30 June 2009 and issuance in 2008-09 ..................... 9
Chart 2: Semi-government bond spreads for select semi-government bond lines ................... 15
Chart 3: Net mark-to-market and accrual performance of Debt Hedge Portfolio .................... 16
Chart 4: Within-year funding requirement 2008-09...................................................................... 18
Chart 5: Short-term financial asset holdings and Treasury Notes on Issue 2008-09................. 19
Chart 6: 91-day moving average cash balance............................................................................... 20
Chart 7: Changes in debt servicing cost between 2007-08 and 2008-09...................................... 25
Chart 8: Modified Duration — nominal component of Australian dollar
Long-Term Debt Portfolio 2008-09 ................................................................................ 27
Chart 9: Total Savings arising from interest rate swaps (inclusive of revaluations) ................ 28
x
REVIEW BY THE CHIEF EXECUTIVE OFFICER
Treasury Bond market .....................................................................................................................xiii

Additional Treasury Bond issuance and investment of the proceeds....................................... xiv
Management of the portfolio ........................................................................................................... xv
Interest rate swap terminations...................................................................................................... xvi
Residential mortgage-backed securities ........................................................................................ xvi
Other changes ..................................................................................................................................xvii
Portfolio outcomes ..........................................................................................................................xvii
Public Register of Government Borrowings ...............................................................................xviii
Operational risk................................................................................................................................ xix
Cooperation with other debt managers ........................................................................................ xix
Staff .................................................................................................................................................... xix
Sovereign Risk Manager of the Year award .................................................................................. xx
xi
REVIEW BY THE CHIEF EXECUTIVE OFFICER
Treasury Bond market

Last year’s annual report included an article which reviewed the role of the Treasury Bond
market in the Australian financial system in the light of developments over the preceding five
years. In 2003 the then Government had announced that it would continue to issue Treasury
Bonds in periods when borrowing was not needed for Budget funding in order to maintain a
liquid and efficient bond market. This policy was continued by the present Government when it
took office in 2007.
The decision to continue issuance was based on the benefits that the economy derives from
having an active and efficient Treasury Bond market, together with the related market in
Treasury Bond futures. These markets help financial institutions manage their interest rate risk
and thereby contribute to a lower cost of capital in Australia. They also strengthen the financial
system against the potential impact of financial shocks.
Taking account of developments over subsequent years, the article in last year’s annual report
concluded that these benefits remained important for the Australian economy. In particular, the
experience of financial market turbulence in 2007-08, as the global financial crisis began to have
its impact, had highlighted the roles of the Treasury Bond market and the futures market as
anchors for the financial system.
During 2008-09, the global financial crisis intensified, generating further turbulence in
Australian financial markets, particularly in the period between the failure of Lehman Brothers
in mid-September 2008 and the announcement by the Government in mid-October that it would
guarantee the deposits and wholesale funding of Authorised Deposit-taking Institutions. Over
this period, the Treasury Bond market came under considerable buying pressure as investors
sought safe haven assets. In addition, existing investors tended to hold the bonds more tightly,
while some with large holdings reportedly stopped lending their securities to market makers.
The AOFM increased its issuance to relieve these strains, and the Treasury Bond market and the
Treasury Bond futures market continued to function in a broadly satisfactory manner.
Many other segments of financial markets were more severely affected by the turmoil and some
effectively ceased operating through this period. The interest rate swaps market continued, but
at a reduced level. The operation of the swaps market was helped by the continued functioning
of the Treasury Bond futures market, as it allowed parties to undertake swaps to hedge their
positions if needed.
xiii
Review by the Chief Executive Officer
In short, the experience of the past year further confirmed the value of the Treasury Bond and
bond futures markets for the resilience of the financial system, while the global financial crisis
has itself underscored the importance of financial system stability for economic prosperity.
The past year also highlighted one other benefit of maintaining an active and efficient Treasury
Bond market that was not considered in the article in last year’s report. This was that the
existence of an active market, with its supporting networks of investors, dealers and other
market intermediaries, tender arrangements and established procedures, enabled the AOFM to
increase the volume of issuance very quickly when the need arose. It thus allowed the
Government to act proactively and decisively in responding to the financial crisis and providing
stimulus to the economy.
The AOFM was able to launch an increased issuance program in the same week that the
Government announced the revised Budget outlook. In the subsequent five months, over
$25 billion of Treasury Bonds were issued. This speedy response would not have been
practicable if the sovereign bond market had no longer existed.
The increased issuance was readily taken up by investors, prompted by the energetic
promotional efforts of our bond dealers and intermediaries. The AOFM also engaged actively
with major investors, both domestically and overseas. The Treasurer gave presentations to
investors in Tokyo, London and New York, and I visited investors in Hong Kong, Beijing,
Tokyo, London, Paris and Dubai (the latter at a forum for investors in AAA bonds that included
many central banks and reserve asset managers from around the globe). Meetings were also held
in Sydney and Melbourne. Several financial institutions assisted in arranging meetings,
including the Commonwealth Bank of Australia, Deutsche Bank, HSBC Bank, Nomura
Securities, UBS and Westpac, and also the Australian Business Economists. I thank them for their
support.
Additional funding was provided in the 2009-10 Budget for the Office to expand its investor
relations and bond promotion activities. The main selling points for our bonds are the very
strong position of the Australian economy and the Budget, the Australian Government’s high
credit status within the ranks of AAA-rated sovereigns, Australia’s close links with strongly
growing Asian economies, and the liquidity of our bond lines.
Additional Treasury Bond issuance and investment of the proceeds

During the first part of 2008-09 (prior to the change in the Budget outlook announced on
3 February 2009), the AOFM undertook additional issuance of Treasury Bonds over the program
originally announced in the 2008-09 Budget. This was to maintain the liquidity and efficient
operation of the market in the face of increased demand for the bonds. The proceeds of this
additional issuance were invested to offset the cost and risk of the additional issuance.
xiv
The additional issuance program ended with the change in Budget estimates published on
3 February 2009. The additional issuance and investment undertaken up to that date amounted
to $4.6 billion. The investments were predominantly in semi-government and Kangaroo bonds
with risk characteristics closely matched to those of the additional Treasury Bonds. On
3 February 2009 the program had provided a positive net return of $21.5 million on an historic
accruals basis, but a negative net return of $12.1 million on a mark-to-market basis.
Management of the portfolio

Since its establishment in 1999, the AOFM has sought to manage its debt portfolio to reduce debt
servicing costs over the medium term at acceptable risk. For much of this period it used interest
rate swaps to achieve this aim. However over recent years, market yield curves flattened and, at
times, became inverted. This reduced the potential savings available from adjusting the
portfolio’s cost and risk characteristics through interest rate swaps. In the 2008 regular review of
its portfolio management strategy, the AOFM concluded that this approach no longer provided
a firm basis for achieving future savings. It therefore decided to end the strategy from the end of
2007-08.
Under the new approach followed in 2008-09, interest rate swaps are no longer used; the cost
and risk characteristics of the portfolio are determined by issuance decisions, including the
selection of the bond maturities to be issued.
Initially, issuance was planned to continue in accordance with the model set out in the 2003-04
Budget papers, which was designed to maintain a stable Treasury Bond market while also
supporting the 3 and 10-year Treasury Bond futures contracts. In the absence of interest rate
swaps, this approach would have caused the duration of the portfolio to rise gradually towards
4 over a period of years.
In the first half of 2008-09, the global financial crisis generated increased demand for Treasury
Bonds in view of their high credit quality. This reduced the liquidity of the market and, to offset
this, the Government directed the Office to undertake additional issuance as a temporary
measure. The cost and risk of this additional issuance were offset by investing the proceeds in
matched assets.
However, with the revised Budget outlook announced on 3 February 2009, investments in
matched assets ceased and the selection of bond lines and the size of tenders now directly
affected the risk characteristics of the portfolio. Henceforth issuance decisions needed to have
regard to their impact on the overall maturity structure of the portfolio.
The revised approach to issuance adopted by the AOFM was designed to provide short-term
flexibility within a framework directed to medium-term objectives. Decisions on the bond lines
to be offered at tender were made weekly, taking account of market conditions, but a balance
xv
was maintained between issuing shorter and longer bonds. Issuance was spread over almost all
the existing bond lines to increase their liquidity. Refinancing risk was managed by limiting the
volume of debt maturing in the early years. The cumulative effect of these decision processes
was that the average maturity and duration of the bonds issued between February and June 2009
was longer than if the selection of the bond lines to be issued had been guided simply by relative
market demand.
Interest rate swap terminations

Although interest rate swaps are no longer used in the management of the AOFM’s portfolio, at
the start of the year it held a substantial volume of swaps as a legacy from their past use. During
the year, the AOFM unwound 131 swaps with a notional face value of $15.35 billion. Of these,
130 were undertaken as part of an unwind program that commenced in November 2008. The
program generated a net realised value of $1.029 billion in favour of the Commonwealth.
At end-June 2009 the portfolio contained 21 remaining swaps with a total notional face value of
$2.425 billion. These are all due to mature by mid-May 2010; the AOFM expects to allow them to
mature without early termination.
Residential mortgage-backed securities

In October 2008 the Treasurer directed the AOFM to invest up to $8 billion in residential
mortgage-backed securities (RMBS) to support competition in lending for housing in Australia.
The AOFM adopted a cornerstone investor approach to these investments with the aim of
encouraging other investors to return to the RMBS market. The selection criteria used in
assessing proposals was directed towards the objective of supporting competition in lending for
housing and in ensuring that the funds provided would be used to originate new residential
mortgages.
Consistent with the purpose of the program, the pricing of RMBS issues was determined by
balancing the objective of providing a flow of funds that would allow competitive lending for
new housing with the objective of attracting other investors. Where third party investors
participated in transactions, the AOFM participated at the same price. This approach resulted in
spreads over BBSW rates which were lower than the spreads available in the secondary market
on previously issued RMBS, but which were still attractive in historic terms (relative to past
primary issuance).
By end-June 2009, a total of 13 issues had been completed, in which the AOFM invested
$6.2 billion and other investors $1.8 billion.
xvi
RMBS are complex financial and legal instruments and the AOFM has needed to expand its
skills base to manage them. A new position of RMBS Portfolio Manager was established and
filled by the recruitment of a person with extensive market experience of securitisation in
Australia and overseas.
Other changes
Other substantial changes made during the year included:
• The resumption of issuance of Treasury Notes. These will be used primarily for
within-year cash management, although in 2008-09 the volume of notes on issue was
built up to allow a continuing market to be established;
• The use in cash management of short-term money market investments in highly-rated

bank accepted bills and certificates of deposit. This provides the AOFM with a
broader range of investment options and allows higher yields than on term deposits
with the Reserve Bank of Australia; and
• The closure of the Communications Fund on 1 January 2009. The AOFM managed the
investments of this Fund on behalf of the Department of Broadband, Communications
and the Digital Economy. It was not part of the AOFM’s own balance sheet.
Portfolio outcomes
The debt servicing cost of the gross debt managed by the AOFM in 2008-09 was $3.0 billion
(after swaps). This represented a cost of funds of 4.39 per cent, compared with 6.55 per cent the
previous year. The yield on physical debt fell as new debt was issued at lower interest rates than
the debt issued in previous years. However, the major part of the change was due to increased
revenues from interest rate swaps, as market interest rate movements during the year brought
the value of the swap portfolio strongly into-the-money in the AOFM’s favour and swap
terminations allowed these gains to be realised.
The yield on assets in the portfolio was 5.36 per cent in 2008-09, compared with 6.75 per cent the
previous year. This reflected lower yields on term deposits with the Reserve Bank of Australia,
partially offset by higher yields from term investments (made with the proceeds of the
additional issuance undertaken in the first part of the year). The returns from investments in
residential mortgage-backed securities also lowered the average yield on gross assets.
The net cost of funds on the combined portfolio of debt and assets in 2008-09 was 3.64 per cent,
compared with 6.44 per cent the previous year.
xvii
Public Register of Government Borrowings

The Guarantee of State and Territory Borrowing Appropriation Act 2009 (the Guarantee Act), which
was enacted in June 2009, includes provisions which require the AOFM to establish, and publish
on its website each quarter, a register recording the beneficial ownership, by country, of all
securities issued by the Commonwealth. The register must also record the beneficial ownership
of any issuance by Australian States or Territories that is guaranteed by the Commonwealth. The
AOFM must include in the register a statement of the Office’s opinion as to the domicile of the
beneficial owner of securities if nominal ownership is registered in a country other than the
actual domicile.
These provisions were introduced as an amendment to the legislation in the Senate. The
Government did not support the amendment there on the grounds that it was impractical and
would not create greater transparency. However, the Government ultimately accepted the
amendment in order to achieve passage of the Act.
The AOFM is consulting with the Treasury and the Australian Bureau of Statistics to establish
whether there is a practicable way of providing better information on bond holdings. However
this would need to take into account the following concerns:
• Many non-resident investors with large holdings of fixed securities are unwilling to
disclose details of their investments for commercial reasons. Some public sector
investors, such as central banks and foreign reserve managers, also have policy
reasons for maintaining confidentiality about their activities.
• Such investors are likely to withdraw from securities where their holdings are
required to be revealed. This would make it more difficult, and more costly, for the
Commonwealth to issue securities and for States and Territories to issue guaranteed
debt.
• The Guarantee Act contains no provisions to ensure participation by State and

Territory governments that would be disadvantaged by its operation.
• The AOFM is unlikely to be able to form an opinion on the domicile of beneficial

owners of securities where the nominal owners do not cooperate in identifying them.
• The Act contains no provisions to compel the provision of information by beneficial

or notional bond holders.
• No provision has been made for additional resources for the AOFM to undertake this
new function.
• No other country has similar requirements.
xviii
The Guarantee Act provides that the proposed public register must be in a form to be prescribed
by regulations. No regulations have yet been made. The AOFM considers that this should not be
done until a practicable set of arrangements has been devised that meets these concerns.
Operational risk
The AOFM has continued its efforts to strengthen its management of operational risk. Activities
undertaken during the year included an update of the AOFM’s Fraud Control Plan, completion
of processes to support the provision of an annual Certificate of Compliance under the Financial
Management and Accountability Act 1997 and a comprehensive review of the AOFM’s Chief
Executive Officer’s Instructions.
Cooperation with other debt managers

The AOFM actively supports sovereign debt management in other countries. It has seconded
one staff member to assist in capacity development in debt management in Papua New Guinea
under the Strongim Gavman program and one in the Solomon Islands as part of the Regional
Assistance Mission Solomon Islands. These deployments aim to develop cash and debt
management capabilities through training and mentoring, as well as the development of systems
and procedures. This year a forum was conducted by the AOFM in Canberra attended by
officials responsible for sovereign debt management of the two countries, together with
seconded AOFM staff, to improve the assistance provided. The AOFM also hosted two visits
from debt management officials from Indonesia.
Staff
Since its establishment in 1999, all AOFM staff have been engaged under Australian Workplace
Agreements. With the change in government policy on 13 February 2008, the AOFM is working
towards the establishment of a collective agreement. Since that date, no new Australian
Workplace Agreements have been made. As an interim arrangement, new recruits are engaged
under common law contracts.
There were no changes in the senior staff of the Agency during 2008-09.
The AOFM faced considerable challenges during the year in implementing policy initiatives and
dealing with turbulent market conditions. Staff met these challenges with skill and
determination. I thank them all for the contributions they have made.
xix
Sovereign Risk Manager of the Year award

In January 2009 the AOFM was presented with the Sovereign Risk Manager of the Year award
by Risk Magazine in London. The commendation referred to a range of activities undertaken by
the AOFM in 2008, including issuance to maintain an active sovereign debt market, execution of
interest rate swap terminations, investments in residential mortgage-backed securities and risk
management initiatives aimed at reviewing, prioritising and mitigating the operational risks
faced by the Agency.
It was pleasing to receive this award in the tenth year of the Office’s operations as a separate
agency. The Office has come a long way over this period in developing its expertise and systems
and in responding to changing policy and market needs.
Nevertheless, it faces a challenging period ahead. Now is not the time to rest on our laurels.
Neil Hyden
xx
PART 1: AOFM OVERVIEW
Role, function, outcome and output structure ................................................................................ 3

Organisational structure..................................................................................................................... 4
1
AOFM OVERVIEW
Role, function, outcome and output structure

The Australian Office of Financial Management (AOFM) is a specialised agency responsible for
the management of Australian Government debt. The AOFM also manages the Government’s
cash balances and invests in financial assets.
The AOFM’s debt management activities include the issuance of Commonwealth Government
Securities (CGS) in the form of Treasury Bonds, and the operation of a securities lending facility
that allows financial market participants to borrow Treasury Bonds from the Reserve Bank of
Australia. The AOFM’s cash management activities include the issuance of Treasury Notes for
short-term funding, with surplus funds being invested in term deposits with the Reserve Bank
of Australia (RBA) and in short-term money market instruments such as bank accepted bills and
negotiable certificates of deposit. During the 2008-09 year, the AOFM also invested in residential
mortgage-backed securities under a Government program to support competition in lending for
housing. It also invested the proceeds of additional bond issuance undertaken during the year in
semi-government and Kangaroo bonds.
During the year, the AOFM managed the investment of monies for the Communications Fund
on behalf of the Department of Broadband, Communications and the Digital Economy. The
Communications Fund was closed on 1 January 2009, with the assets being transferred into the
Building Australia Fund, which is managed by the Future Fund Management Agency.
The AOFM forms part of the Treasury portfolio. It is accountable to the Secretary to the Treasury
and to the Treasurer, and through the Treasurer to the Parliament and the public. However, its
finances are separate from those of the Treasury as it is a prescribed agency under the Financial
Management and Accountability Act 1997 and maintains its own accounts. Its staff are employed
under the Public Service Act 1999.
For budgetary purposes, the AOFM’s activities comprise a single output — debt management —
directed to one outcome. This has been to enhance the Australian Government’s capacity to
manage its net debt portfolio, offering the prospect of savings in debt servicing costs and an
improvement in the net worth of the Australian Government over time.
3
Part 1: AOFM overview
Organisational structure
During 2008-09, the AOFM was organised into four groups as set out in Figure 1:
• Treasury operations;
• Financial risk management;
• Compliance and reporting; and
• Finance, settlement and corporate functions.
These four groups are supported by an information technology support unit and a human
resources unit. Additionally, two staff members are seconded to the Papua New Guinea and
Solomon Islands governments to support their debt management activities. Roles and
responsibilities within the office are structured to ensure an appropriate segregation of duties
and reporting lines.
Figure 1: AOFM organisational structure

Neil Hyden
Finance,
Treasury Compliance &
Financial Risk Settlements &
Services Reporting
Gerald Dodgson
Michael Bath
Andrew Johnson
Corporate
Pat Raccosta
Funding &
Audit &
Liquidity Debt Strategy Finance IT Support
Compliance
Management
Portfolio Human
Deal Execution Reporting Settlements
Management Resources
Financial Market Papua New

Performance Corporate
Monitoring & Operational Risk Guinea &
Analytics Services
Liaison Solomon Islands
Credit
Corporate
Management &
Communications
Risk Policy
4
PART 2: OPERATIONS AND PERFORMANCE
Introduction ......................................................................................................................................... 7
Treasury Bond issuance...................................................................................................................... 7
Investment of the proceeds of additional Treasury Bond issuance ............................................ 13
Cash management............................................................................................................................. 17
Minimising debt servicing costs subject to acceptable risk.......................................................... 20
Interest rate swap terminations....................................................................................................... 26
Credit management of interest rate swaps .................................................................................... 28
Residential mortgage-backed securities ......................................................................................... 29
Communications Fund ..................................................................................................................... 36
Operational risk................................................................................................................................. 36
Settlement operations ....................................................................................................................... 38
Information Technology operations ............................................................................................... 38
Cooperation with other debt managers ......................................................................................... 38
Agency financial performance......................................................................................................... 39
5
OPERATIONS AND PERFORMANCE
Introduction
The principal functions of the AOFM are:
• funding the Budget through the issuance of Australian Government debt;
• managing the Australian Government’s daily cash balances through short-term

borrowings and investments;
• undertaking investments in financial assets in accordance with Government policy

objectives;
• managing its portfolio of debt and financial assets cost effectively, subject to
acceptable risk; and
• supporting the efficient operation of Australia’s financial system.
This section outlines the activities undertaken in 2008-09 and reports on their performance.
Treasury Bond issuance
Objectives
Between 1 July 2008 and 3 February 2009 the Budget was forecast to have a positive Underlying
Cash Balance in 2009-10 so that there was no need to borrow for Budget funding. Treasury Bond
issuance during this period was undertaken simply to support the efficient operation of the
Treasury Bond and Treasury Bond futures markets. These markets play an important role in the
operation of the Australian financial system, as they are used in the pricing and hedging of a
wide range of financial instruments and in the management of interest rate risk. The existence of
active and efficient Treasury Bond and Treasury Bond futures markets also strengthens the
robustness of the financial system and reduces its vulnerability to shocks.
The forecast Budget outcome changed in the Updated Economic and Fiscal Outlook (UEFO)
published on 3 February 2009. From that date, the primary objective of Treasury Bond issuance
became raising monies to fund the Budget.
7
Part 2: Operations and performance
Achieving the objective
Supporting the Treasury Bond market

One consequence of the global financial crisis was an increase in the demand for Treasury
Bonds, as investors sought high quality fixed interest investments. As a result, conditions in the
Treasury Bond market tightened.
On 20 May 2008, following consultations with market participants about the adequacy of the
supply of Treasury Bonds, the Treasurer announced that the Government would increase the
issuance in order to ensure the continued efficient operation of the Treasury Bond and Treasury
Bond futures markets. To this end, the Government legislated to allow an increase in Treasury
Bonds on issue of up to $25 billion. Legislation providing for this received Royal Assent in
July 2008.
On 13 July 2008, the Treasurer directed the AOFM to issue up to an additional $5 billion of
Treasury Bonds beyond the $5.3 billion program announced in the Budget. The amount of
additional issuance was to depend on market conditions. Towards the end of 2008 it appeared
that the $5 billion limit might not be sufficient, and on 15 December 2008 the Treasurer increased
the limit by a further $5 billion.
Between 1 July 2008 and 3 February 2009, the AOFM issued a total of $8.8 billion of Treasury
Bonds (in face value terms). Of this amount, $4.2 billion represented issuance under the core
program announced in the 2008-09 Budget and $4.6 billion represented additional issuance.
Issuance under the core program was in a new June 2014 bond line and the existing May 2021
bond line.
In order to best support the market, additional issuance was directed to bond lines that were in
the shortest supply. Bonds were issued both on an outright tender basis (that is in exchange for
cash) and through switch tenders where bonds were issued in exchange for State government
bonds of a similar maturity. A total of 19 additional tenders were held, seven on an outright
basis and 12 as switch tenders.
Funding the Budget

Following the change in fiscal forecasts in February 2009, Treasury Bond issuance was redirected
towards raising monies to fund the Budget. The volume of issuance also increased; over
$25 billion of bonds were issued between February 2009 and June 2009.
Generally two bond tenders were held per week, each in the range $500 million to $700 million.
The bulk of issuance was into existing bond lines in order to enhance their liquidity and improve
their attractiveness to investors. A new bond line with a maturity date of April 2020 was also
launched in order to establish a line that can act as the benchmark ten-year bond in 2010.
8
The selection of bond lines for issue took account of current market conditions, relative value
considerations, the aim of increasing the liquidity of all outstanding bond lines and the need to
manage the maturity structure of the debt to limit refinancing risk.
Chart 1 shows the Treasury Bonds outstanding as at 30 June 2009 and issued over the financial
year.
Chart 1: Treasury Bonds outstanding as at 30 June 2009 and issuance in 2008-09

$billion $billion
11 11
10 10
9 9
8 8
7 7
6 6
5 5
4 4
3 3
2 2
1 1
0 0
7.5% 5.25% 5.75% 5.75% 6.5% 6.25% 6.25% 6% 5.25% 4.50% 5.75%
Sep 09 Aug 10 Jun 11 Apr 12 May 13 Jun 14 Apr 15 Feb 17 Mar 19 Apr 20 May 21
On issue 1 July 2008 Pre UEFO issuance Post UEFO issuance
Whereas in June 2008 most bond lines had a volume on issue of around $5 billion, by June 2009
five lines had volumes on issue of over $8 billion. During the year the total volume of
Treasury Bonds on issue (net of Australian Government holdings) increased by around
$29.0 billion, to $78.4 billion.
Following the 2009-10 Budget, consideration was given to issuing longer-dated Treasury Bonds
and resuming the issuance of Treasury Indexed Bonds. Issuance of such bonds could assist
portfolio management by widening the range of available debt instruments, diversifying risk
and tapping additional sources of investor demand. However no decisions had been announced
by the end of the year.
Securities lending facility

The AOFM’s securities lending facility allows bond market participants to borrow Treasury
Bonds for short periods when they are not otherwise available. This enhances the efficiency of
the market by improving the capacity of intermediaries to make two-way prices.
9
In August 2008 changes were made to the securities lending facility in order to enhance its
effectiveness.
• The range of collateral accepted in lending Treasury Bonds through the facility was
widened to include all securities accepted by the Reserve Bank of Australia as general
collateral in repurchase agreements. Prior to this, acceptable collateral was limited to
Commonwealth Government Securities. This limitation on the range of acceptable
collateral made it potentially more difficult to access the facility when these securities
were in general short supply.
• The facility was also extended to permit the borrowing of Treasury Bonds on an
intra-day basis. This change was made because it would facilitate the settlement of
financial transactions involving the bonds in some situations (for example where a
closed chain of lending transactions has inadvertently developed between market
participants).
Consultation with financial market participants

The AOFM continued to maintain an active dialogue with financial market participants, the RBA
and the Australian Securities Exchange. The AOFM also participated as an observer in meetings
of the Debt Securities Committee, Repo Committee and Negotiable Trading Instruments
Committee of the Australian Financial Markets Association.
Following the increase in issuance from February 2009, liaison with both domestic and overseas
investors was substantially expanded to promote issuance and the Office’s awareness of investor
needs and preferences.
Performance
Market efficiency
The Treasury Bond market experienced considerable volatility in 2008-09. In particular, in the
period between the failure of Lehman Brothers in mid-September 2008 and the announcement of
the Commonwealth guarantee of deposits and wholesale funding of authorised deposit-taking
institutions in mid-October 2008, the Treasury Bond market came under considerable buying
pressure as investors sought safe haven assets. In addition, existing investors tended to hold the
bonds more tightly, while some with large holdings reportedly stopped lending their securities
to market-makers.
Despite these strains, the Treasury Bond market continued to function in a broadly satisfactory
manner. Many other segments of financial markets were more severely affected by the turmoil
through this period and at times some effectively ceased operating.
10
Tightness in the Treasury Bond market was eased by the increased issuance and its targeting
into the most sought after bond lines. The timing and volume of issuance was closely aligned to
market conditions. For example, in early October, when market strains were at their height,
$1.45 billion of bonds were issued in four tenders over consecutive business days.
The changes to securities lending arrangements also helped minimise pressures in the Treasury
Bond market and kept the repurchase (repo) market operating reasonably smoothly. Reflecting
the strong demand for Treasury Bonds, there was considerable usage of the securities lending
facility in 2008-09:
• The facility was used for overnight borrowing 374 times in 2008-09 compared with
88 times in 2007-08. The face value amount lent was around $12.8 billion compared to
$2.5 billion in 2007-08.
• Peak usage of the facility occurred in September and October, when the facility was
accessed 161 times for term lending and the amount lent was $6.7 billion.
The financial market turbulence impacted upon turnover in both the Treasury Bond and
Treasury Bond futures markets.
• The turnover of Treasury Bonds decreased by around 10.4 per cent in 2008-09
compared to 2007-08.
• The turnover of 3-year Treasury Bond futures contracts decreased by around

30 per cent in 2008-09 compared to 2007-08, and turnover of the 10-year contracts
decreased by around 38 per cent.
All Treasury Bond futures contract close-outs in 2008-09 occurred smoothly.
Efficiency of issuance
Treasury Bonds are issued by competitive tender using an electronic tender system. In
March 2009 the AOFM adopted a new electronic tender system supplied by Yieldbroker Pty Ltd.
The Yieldbroker DEBTS system is an online platform which operates in Australia for the trading
of fixed income securities. The change to the new tender system occurred very smoothly and
was well received by bidders. The system is easy to use and tender results are now available
almost immediately after the close of bidding. Each bidder is also given details of the stock
allotted to them almost immediately after the close of the tender.
Despite the large increase in issuance, tender performance measures in 2008-09 were broadly in
line with those in recent years. Table 1 shows the results of the tenders conducted during the
year.
11
Table 1: Treasury Bond tender results — 2008-09

Face value Weighted Spread to Range
amount average secondary of bids
Tender Coupon allocated issue yield market yield accepted Times
date and maturity ($m) (%) (basis points) (basis points) covered
21-Jul-08 6.25% 15-Jun-2014 750 6.4774 na 1.50 2.68
30-Jul-08 6.25% 15-May-2013 150 6.2167 -0.33 1.00 5.69
6-Aug-08 6.50% 15-Apr-2012 149 5.8899 -0.51 1.00 6.05
11-Aug-08 6.25% 15-Jun-2014 600 5.8867 0.67 3.00 2.43
13-Aug-08 5.75% 15-Jun-2011 151 5.6800 na na 8.47
18-Aug-08 6.25% 15-May-2013 149 5.7150 na na 6.70
20-Aug-08 5.75% 15-Jun-2011 151 5.6700 na na 8.19
27-Aug-08 6.00% 15-Feb-2017 152 5.7000 na na 8.55
3-Sep-08 6.25% 15-Apr-2015 300 5.6500 na na 4.44
8-Sep-08 6.25% 15-Apr-2015 401 5.7991 -0.09 1.50 4.48
17-Sep-08 6.25% 15-May-2013 300 5.4850 na na 5.15
22-Sep-08 5.75% 15-May-2021 400 5.7866 -0.59 1.50 2.94
1-Oct-08 6.00% 15-Feb-2017 301 5.485 na na 3.26
8-Oct-08 5.75% 15-May-2021 399 5.1204 1.29 1.00 3.05
9-Oct-08 6.25% 15-Jun-2014 450 4.7310 1.10 2.50 1.50
10-Oct-08 5.25% 15-Aug-2010 301 4.0300 na na 2.55
13-Oct-08 7.50% 15-Sep-2009 300 4.0983 9.83 5.00 3.43
24-Oct-08 5.25% 15-Aug-2010 300 4.1900 na na 2.98
5-Nov-08 6.00% 15-Feb-2017 299 5.2000 na na 4.08
12-Nov-08 6.25% 15-Apr-2015 299 4.5500 na na 4.59
19-Nov-08 6.25% 15-May-2013 200 4.1100 na na 3.15
5-Dec-08 6.25% 15-Apr-2015 300 3.8856 -0.44 2.00 3.00
8-Dec-08 6.25% 15-May-2013 299 3.8411 -0.64 0.50 3.25
10-Dec-08 6.25% 15-Jun-2014 400 3.9244 1.44 3.00 2.03
7-Jan-09 5.75% 15-Jun-2011 300 3.2950 -1.00 0.00 3.70
12-Jan-09 6.25% 15-Apr-2015 150 3.6850 -1.00 0.00 5.90
16-Jan-09 6.25% 15-Jun-2014 401 3.4413 0.83 2.00 2.51
21-Jan-09 5.75% 15-May-2021 399 4.0692 2.92 4.00 1.44
6-Feb-09 6.25% 15-Apr-2015 601 3.9113 0.38 1.50 2.62
11-Feb-09 6.25% 15-May-2013 601 3.4608 1.08 1.50 2.58
13-Feb-09 6.25% 15-Jun-2014 601 3.6905 0.75 3.00 2.87
18-Feb-09 6.50% 15-Apr-2012 600 2.9851 -0.99 1.50 4.78
20-Feb-09 5.75% 15-Jun-2011 599 2.9321 -2.29 0.50 4.45
25-Feb-09 6.25% 15-May-2013 600 3.4804 0.54 1.50 4.08
27-Feb-09 5.75% 15-May-2021 501 4.5176 -2.24 1.50 3.91
3-Mar-09 6.50% 15-Apr-2012 600 3.3029 0.29 1.50 3.88
6-Mar-09 6.25% 15-Jun-2014 598 3.7168 0.18 2.00 3.14
11-Mar-09 6.00% 15-Feb-2017 601 4.1811 -0.61 2.50 2.97
13-Mar-09 5.25% 15-Aug-2010 600 2.5880 0.30 2.00 2.55
18-Mar-09 5.75% 15-Jun-2011 701 2.9546 1.46 2.00 4.48
20-Mar-09 5.75% 15-May-2021 500 4.4176 1.26 3.50 2.46
25-Mar-09 6.25% 15-Jun-2014 601 3.9811 1.61 4.00 2.71
27-Mar-09 5.25% 15-Mar-2019 600 4.5506 1.06 2.00 2.98
1-Apr-09 6.00% 15-Feb-2017 600 4.2867 1.17 2.00 3.66
3-Apr-09 6.25% 15-May-2013 599 3.8374 2.24 2.00 3.40
8-Apr-09 5.75% 15-May-2021 700 4.8736 0.61 1.50 3.36
15-Apr-09 5.25% 15-Mar-2019 700 4.6351 1.01 1.50 3.16
17-Apr-09 5.75% 15-Jun-2011 701 3.3248 -0.02 2.00 4.94
Continued over page.
12
Table 1: Treasury Bond tender results — 2008-09 (continued)

Face value Weighted Spread to Range
amount average secondary of bids
Tender Coupon allocated issue yield market yield accepted Times
date and maturity ($m) (%) (basis points) (basis points) covered
22-Apr-09 6.50% 15-Apr-2012 700 3.5375 -1.25 2.50 5.46
24-Apr-09 6.00% 15-Feb-2017 700 4.3763 0.13 1.00 3.56
29-Apr-09 4.50% 15-Apr-2020 750 4.6844 na 10.50 2.89
1-May-09 5.25% 15-Aug-2010 700 2.6779 -2.21 2.00 5.46
6-May-09 4.50% 15-Apr-2020 699 5.0042 0.92 3.00 3.19
8-May-09 5.25% 15-Mar-2019 702 4.9563 0.13 1.00 3.80
13-May-09 6.50% 15-Apr-2012 701 3.8646 -0.29 1.00 4.36
15-May-09 6.00% 15-Feb-2017 700 4.7633 0.58 1.00 2.59
20-May-09 4.50% 15-Apr-2020 699 5.2237 1.07 1.50 3.04
22-May-09 5.75% 15-Jun-2011 700 3.7275 -1.00 0.50 5.66
27-May-09 5.25% 15-Mar-2019 699 5.3471 1.21 1.50 2.76
29-May-09 6.50% 15-Apr-2012 698 3.9845 -0.30 1.50 4.58
3-Jun-09 6.00% 15-Feb-2017 700 5.3252 1.02 1.50 3.27
5-Jun-09 6.25% 15-May-2013 700 4.5704 0.04 1.00 3.46
10-Jun-09 6.25% 15-Apr-2015 499 5.2852 0.00 2.00 2.11
12-Jun-09 5.75% 15-Jun-2011 699 4.0056 0.06 3.00 3.39
17-Jun-09 5.25% 15-Mar-2019 700 5.4372 1.72 3.00 1.78
19-Jun-09 6.50% 15-Apr-2012 700 4.5279 1.29 3.00 1.87
24-Jun-09 5.25% 15-Aug-2010 701 3.4161 0.86 4.00 3.85
Average over year to June 2009 0.48 2.06 3.76
Average over 3 years to June 2009 0.33 1.66 3.76
Average over 10 years to June 2009 0.41 1.42 3.83
Denotes switch tender
Investment of the proceeds of additional Treasury Bond issuance
Objective
Additional Treasury Bond issuance totalling around $4.6 billion (in face value terms) was
undertaken between 1 July 2008 and on 3 February 2009 to support the operation of the Treasury
Bond and Treasury Bond futures markets. The proceeds were invested with the aim of
providing returns commensurate with the debt serving costs of the additional issuance, while
adopting a prudent approach to credit and interest rate risk.
With the change in fiscal outlook published on 3 February 2009, the objective of issuance
changed to funding the Budget. The distinction between core and additional issuance was
removed and the AOFM began selling the investments acquired with the proceeds of additional
issuance.
13

To facilitate performance monitoring, the assets and liabilities arising from the additional
Treasury Bond issuance were allocated to a separate portfolio, called the Debt Hedge Portfolio.
The portfolio was managed to minimise maturity gaps and to have an overall net interest rate
exposure approaching zero.
The investment mandate approved by the Secretary to the Treasury provided for the proceeds of
the additional issuance to be invested in a range of highly-rated Australian dollar denominated
debt securities. It also allowed funds to be invested in short-term money market investments
such as negotiable certificates of deposit issued by Authorised Deposit-taking Institutions and
term deposits at the RBA.
The bulk of the proceeds were invested in semi-government bonds and Kangaroo bonds,1 as
these Australian dollar denominated securities matched relatively closely the characteristics of
Treasury Bonds. Purchases of securities were transacted by the following means:
• on an outright basis in the secondary market, where the AOFM contacted at least
three market-makers for either two-way prices or offers;
• on a switch basis, where the AOFM contacted at least three market-makers for prices
to switch from an existing investment to another;
• as part of a placement of new securities (as either a new primary issue or tap of
existing securities) on an outright or switch basis; and
• tenders for the issue of additional Treasury Bonds conducted on a switch basis for
semi-government bonds.
An advantage of the switch tenders was that the issuance of the Treasury Bonds and the
investment of their proceeds occurred simultaneously. This removed the risk of losses due to
unfavourable movements in market rates between issuance and investment.
When the investment of the proceeds of the additional issuance ceased in February 2009, the
Debt Hedge Portfolio was closed and its assets and liabilities transferred to the Long-Term Debt
Portfolio.
Performance
On an accruals (historic cost) basis, the Debt Hedge Portfolio had provided a net return of
$21.5 million when it was closed on 4 February 2009.
1 A Kangaroo bond is an Australian dollar denominated bond issued into the Australian market by a
foreign issuer.
14
Up until early December 2008, the mark-to-market performance of the Portfolio experienced
only relatively small deviations around zero. In mid-December 2008, in line with a general
widening of credit spreads coinciding with the first usage of the wholesale funding guarantee by
domestic banks, there was a significant widening in the spread of semi-government bond yields
to Australian Government bond yields. This led to a deterioration in the mark-to-market
performance of the Portfolio. By early February 2009, semi-government bond spreads had
narrowed from their peaks, but still remained much wider than over most of 2008. Chart 2
shows semi-government bond spreads for select semi-government bond lines.
Chart 2: Semi-government bond spreads for select semi-government bond lines

basis points basis points
160 160
140 140
120 120
100 100
80 80
60 60
40 40
20 20
0 0
Nov-2008
Aug-2008
Sep-2008
Feb-2009
Oct-2008
Dec-2008
Jan-2009
NSWTC 6.00% 01-May-2012 vs. CGS 5.75% 15-Apr-2012

QTC 6.00% 14-Aug-2013 vs. CGS 6.5% 15-May-2013
TCV 4.75% 15-Oct-2014 vs. CGS 6.25% 15-June-2014
WATC 8.00% 15-Jun-2013 vs. CGS 6.5% 15-May-2013
Source: Bloomberg
Mid-curve semi-government bonds experienced the greatest widening in spreads. While the
additional Treasury Bond issuance was allocated across virtually all bond lines, it centred on
mid-curve lines that were most in demand in the market. The investment strategies followed to
reduce the interest rate risk exposure of the Portfolio produced a similar maturity structure for
investments, with a concentration of mid-curve semi-government bonds. This exacerbated the
impact of the movements in spreads on the market value of the Portfolio.
At 3 February 2009, the Portfolio had a mark-to-market return of negative $12.1 million.
15
The net accrual and mark-to-market performance of the Debt Hedge Portfolio through time is
shown in Chart 3. The chart also displays the volume and make-up of investment holdings and
the corresponding volume of additional Treasury Bond issuance through time.
Chart 3: Net mark-to-market and accrual performance of Debt Hedge Portfolio

$million $million
6,000 200
150
4,000
100
2,000
50
0 0
-50
-2,000
-100
-4,000
-150
-6,000 -200
Nov-2008
Aug-2008
Sep-2008
Dec-2008
Jan-2009
Feb-2009
Jul-2008
Oct-2008
Additional Treasury Bonds (MV) Semi-government Bonds (MV)

Kangaroo Bonds (MV) Short Term Investments (MV)
Cash (MV) Net Asset M-T-M Performance (RHS)
Net Asset Accrual Performance (RHS)
The assets and liabilities in the Debt Hedge Portfolio were transferred to the Long-Term Debt
Portfolio on 4 February 2009. The investments were no longer required and were completely
divested by end-July 2009.
Yields for both Kangaroo and semi-government bonds began to rise in the first quarter of 2009
and continued rising over the remainder of the financial year. This was a consequence of the
general steepening in yield curves that occurred at this time.
Over their entire holding period, Kangaroo and semi-government bonds generated a positive
return of $175.4 million, comprising $165.5 million in interest revenue and $9.9 million in
realised capital gains.
16
Cash management
Objective
The AOFM manages the daily cash balances of the Australian Government in the Official Public
Account (OPA).2 The AOFM’s primary objective in managing these balances is to ensure that the
Government is able to meet its financial obligations as and when they fall due. Other objectives
are to minimise the cost of funding the balances and to invest excess balances efficiently. In
minimising cost the AOFM seeks to avoid undue use of the overdraft facility provided by the
RBA.3

Achieving the objectives in relation to cash management involves undertaking appropriate
short-term investment and debt issuance.
Cash balances not required immediately are invested outside the OPA for nominated periods of
time, with the maturity dates set primarily to finance large future outlays. The magnitudes and
tenors of the short-term investments are determined by the AOFM.
In August 2008, the AOFM began investing excess cash in a broader range of short-term
investment assets, namely highly-rated bank accepted bills and certificates of deposit issued by
Authorised Deposit-taking Institutions. Prior to this, excess cash was invested only in term
deposits at the RBA. The broader range of investment options should help enhance investment
returns on surplus cash balances.
• Interest rates for term deposits at the RBA are based on Overnight Indexed Swap
rates.
• Interest rates for bank accepted bills and certificates of deposit reflect prevailing
market rates for those instruments.
Treasury Notes are short-term debt securities that can be issued to provide short-term funding.
In recent years their issuance has not been needed because the AOFM’s holdings of short-term
assets have been sufficient to cover fluctuations in OPA balances. However, with the Budget
balance moving into deficit and the transfer of monies to funds managed by the Future Fund, it
was evident that the AOFM’s short-term asset holdings would soon become insufficient to meet
all within-year funding needs and that short-term borrowings would also be required.
2 The Official Public Account (OPA) is the collective term for the Core Bank Accounts maintained at the
RBA for Australian Government cash balance management.
3 The overdraft facility is more costly than equivalent short-term borrowing (for example, issuance of
Treasury Notes). The terms of the facility provide that it is to cover only temporary shortfalls of cash and
is to be used infrequently and, in general, only to cover unexpected events.
17
To this end, the issuance of Treasury Notes recommenced in March 2009. The notes on issue
were built up over the remaining months of the financial year. The AOFM plans to keep at least
$10 billion of notes on issue at all times so as to maintain a liquid market in them.
The size and volatility of the within-year funding requirement are indicated by changes in the
short-term financial asset holdings managed by the AOFM, after deducting Treasury Notes on
issue. Chart 4 shows the movement in the funding requirement in 2008-09.
Chart 4: Within-year funding requirement 2008-09

$billion $billion
44 44
40 40
36 36
32 32
28 28
24 24
20 20
16 16
12 12
8 8
4 4
0 0
May-09
Nov-08
Mar-09
Aug-08
Sep-08
Oct-08
Feb-09
Apr-09
Jul-08
Dec-08
Jan-09
Jun-09
Short-term financial assets less Treasury Notes
Performance
The objective of meeting the Government’s financial obligations when they fall due was met,
with the overdraft facility provided by the RBA accessed only once in 2008-09.
During 2008-09 the AOFM placed 473 term deposits with the RBA. The stock of term deposits
fluctuated from a minimum of $3.1 billion in January 2009 to a maximum of $39.0 billion in
June 2009.
• The average yield obtained on term deposits during 2008-09 was 4.97 per cent,
compared with 6.89 per cent in 2007-08.
Short-term investment in bank accepted bills and certificates of deposit was undertaken when
excess funds were available for investment and there was an acceptable higher return from
investing in such paper compared with placing funds on deposit at the RBA. (While investment
18
in highly-rated bank issued paper carries low credit risk, it is not completely risk free, unlike a
deposit at the RBA, and requires an appropriately higher return.)
The face value amount invested in bank accepted bills and certificates of deposit peaked at
$8.25 billion in November 2008. The average additional return in 2008-09 from investing in bank
accepted bills and certificates of deposit compared with investing funds on deposit at the RBA
was approximately 47 basis points per annum. This is estimated to have generated additional
investment earnings in 2008-09 totalling around $10 million.
Re-establishment of the Treasury Note market occurred relatively smoothly and tenders for the
issue of Treasury Notes were well supported. Sixteen tenders were conducted in 2008-09 for the
issue of $18.7 billion (in face value terms) of Treasury Notes.
• The notes were issued at tender at yields that averaged around 20 basis points less
than bank bill yields of the corresponding maturity. This is broadly similar to the
spread to bank bill yields that Treasury Notes were issued at in the past.
The movement in total short-term financial asset holdings managed by the AOFM (OPA cash
balance plus term deposits with the RBA and other short-term investments managed by the
AOFM), together with the volume of Treasury Notes on issue, during 2008-09 are shown in
Chart 5.
Chart 5: Short-term financial asset holdings and Treasury Notes on Issue 2008-09
$billion $billion
44 44
40 40
36 36
32 32
28 28
24 24
20 20
16 16
12 12
8 8
4 4
0 0
May-09
Nov-08
Mar-09
Aug-08
Sep-08
Oct-08
Jul-08
Dec-08
Jan-09
Feb-09
Apr-09
Jun-09
Treasury Notes on issue Short-term financial assets
In undertaking its cash management activities, the AOFM is required to maintain the 91-day
rolling average of the daily OPA cash balance within operational limits around a target level. In
19
2008-09 these limits were the same as applied in 2007-08, with an operational target of
$750 million and upper and lower limits of $1,000 million and $500 million respectively. There is
also a Ministerially-approved upper limit of $1.5 billion.
The 91-day moving average OPA cash balance was maintained within operational limits, and
within the Ministerial limit, throughout the year.
Movements in the 91-day rolling average OPA cash balance over the year are shown in Chart 6.
Chart 6: 91-day moving average cash balance

$million $million
1,100 1,100
1,000 1,000
900 900
800 800
700 700
600 600
500 500
400 400
May-09
Nov-08
Mar-09
Aug-08
Sep-08
Oct-08
Jul-08
Dec-08
Jan-09
Feb-09
Apr-09
Jun-09
Upper limit 91-day average Lower limit
Minimising debt servicing costs subject to acceptable risk
Objective
In managing its debt portfolio, the AOFM generally seeks to minimise debt servicing costs over
the medium term at an acceptable level of risk, by which is meant an acceptable level of
variability in cost outcomes.
The primary measure of cost used in this context is historic accrual debt servicing cost. This
includes interest on physical debt and derivatives, realised market value gains and losses, capital
indexation of inflation-linked debt and the amortisation of any issuance premiums and
discounts. However, it does not include unrealised market value gains and losses. Accrual debt
servicing cost is the most appropriate measure of cost in circumstances where financial assets
and liabilities are intended to be held or to remain on issue until maturity and there is little
likelihood that unrealised market value gains and losses will be realised.
20
Information on unrealised market value gains and losses is useful in circumstances where it is
possible that they may be realised in the future. In the AOFM’s financial statements, debt
servicing cost outcomes are presented on a ‘fair value’ basis that includes movements in the
unrealised market value of physical debt, assets and interest rate derivatives. A comprehensive
income format is used that allows revenues and expenses on an historic basis to be distinguished
from the effects of unrealised market value fluctuations.

For several years prior to 2008-09, the composition of the physical debt in the AOFM’s portfolio
provided little opportunity for reducing debt servicing costs, because the volume and maturity
structure of the debt was determined by the policy of issuing to support the Treasury Bond and
Treasury Bond futures markets. Furthermore, the volume and tenor of assets held as term
deposits were largely determined by cash management requirements. However, the AOFM was
able to reduce debt servicing costs by using derivative instruments to adjust the portfolio’s cost
and risk characteristics, such as modified duration and short-dated exposure. It used interest
rate swaps4 to achieve this objective.
Historically, debt issued for long periods at fixed rates of interest has required higher interest
rates than shorter-term debt, because lenders demand a higher return for having their funds
locked away for longer periods. Interest rate swaps provided savings in debt service costs by
swapping from longer to shorter-term debt (or from fixed-rate debt to floating-rate debt).
However, increasing the amount of short-term or floating-rate debt in the portfolio increased the
potential variability of debt service costs, as interest rate movements were able to flow through
to the overall cost of funds more quickly.
Over recent years, market yield curves flattened and, at times, became inverted. This reduced
the potential savings available from adjusting the portfolio’s cost and risk characteristics
through interest rate swaps. In its 2008 review of its portfolio management strategy, the AOFM
concluded that this strategy no longer provided a firm basis for achieving future savings in debt
servicing costs. While the strategy had produced substantial savings over many years, in the
changed circumstances it was considered better to accept the maturity structure of the debt
portfolio that resulted from debt issuance.
As a result, the previous portfolio management framework was terminated from the end of
2007-08. Existing swaps were regarded as a legacy component of the portfolio to be managed in
light of market conditions. Initially the legacy swaps were allowed to remain and mature, but
when swap rates fell significantly in late 2008, the AOFM began terminating them, a process that
was largely completed by May 2009.
4 An interest rate swap is a financial contract where one party agrees to pay another a stream of fixed
interest payments on an agreed notional principal amount, in return for a stream of floating interest rate
payments on the same notional principal.
21
Under the new strategy, the duration of the nominal debt portfolio was determined by the
cumulative effect of issuance decisions. It was recognised that the policy of issuing into bond
lines that supported the baskets for the 3 and 10-year bond futures contracts would cause the
duration of the nominal debt portfolio to tend towards a value of four over a period of years as
the legacy swaps matured.5 This governed the interest rate risk of the portfolio. The portfolio
management strategy was thus to allow duration to move to four; the decision to actively
unwind swaps accelerated this transition.
The Treasurer’s direction in May 2008 for the AOFM to undertake additional Treasury Bond
issuance to support the market did not affect the strategy, as the cost and risk of the additional
issuance was offset by the investment of the proceeds in matched assets comprising
semi-government and Kangaroo bonds. The Office was thus able to be flexible in responding to
shortages in particular bond lines without disturbing the cost and risk characteristics of the core
portfolio.
The reorientation of the AOFM’s borrowing task to funding the Budget had a bigger impact on
portfolio management. The distinction between core and additional issuance was removed,
investments in matched assets ceased and the selection of bond lines and the size of tenders now
had a direct impact on the cost and risk of the overall portfolio. Henceforth issuance decisions
needed to have regard to the overall maturity structure of the portfolio — including its exposure
to market risk and refinancing risk over the medium term — as well as to short-term market
conditions and the relative demand and cost of different bond lines.
The approach adopted to issuance after 3 February 2009 was designed to provide short-term
flexibility within a framework directed to medium-term objectives. Decisions on the bond lines
to be offered at tender were made weekly, taking account of market conditions, but a balance
was maintained between issuing shorter and longer bonds. Issuance was spread over almost all
the existing bond lines to increase their liquidity. Refinancing risk was managed by limiting the
volume of debt maturing in the early years. The cumulative effect was that the average maturity
and duration of the bonds issued between February 2009 and June 2009 was longer than if the
selection of the bond lines to be issued had been guided simply by relative market demand.
5 The modified duration of the nominal physical debt before swaps has generally been a little over 4.0
over recent years.
22
Performance
Reducing debt servicing cost

The debt servicing cost6 of the gross debt managed by the AOFM in 2008-09 was $3.0 billion
(after swaps), on an average book value of $67.8 billion. This represented a cost of funds of
4.39 per cent.
The return on gross assets was $1.6 billion, on an average book value of $29.4 billion, over the
same period. This represented an average yield of 5.36 per cent.
These aggregates were affected by the inclusion of a number of new instruments in 2008-09. On
the debt side, the issue of Treasury Notes resumed during the year, while new assets included
bank paper (money market instruments), term investments in semi-government and Kangaroo
bonds, and residential mortgage-backed securities. The AOFM’s holdings of Commonwealth
advances to State and Territory governments for public housing are also included for the first
time.7
Taken together, the combined portfolio of debt and assets managed by the AOFM had a net
interest expense (before re-measurements) of $1.4 billion, at an effective yield of 3.64 per cent.
The corresponding figure for 2007-08 was 6.44 per cent.
The large decrease in net interest expense for 2008-09 compared to 2007-08 was driven by a
number of factors, the largest of which was the substantial revenue from swaps over the year.
Interest rate swaps reduced the effective yield of gross CGS debt by 1.43 per cent through
realising $969 million from swap terminations and net interest receipts. Also contributing to the
reduced net interest expense of the AOFM portfolio was the return obtained from investments in
short-term bank paper and term investments in semi-government and Kangaroo Bonds.
Table 2 provides further details of the cost outcomes for the combined portfolio by instrument
and portfolio for 2007-08 and 2008-09. In this table, the Debt Hedge Portfolio (which operated
separately for only part of the year) has been grouped with the Long-Term Debt Portfolio (in
which its assets and liabilities were subsumed on 4 February 2009). Information on the separate
performance of the Debt Hedge Portfolio is provided on page 14 above.
6 Debt servicing cost includes net interest expenses (measured on an accruals basis) plus foreign exchange
revaluation gains and losses. Unrealised changes in the market valuation of domestic debt and
derivatives are not part of this measure.
7 These advances were made under Commonwealth-State Housing Agreements and have been
administered by the AOFM for many years, but were not previously reported in the debt portfolio cost
outcomes.
23
Table 2: Australian Government debt and assets administered by the AOFM

Interest expense Book volume Effective yield
2007-08 2008-09 2007-08 2008-09 2007-08 2008-09
$ million $ million per cent per annum
Contribution by instrument
Treasury fixed coupon bonds (2,947) (3,182) (48,476) (56,514) 6.08 5.63
Treasury inflation indexed bonds (593) (687) (8,317) (8,677) 7.13 7.92
Treasury notes - (75) - (2,641) 2.85
Other miscellaneous domestic debt (0) (0) (4) (0) 8.22 7.20
Foreign loans (a) 0 (2) (6) (7) -3.42 23.27
Gross physical CGS debt (3,540) (3,946) (56,804) (67,840) 6.23 5.82
Interest rate swaps (180) 969 - -

Gross CGS debt (after swaps) (3,721) (2,977) (56,804) (67,840) 6.55 4.39
Term deposits with the RBA 1,197 981 17,378 19,759 6.89 4.97
Investments in bank paper - 140 - 2,108 6.64
Term investments (b) - 199 - 2,864 6.96
RMBS investments - 89 - 1,859 4.80
State Housing Advances 171 166 2,899 2,826 5.89 5.89
Gross assets 1,368 1,576 20,277 29,416 6.75 5.36
Total debt and assets (2,353) (1,400) (36,527) (38,423) 6.44 3.64
Contribution by portfolio
Long Term Debt Portfolio (c) (3,727) (2,690) (56,892) (62,070) 6.55 4.33
Cash Management Portfolio 1,204 1,034 17,466 18,961 6.89 5.45
RMBS Portfolio - 89 - 1,859 4.80
State Housing Portfolio 171 166 2,899 2,826 5.89 5.89
Total debt and assets (2,353) (1,400) (36,527) (38,423) 6.44 3.64
Re-measurements (d) (118) (232)

Total after re-measurements (2,471) (1,632) (36,527) (38,423)
(a) Interest expense and effective yield on foreign loans incorporates foreign exchange revaluation effects.
The reported interest expense for Foreign Loans in 2007-08 has been corrected from that reported in the
AOFM’s 2007-08 annual report.
(b) Investments in State and Territory government bonds and Kangaroo bonds.
(c) Includes the Debt Hedge Portfolio which operated separately for part of the year.
(d) Re-measurements refer to unrealised changes in the market valuation of financial assets and liabilities.
Despite the volume of debt increasing in 2008-09 over 2007-08, the debt servicing cost of the total
portfolio fell by $953 million. Chart 7 sets out the components of this change by instrument,
broken down to show contributions from changes in the overall volume of debt and in the
composition of the portfolio, and from movements in interest rates, exchange rates and the
Consumer Price Index (CPI).
24
Chart 7: Changes in debt servicing cost between 2007-08 and 2008-09

Treasury Bonds -45 -198 478
Treasury Notes 75
RMBS -89
Decreasing Increasing
Indexed Debt 94
Foreign Currency Debt 2
Bank Paper -140
Term Investments -199
Interest Rate Swaps -53 -1292 196
State Housing Advances 5
Term Deposits -160 376
TOTAL -83 -1116 94 2 150
-1500 -1100 -700 -300 100 500

Debt service costs ($ millions)
Interest rates -$1116 million Capital indexation $94 million

Change in foreign currency gains $2 million Debt composition $150 million
Volume -$83 million
The reduction in total debt servicing costs was dominated by increased savings from interest
rate swaps. Returns on swaps increased by $1.15 billion compared to 2007-08. A driving factor
for this was the proceeds from the termination of swaps, which crystallised significant gains in
market value. Also contributing to the increased returns from swaps were falls in market interest
rates and a reversal in the shape of yield curves. In particular, lower short-term interest rates
reduced the cost of the floating legs of swaps and brought a large increase in interest receipts
from swaps in the second half of the financial year. Overall, swaps reduced the interest costs of
the portfolio (before re-measurements) by $969 million during 2008-09.
The debt servicing cost of physical debt increased by $406 million compared to 2007-08, as a
result of the increased Treasury Bond issuance and the resumption of issuance of Treasury
Notes. Also contributing were higher capital accretion costs on indexed bonds due to larger CPI
increases. This was partially offset by relatively expensive debt maturing and being replaced
with new debt issued at significantly lower interest rates.
However, the lower short-term interest rates had a negative impact on the return obtained on
term deposits. The interest revenue on term deposits in 2008-09 was $981 million, on an average
book volume of $19.8 billion. This represented a return on funds of 4.97 per cent, compared with
6.89 per cent in 2007-08. Overall, term deposits in 2008-09 contributed $216 million less in
interest compared to 2007-08, despite there being a slightly higher average volume. Unlike in
25
2007-08, term deposits in 2008-09 did not have a favourable effect on the net cost of funds in
percentage terms, as the yield on term deposits was lower than the average cost of servicing
gross debt.
Movements in market interest rates had an unfavourable impact on the market value of the
portfolio in 2008-09, with unrealised losses from re-measurements amounting to $232 million.
They comprised a gain of $1.01 billion on interest rate swaps, offset by losses of $1.07 billion on
nominal debt, $35 million on term investments and $136 million on RMBS investments. The
increase in unrealised losses from re-measurements in 2008-09 compared to 2007-08 was largely
driven by falling interest rates inflating the market value of debt on issue. Conversely, lower
market interest rates in 2008-09 had a positive impact on swap revaluations.
Interest rate swap terminations

In November 2008, the AOFM commenced a program to unwind its remaining domestic interest
rate swaps. At that time, the portfolio comprised 177 swaps with a notional face value of
$20.65 billion. The program was largely completed by May 2009, when the AOFM stopped
actively seeking terminations. In total, 130 swaps were unwound representing a notional face
value of $15.25 billion. This included 12 swaps that were unwound in response to adjustments to
credit ratings or other credit-related events.8 The unwind program generated a net realised value
of $1.029 billion in favour of the Commonwealth. The estimated price of unwinding the swaps
was around 2.5 basis points from mid-market, equating to around $13.5 million.
As at 30 June 2009, the AOFM’s swap portfolio consisted of 21 swaps with a total notional face
value of $2.425 billion. These swaps all mature by mid-May 2010 and thus carry very little
interest rate risk. The AOFM expects to allow them to mature without early termination.
With the unwind of the swaps, the modified duration of the nominal Long-Term Debt Portfolio
will in future be determined by ongoing issuance and maturing debt. Chart 8 illustrates this
transition over the course of the unwind program.
8 In 2008-09, there were a total of 13 credit-related swap terminations. The first occurred in October 2008,
prior to the commencement of the unwind program. Over the course of 2008-09, therefore, a total of 131
interest rate swap terminations were undertaken.
26
Chart 8: Modified Duration — nominal component of Australian dollar

Long-Term Debt Portfolio 2008-09
Modified duration Modified duration
5 5
4.5 4.5
4 4
3.5 3.5
3 3
2.5 2.5
2 2
May-09
Mar-09
Nov-08
Aug-08
Sep-08
Oct-08
Jul-08
Dec-08
Jan-09
Apr-09
Jun-09
Actual LTDP Bond Portfolio LTDP - Without Swap Unwinds
The AOFM’s annual report for 2006-07 included a review article on the management of the
domestic debt portfolio over recent years and the use of interest rate swaps. It concluded that the
direct costs savings from interest rate payments and receipts on swaps had amounted to
$2.1 billion between 1992 (when interest rate swaps were first executed) and the end of 2006-07.
It estimated that these direct savings had generated additional indirect savings through higher
asset balances, and that the cumulative realised benefit to the Commonwealth from direct and
indirect savings combined over this period amounted to $2.8 billion. Against this, at 30 June 2007
the interest rate swaps portfolio had an unrealised market value of negative $581 million.
These figures can now be updated. Realised direct savings from interest rate swaps have grown
to a total of $2.898 billion as at 30 June 2009, while the cumulative realised benefit from direct
and indirect savings combined have been $3.952 billion. At 30 June 2009 the remaining interest
rate swaps had a positive unrealised market value of $66.8 million. Thus, at 30 June 2009 swaps
had generated a total benefit of $4.019 billion.
Chart 9 shows the total savings provided by swaps over the period since 1992-93 and projected
to 18 May 2010 when the final remaining swap matures. While final performance figures will not
be available until then, the outcome is unlikely to differ greatly from the projections as only
21 swaps remained in the portfolio at 30 June 2009, of which 11 were subject to only one further
repricing. The chart shows the cumulative direct cash flows from the swaps, cumulative realised
(direct and indirect) savings and cumulative realised savings and (market value) revaluations. It
also shows the yearly components of these aggregates.
27
Total direct savings are projected to be $2.964 billion on 18 May 2010. Including indirect savings,
the total benefit is projected to be $4.126 billion.
Chart 9: Total Savings arising from interest rate swaps (inclusive of revaluations)
$million $million
4,200 4,200
3,600 3,600
3,000 3,000
2,400 2,400
Forecast
1,800 1,800
1,200 1,200
600 600
0 0
-600 -600
-1,200 -1,200
18-May-10
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
Revaluation Costs and Benefits

Realised Financing Impact of Direct Cash Flow
Realised Net Unwind Cash Flow
Realised Net Interest Cash Flow
Cumulative Direct Cash Flow
Cumulative Realised Savings
Cumulative Realised Savings and Revaluations
Credit management of interest rate swaps

The use of interest rate swaps brings an exposure to counterparty credit risk. In 2008-09 the
AOFM continued to use collateral agreements to manage this risk. These collateral agreements
require counterparties to post collateral when the AOFM’s credit exposure rises above a
predefined threshold. Swap terminations were also undertaken to reduce the level of credit
exposure during the year.
The AOFM has Credit Support Annexes with 17 of its swap counterparties. On 30 June 2009,
84.7 per cent of the total nominal face value of the interest rate swap portfolio was covered by
28
collateral agreements. Table 3 indicates the average credit quality across the counterparties to
which the AOFM has an exposure.
Table 3: Derivative counterparties by credit rating

as at 30 June 2008 and 30 June 2009
Number of AOFM Number of AOFM
counterparties by counterparties by
credit rating as at credit rating as at
Credit rating: Moody’s/ Standard & Poors (a) 30 June 2008 30 June 2009
Aaa/AAA 0 0
Aa1/AA+ 1 0
Aa2/AA 10 2
Aa3/AA- 7 2
A1/A+ 2 2
A2/A 2 3
Total number of counterparties 22 9
(a) Where a counterparty has a split rating between the two ratings agencies it is allocated to the lower of
the two ratings levels.
(b) The number of counterparties listed as at 30 June 2008 has been corrected from that of the AOFM’s
2007-08 report which had listed a total 24.
As a result of credit downgrades and movements in interest rates, the AOFM made five
collateral calls from two counterparties totalling $106.3 million, and executed 13 credit-related
swap terminations across five different counterparties, recouping $125.4 million in order to
reduce its credit exposures to these counterparties.
The AOFM’s exposure to counterparty credit risk on swaps was $66.8 million at 30 June 2009.
All remaining swaps will mature in 2009-10.
Objective
Since the late 1980s, the securitisation of mortgages into residential mortgage-backed securities
(RMBS) has provided an important source of funding for new and small mortgage lenders to
compete with the major banks in lending for housing. Commencing in 2007-08, developments in
global financial markets reduced liquidity in the Australian RMBS market and constrained the
ability of lenders to access funding from the source. In particular, margins on existing
mortgage-backed bonds widened to a point that rendered securitisation uncompetitive as a
source of finance for mortgage providers. This deterioration occurred despite the high quality of
Australian RMBS and the fact that there has never been a credit-related loss on a rated prime
residential mortgage-backed security in Australia.
In view of these developments, the Government decided to invest in Australian RMBS to

support competition in Australia’s mortgage market during the current market dislocation. In
29
October 2008, the Treasurer directed the AOFM to invest up to a total of $8 billion in eligible
RMBS, including $4 billion to be invested in securities by issuers that were not Authorised
Deposit-taking Institutions (non-ADIs). The allocation to the non-ADI sector was made in
conjunction with the Government’s decision to guarantee the deposits and wholesale funding of
ADIs.
Securitisation and RMBS

Securitisation is the process whereby income producing assets are pooled together to produce
bond-like securities. Cash flows from the assets are directed to bondholders through a special
purpose vehicle. The special purpose vehicle is legally separate to the originator of the assets,
and is structured to remain unaffected in the event that the originator becomes bankrupt.
The first RMBS transaction was undertaken in 1977 by Bank of America, and consisted of a
simple ‘pass-through’ structure. The asset class has evolved, however, and now investors can
benefit from credit enhancement techniques such as subordination and over-collateralisation.
Subordination is the name given to the structure whereby the securities that are supported by
the pool of mortgages are structured into ‘tranches’ that allow ‘senior’ notes to be repaid
before the other ‘mezzanine’ and ‘junior’ or ‘subordinated’ notes. As the underlying pool of
mortgages repays both principal and interest through time, the most senior tranches will be
repaid before the mezzanine and subordinated notes, and the mezzanine notes will in turn be
repaid before the subordinated notes. Based on historic mortgage prepayment experience, the
cash flows associated with each tranche can be modelled with some degree of accuracy.
In Figure 1 below, the senior notes are shown as classes A-S and A1, class AB is a mezzanine
note and classes B1 and B2 are the subordinated notes. The senior tranches typically comprise
the major part of an RMBS issue; in Figure 1, the senior notes make up 90 per cent of the total,
whereas the mezzanine notes and subordinated notes together represent 10 per cent. With this
deal structure, the senior notes and mezzanine note respectively have 10 and 5 per cent credit
enhancement through subordination. While there is some variation from deal to deal,
depending on pool characteristics, the senior and mezzanine notes typically obtain AAA
credit ratings and subordinated notes are typically assigned lower ratings.
30
Figure 1: Typical RMBS Structure

Liabilities Assets
Most
Senior
A-S (10%)
Seniority of claims
A1 (80%)
Residential
Mortgages
AB (5%)
B1 (2.5%)
B2 (2.5%)
Least
Senior
The ‘Weighted Average Life’ (WAL) of an RMBS tranche represents the duration of the
tranche. It is calculated as the sum of its cash flows weighted by the periods in which they are
paid, divided by the initial face value of the tranche. While repayments can stretch out for
much longer than the WAL, this is a useful measure in making comparisons with equivalent
standard bonds, or ‘bullet’ securities.
In the event that the mortgage pool suffers losses, for example through defaults on underlying
mortgages, the subordinated tranches suffer the first losses. In so doing, the senior notes enjoy
a buffer, making them less risky. Under the AOFM’s investment program, only AAA-rated
pieces have been purchased. Occasionally, the AOFM has purchased small amounts of the
most senior, fastest paying tranches (see class A-S in Figure 1 above), but these tranches have
typically been purchased solely by other investors. The amount of subordination in the
tranches below the AOFM’s lowest-ranked investments has varied from 2.7 per cent to
9.4 per cent of the pool.
Lenders mortgage insurance (LMI) is another common form of credit enhancement. LMI
providers insure bondholders against defaults by mortgage borrowers. A less common form
of credit enhancement has been the use of over-collateralisation, whereby the issuer injects an
equity piece or ‘seller note’ into the structure as the lowest tranche (see class B2 in Figure 1
above).
31

After consulting with market participants, the AOFM concluded that the most effective means of
arranging these investments would be to act as a cornerstone investor in AAA-rated tranches of
eligible RMBS transactions. This recognised that a key to re-invigorating the RMBS market lay in
encouraging investors to return to it. The AOFM also aimed to ensure, as far as practicable, that
the proceeds on the investments would be used for further lending for housing and to promote
market competition. An alternative approach that was considered, of simply purchasing existing
RMBS in the secondary market, may have resulted in issuers withdrawing from housing lending
and investing the proceeds in other activities.
Investment Guidelines were developed that were consistent with the Treasurer’s Directions and
the first Request for Proposals (RFP) was issued on 13 October 2008. The RFP specified the
selection criteria and minimum requirements that would be used in selecting proposals.
The selection criteria were directed to the objective of supporting competition in the residential
mortgage market, and comprised:
(i) the extent to which the funds raised would be used to originate new residential
mortgages in the near term;
(ii) the extent to which the mortgage originators have relied on RMBS to finance their
residential housing lending in the past;
(iii) the expected participation of other investors in the transaction;
(iv) the experience and capability of the deal arrangers and lead managers;
(v) the extent to which the transaction would avoid congestion with other proposed
transactions; and
(vi) the capability and quality of the asset servicer.
The minimum requirements were as follows:
(i) securities must have a AAA-rating, from two major ratings agencies;
(ii) the transactions are to settle via Austraclear;
(iii) the issuers are to commit to monthly reporting on the composition of the
underlying mortgage pool; and
(iv) the underlying mortgage pool must meet the following minimum standards:
a. mortgage insurable, Australian dollar denominated mortgages;
b. a closed pool, with no substitution or pre-funding of mortgages;
c. a maximum of 10 per cent of the pool in low-doc loans;
d. a maximum loan size of $750,000;
e. a maximum loan term of 30 years;
f. a weighted average loan to value ratio of not more than 70 per cent;
g. a maximum individual loan to value ratio of 95 per cent;
32
h. a maximum of 50 per cent of the pool in interest only loans;

i. a maximum interest only period of 10 years; and
j. a maximum time in arrears of 30 days of any loan.
Twelve proposals that met these requirements were received, from which a panel comprising
the Chief Executive Officer, the Director of Financial Risk and the Head of Treasury Services
selected the four highest ranking transactions. These deals, totalling $1.996 billion, were
transacted and settled by 15 December 2008.
A second RFP was issued on 18 December 2008, with minor changes based on experience and
feedback from the first RFP. Specifically, the cap on the weighted average loan to value ratio was
removed, the requirement for mortgage insurability was clarified and the requirement for a pool
audit was specified in greater detail. An additional selection criterion, namely the overall quality
of the mortgage pool and securities on offer, was also included. The main purpose of these
changes was to allow greater flexibility in the composition of mortgage pools, while maintaining
a level of assurance regarding the overall quality of the AOFM’s investments.
Seventeen conforming proposals were received under the second RFP, including four from
non-ADIs. A further nine investments were made under this RFP over the remainder of the
2008-09 financial year.
Price was not a criterion used to rank proposals in the selection process. Instead, pricing was
determined in consultation with issuers after mandates had been awarded. In this, the AOFM
aimed to balance the objective of maintaining a competitive flow of funds for new lending for
housing with the objective of attracting other investors. Where third party investors participated
in transactions, the AOFM participated at the same price.
Since mid-December 2008 when the wholesale bank guarantee was first used, the AOFM has
typically been the sole investor in the longer-dated AAA-rated tranches of RMBS issues. At the
same time, distressed selling in the secondary market increased, at price levels that were
uneconomic for new mortgage lending. The AOFM sought to obtain margins that allowed the
competitive origination of new mortgages, while maintaining consistency, on a risk-adjusted
basis, in the pricing between transactions. The outcome was that the majority of investments in
the longer tranches were undertaken at margins to the bank bill rate of between 1.2 per cent
per annum and 1.4 per cent per annum, while smaller AAA-rated mezzanine tranches were
priced at a wider margin to compensate for their subordination to the senior AAA tranches and
longer WALs.
Outcome and performance

By 30 June 2009, the AOFM had completed 13 RMBS transactions, totalling $6.203 billion,
comprising $2.75 billion in six transactions sponsored by five ADIs and $3.453 billion invested in
seven transactions sponsored by four non-ADIs. Including investments from other parties, the
33
total volume of RMBS that was able to be issued over this period as part of the program was
$8.042 billion. This represented approximately 6.6 per cent of residential mortgages originated in
Australia over the period November 2008 to June 2009.
Interest accrued in 2008-09 was $89 million, which represented an annualised return of
4.80 per cent. The securities purchased in 2008-09 were all floating-rate notes, paying a weighted
average margin of around 1.3 per cent per annum over the one month bank bill rate.
The average credit margin of around 1.3 per cent per annum on the RMBS portfolio is above the
AOFM’s cost of short-term funding, which has historically been below the bank bill rate.
However this average margin is narrower than margins currently available in the secondary
market, and the RMBS held by the AOFM showed an unrealised mark-to-market loss of
$136 million in 2008-09. The market value of the AOFM’s RMBS is determined by an
independent service provider. The difference corresponds to a margin of about 80 basis points
across the RMBS portfolio. This remeasurement effect can be considered to be the opportunity
cost associated with purchasing these assets at prices that promote competition in housing
lending, rather than at secondary market prices. If the RMBS investments had been priced at
yields 80 basis points wider, they would not have provided a viable source of funding for
housing.
Table 4 provides details of RMBS investments at 30 June 2009. A total of $6.203 billion had been
invested and had generated capital repayments of $179 million.
34
Table 4: RMBS Investments as at 30 June 2009

Coupon
Expected Original Current
1m
Pricing ADI/ WAL* at Face Face
Issuer Instrument Name BBSW
Date Non-ADI closing Value Value
+
(years) ($m) ($m)
(%)
14-Nov-08 FirstMac Non-ADI FirstMac 2008-2 Class A1 0.7 1.25% 132.0 96.9
FirstMac 2008-2 Class A2 3.5 1.50% 325.0 325.0
FirstMac 2008-2 Class AB 5.0 1.80% 39.0 39.0
17-Nov-08 Members Equity ADI SMHL 2008-2 Class A1 2.8 1.30% 500.0 454.6
Bank
4-Dec-08 Challenger Non-ADI Challenger 2008-2 Class A 2.8 1.35% 481.0 442.4
Challenger 2008-2 ClassAB 4.5 1.75% 19.0 19.0
10-Dec-08 RESIMAC Non-ADI RESIMAC 2008-1 Class A2 1.5 1.20% 280.0 250.6
RESIMAC 2008-1 Class A3 4.5 1.40% 204.8 204.8
RESIMAC 2008-1 Class AB 4.5 1.70% 15.3 15.3
6-Mar-09 Credit Union ADI HarvTrust 2009-1 Class A1 3.6 1.40% 350.0 350.0
Australia
13-Mar-09 Bendigo and ADI TORRENS 2009-1 Class A2 4.2 1.35% 475.0 475.0
Adelaide Bank
23-Mar-09 AMP Bank ADI PROGRESS 2009-1 Class A2 4.0 1.30% 425.0 425.0
3-Apr-09 Bank of ADI REDS 2009-1 Class A1 4.2 1.30% 500.0 500.0
Queensland
9-Apr-09 Liberty Financial Non-ADI LIBERTY 2009-1 Class A1 0.1 0.90% 14.5 0.0
LIBERTY 2009-1 Class A2 0.9 1.20% 164.7 148.4
LIBERTY 2009-1 Class A3 3.2 1.40% 283.0 283.0
LIBERTY 2009-1 Class AB 4.0 1.65% 37.8 37.8
15-Apr-09 Challenger Non-ADI CHALLENGER 2009-1 Class A2 0.5 1.00% 38.2 38.2
CHALLENGER 2009-1 Class A3 1.5 1.30% 152.5 152.5
CHALLENGER 2009-1 Class A4 4.3 1.45% 289.0 289.0
CHALLENGER 2009-1 Class AB 4.4 1.70% 20.3 20.3
11-May-09 Members Equity ADI SMHL 2009-1 Class A2 3.7 1.35% 500.0 500.0
Bank
21-May-09 RESIMAC Non-ADI RESIMAC 2009-1 Class A2 0.5 1.00% 10.0 10.0
RESIMAC 2009-1 Class A3 2.9 1.40% 435.0 435.0
RESIMAC 2009-1 Class AB 4.1 1.70% 13.8 13.8
1-Jun-09 FirstMac Non-ADI FirstMac 2009-1 Class A3 2.9 1.40% 458.0 458.0
FirstMac 2009-1 Class AB 5.0 2.20% 40.6 40.6
6,203.4 6,024.1
* Weighted average life
35
Communications Fund
The Communications Fund was established in September 2005 to provide an income stream to
fund the Government’s response to any recommendations proposed by the Regional
Telecommunications Independent Review Committee in reports reviewing the adequacy of
telecommunication services in regional, rural and remote parts of Australia. The Fund was
closed on 1 January 2009 and its assets transferred to the Building Australia Fund (which is
managed by the Future Fund Board of Guardians). Prior to its closure the AOFM managed the
investments of the Communications Fund on behalf of the Department of Broadband,
Communications and the Digital Economy.
The investments of the Communications Fund comprised short-term Australian denominated

dollar money market instruments and deposits, including bank accepted bills, negotiable
certificates of deposit and commercial paper. When the fund was closed the value of the Fund’s
investments totalled approximately $2,468 million.
The before-fees investment portfolio performance benchmark for the Fund was the UBS
Australian Bank Bill Index. The after-fees performance benchmark was the UBS Australian Bank
Bill Index less 2 to 3 basis points. Performance against the benchmarks for the period the fund
operated in 2008-09 is as follows:
• The before-fees return of the Communications Fund underperformed against the

benchmark by 0.3 basis points.
• The after-fees return of the Communications Fund exceeded the benchmark by

0.4 basis points.
Over the life of the Fund, it obtained an average return on its assets of 7.17 per cent per annum,
which was 3.3 basis points higher than the before-fees Fund benchmark, and 4.2 basis points
higher on an after-fees basis.
Financial information concerning the operation of the Communications Fund is reported in the
financial statements of the Department of Broadband, Communications and the Digital
Economy.
Operational risk
Objective
Operational risk is the risk of loss due to operational failures resulting from internal processes,
people, or systems, or from external events. It encompasses risks such as fraud risk, settlement
36
risk, accounting risk, personnel risk and reputation risk. The AOFM aims to manage its exposure
to operational risk to acceptable levels.

The AOFM maintains a culture of prudence and high ethical standards, which are reinforced by
adherence to the Australian Public Service Code of Conduct and the Australian Financial
Markets Association (AFMA) Code of Conduct. This foundation is accompanied by detailed
controls and procedures overseen by the Operational Risk Committee and the Audit Committee.
The Compliance Unit also monitors compliance with financial risk management policies and
procedures on a daily basis.
In 2008-09, the AOFM undertook a number of activities to enhance the operational risk
framework including:
• an update of the AOFM’s Fraud Control Plan (FCP), including a reassessment of the
risks of fraud from within the Agency and externally. The review considered
potential fraud risks and found that the Agency’s controls were appropriate for
preventing and detecting fraud. No instances of fraud were detected in the Agency in
2008-09;
• completion of the Certificate of Compliance, an annual requirement for Chief

Executives of agencies governed by the Financial Management and Accountability
Act 1997 (FMA Act), to report on compliance with the financial management
framework. As a part of this process the Agency reviewed the requirements of the
FMA Act, FMA Regulations, FMA Orders and FMA (Finance Minister to Chief
Executives) Delegation and associated government financial policies. A risk
assessment of the Agency’s compliance with these requirements found that the
Agency’s controls and processes provide reasonable confidence of compliance.
Further testing of the higher risk areas detected no instances of non-compliance;
• a comprehensive review of the AOFM’s Chief Executive Instructions (CEIs) and

internal financial delegations issued under the Financial Management and
Accountability Act 1997. The CEIs provide a detailed framework of financial and
management controls and delegations which limit discretion, approval and spending
of public monies to minor amounts or alternatively require senior executive approval;
and
• internal audits covering activities such as general controls, IT general controls and
compliance.
37
Settlement operations
The AOFM handles very large volumes of payments on its administered portfolio of debt and
assets. In 2008-09, it settled around $11.0 billion of payments of CGS interest and principal
payments, $1.3 billion of swap payments and $372.8 billion in purchases of term deposits with
the Reserve Bank of Australia. The AOFM also ensures that administered receipts are settled
promptly and correctly by its transaction counterparties.
Settlement risk is a key risk managed by the AOFM. In 2008-09, the AOFM was not late in
settling any payment obligations. There was one instance where compensation was sought from
a counterparty because it failed to settle a payment obligation in line with its contractual
obligations. No other compensation was sought throughout the year.
Information Technology operations

The AOFM has an established technology platform that includes integrated services for the
delivery of treasury management and market data. The services provided by AvantGard
Quantum, Bloomberg and Reuters continue to meet the requirements of the AOFM by providing
a reliable environment that supports the Agency’s debt management and investment activities.
Cooperation with other debt managers

Over the 2008-09 financial year, the AOFM continued to provide support for debt management
activities in Papua New Guinea and the Solomon Islands. One position was staffed in each of
these countries under the auspices of the Strongim Gavman Program and the Regional
Assistance Mission to the Solomon Islands respectively. These deployments aim to develop cash
and debt management capabilities through training and mentoring as well as the development
of systems and procedures. This year a forum was conducted by the AOFM in Canberra
attended by officials responsible for sovereign debt management of the two countries, together
with seconded AOFM staff, to improve the assistance provided.
During the year the AOFM also hosted two visits from debt management officials from
Indonesia.
38
Agency financial performance

Agency activities recorded an operating surplus of $1.97 million for 2008-09 financial year,
comprising total revenue of $9.85 million and expenses of $7.88 million. As at 30 June 2009, the
AOFM was in a sound net worth and liquidity position, reporting net assets of $16.37 million,
represented by assets of $17.97 million (including current assets of $0.32 million) and liabilities
of $1.60 million.
As at 30 June 2009, the AOFM maintained cash and unspent appropriations totalling
$16.78 million. These funds are held to settle liabilities as and when they fall due and for future
asset replacements and improvements.
During 2008-09, the AOFM did not return or establish a provision for return, by the way of
dividend, of unspent appropriation monies to Government.
39
PART 3: MANAGEMENT AND ACCOUNTABILITY
Corporate governance ...................................................................................................................... 43

Audit ................................................................................................................................................... 45
Operations.......................................................................................................................................... 47
Business continuity arrangements .................................................................................................. 47
Judicial decisions............................................................................................................................... 48
Management of human resources................................................................................................... 48
Assets management .......................................................................................................................... 51
Purchasing.......................................................................................................................................... 51
Consultants ........................................................................................................................................ 51
ANAO access clauses and exempt contracts ................................................................................. 52
41
MANAGEMENT AND ACCOUNTABILITY
Corporate governance
The Secretary to the Treasury provides general oversight of the AOFM’s activities and is
responsible for advising the Treasurer on government policy relating to debt management and
investment. The Secretary approves detailed debt management and investment policies, sets
operational limits and addresses any breaches of limits. In discharging his responsibilities, the
Secretary is advised by the AOFM Advisory Board.
The Chief Executive Officer (CEO) of the AOFM is responsible for the day to day management
and direction of the AOFM. The CEO exercises powers delegated by the Treasurer and the
Secretary for debt issuance, investment, portfolio management and management of the AOFM’s
staff. The CEO has final responsibility for all aspects of the financial management of the Office
(which is separate from the financial management of the Treasury as the AOFM is a prescribed
agency under the Financial Management and Accountability Act 1997). The AOFM reports regularly
to the Treasurer on its portfolio, prepares an annual report for presentation to Parliament and
provides information about its activities on its website.
AOFM Advisory Board

The AOFM Advisory Board provides advice to the Secretary on debt management policy and
the operational strategy and performance of the AOFM. The Board does not possess executive
powers or decision making authority. The Advisory Board members as at 30 June 2009 were:
• Dr Ken Henry AC, Secretary to the Treasury (Chair);
• Tony Cole AO, Executive Director of Mercer (Australia) Pty. Ltd., Director of the
Northern Territory Treasury Corporation and Chairman of the Melbourne Institute
Advisory Board;
• Dr Paul Grimes, General Manager, Budget Group, Department of Finance and

Deregulation;
• Neil Hyden, Chief Executive Officer, AOFM;
• Greg Maughan, Consultant;
• Nigel Ray, Executive Director, Fiscal Group, Treasury; and
• Peter Warne, Non-Executive Director of Next Financial Limited and the Securities
Industry Research Centre of Asia Pacific. Chairman of the Australian Leisure &
43
Part 3: Management and accountability
Entertainment Property Group and St Andrews Cathedral School Foundation

Limited. He is also a Director of ASX Limited and subsidiary companies, Macquarie
Group Limited, WHK Group Ltd, Capital Markets Cooperative Research Centre
Limited Ltd and a number of other unlisted companies.
The Advisory Board met on four occasions in 2008-09.
Senior management committees

Several senior management committees operate to assist the CEO in the management of the
Office and to facilitate communication and coordination.
Executive Committee
The Executive Committee coordinates the overall management of the Office, including
consideration of strategic issues, coordination of priorities, financial management, organisational
arrangements and resource management. Its membership comprises the CEO, the Head of
Compliance and Reporting, the Chief Finance Officer, the Director of Financial Risk and the
Head of Treasury Services.
Asset & Liability Committee

The Asset and Liability Committee advises the CEO on operational debt policy and financial risk
management issues. The committee reviews policy and operational settings, deal execution and
market conditions. Its membership comprises the CEO, the Director of Financial Risk, the Head
of Compliance and Reporting and the Head of Treasury Services, together with other senior staff
with relevant functional responsibilities.
Human Resources Committee

This committee advises on the management of human resources, including employment
policies, training and development, recruitment, performance management and remuneration. It
consists of members of the Executive Committee and the Human Resource Manager.
Information Technology Steering Committee

This committee oversees current and planned information technology projects and operations.
Its membership comprises of the CEO (Chair), the Chief Finance Officer and the IT Manager.
Operational Risk Committee

This committee manages operational risks. It recommends and determines compliance priorities
and control procedures and oversees the identification, categorisation and prioritisation of
operational risks. Its membership comprises the CEO, the Head of Compliance and Reporting,
44
the Director of Financial Risk, the Chief Finance Officer and the Head of Treasury Services,
together with other senior staff with relevant functional responsibilities.
Other elements of the governance framework

Other elements of the AOFM’s governance framework include:
• formal delegations and authorisations from the Treasurer of powers under various
Acts that provide the legal authority for the AOFM’s debt management and
investment activities;
• policies, including a Balance Sheet Policy, Credit Policy and Liquidity Policy, and
operational limits, that are approved by the Secretary to the Treasury;
• Chief Executive Instructions and internal financial delegations, which establish an

administrative framework for the delegation of the Chief Executive’s powers under
the Financial Management and Accountability Act 1997;
• a Contract Management Policy, which establishes guidelines for managing

contractual relationships with suppliers of goods and services based on Australian
Government legislative requirements and best practice principles; and
• a fraud risk assessment and Fraud Control Plan which comply with the
Commonwealth Fraud Control Guidelines and include appropriate fraud prevention,
detection, investigation and reporting procedures.
Audit
Audit Committee
The AOFM Audit Committee is a forum for review of audit and related issues. It approves the
AOFM’s internal audit plan, reviews audit reports and advises on action to be taken on matters
raised in them, advises on the preparation and review of the AOFM’s financial statements,
reviews operational risks and oversees the development and implementation of fraud controls
and awareness training.
The Audit Committee membership at 30 June 2009 comprised:
• Peter Warne, independent member of the AOFM Advisory Board (Chair);
• David Lawler, former Group Auditor, Financial Controller of Institutional Banking

and Executive General Manager of the Commonwealth Bank of Australia, Audit
Committee member of the Defence Materiel Organisation, the Australian Trade
45
Commission, the Australian Agency for International Development, the Australian

Sports Anti-Doping Authority and National ICT Australia;
• Michelle Stone, Manager, Government Investment, Risk and Debt Policy Unit, the
Treasury; and
• Andrew Johnson, the Head of Compliance and Reporting, AOFM.
Invited attendees included the Australian National Audit Office (ANAO), the AOFM internal
auditor (PricewaterhouseCoopers) and the AOFM Chief Finance Officer. The Committee met on
four occasions during 2008-09.
Internal auditor
In addition to the regular annual audit review of internal operational controls and information
technology controls, the internal auditor, PricewaterhouseCoopers, completed the following
reviews in 2008-09:
• a review of the AOFM’s Anti-Money Laundering and Counter-Terrorism Financing

program found that the AOFM’s Part A Program is consistent with the overall
requirements of the AML/CTF Act and Rules;
• a review of the processes, content and format of AOFM risk reporting and the
associated governance framework found that the control environment is robust due to
appropriate levels of segregation, system controls and oversight controls. It
recommended some improvements in tailoring the reporting to AOFM objectives; and
• a follow-up review of Business Continuity & Disaster Recovery (IT) found that AOFM
has a comprehensive Business Continuity and Disaster Recovery Plan, which is
supported by satisfactory business continuity and disaster recovery training and
education documentation.
Australian National Audit Office reports

The ANAO’s annual report on the Interim Phase of the Audit of Financial Statements of General
Government Sector Entities for the Year Ending 30 June 2009 identified no risk issues in relation to
the AOFM and concluded, based on the audit work performed, that internal controls were
operating satisfactorily to provide a reasonable assurance that the Office could produce financial
statements free of material misstatement.
During 2008-09, the ANAO did not conduct any other cross-agency audits which involved the
AOFM.
46
Operations
During 2008-09, the AOFM expanded its range of activities as the Government introduced a
number of initiatives designed to address issues in Australian financial markets. The year began
with the AOFM continuing issuance of Government debt in order to support the Treasury Bond
and Treasury Bond futures markets. During the year, the AOFM embarked on a program of
additional Treasury Bond issuance in response to investor demand, the proceeds of which were
used to purchase semi-government and Kangaroo bonds. The AOFM also began using
additional cash balances in the Official Public Account to invest in short-term money market
instruments. In November of 2008, the AOFM acted as a cornerstone investor in AAA-rated
residential mortgage-backed securities for the first time. With the shift in the Government’s
budgetary position in late 2008-09, the AOFM scaled back its investment activities in order focus
on debt issuance. Systems and procedures for the Compliance, Reporting and Settlements Units
evolved to incorporate the new functions and the increased level of activities. AOFM staff in the
aforementioned units received training relating to the new systems and procedures.
In the 2009-10 Federal Budget, the AOFM received an increased level of funding. This will
enable to the Office to employ extra resources to assist in the new and increased functions of the
Agency. The funding will also allow the AOFM to ensure that the risk framework around the
activities remains robust.
Business continuity arrangements

The AOFM has business continuity and pandemic plans which are aimed at ensuring the
Agency’s critical activities are able to continue to be performed in the event of a major
disruption to the Office or influenza pandemic. These include the provision of back up
arrangements that can be implemented when the AOFM’s office accommodation is not able to
be used or when staff are immobilised. There is also an information technology (IT) disaster
recovery plan which sets out the processes required to restore critical IT-reliant functions in the
aftermath of a significant disruption. During the year, business continuity plans were updated
and tested.
In response to the initial stages of the outbreak of Pandemic (H1N1) 2009, action was taken in
accordance with the Office’s pandemic plan to strengthen back-up arrangements for essential
functions and additional training for staff to undertake them. Arrangements for staff working
from home were also reviewed. Key staff have been provided with the capability to dial-in to the
IT network, giving them the capacity to work from home if necessary. The pandemic plan
provides for a range of other measures, depending of the severity of the pandemic. These
measures were not needed in 2008-09.
47
Judicial decisions
In 2008-09, no matters relating to the AOFM were the subject of judicial proceedings, tribunal
hearings or consideration by the Ombudsman.
Management of human resources
Meeting workforce needs

The AOFM aims to meet its workforce needs primarily through the recruitment of recent
graduates and their subsequent development through on the job experience, mentoring,
assistance with further academic studies and in-house training. This approach is designed to
maintain the core professional strength of the AOFM on a continuing basis. It allows people with
strong academic achievements to develop specialised skills and experience related to the
AOFM’s work requirements, expanding their knowledge of financial markets and debt
management, and also of public policy and administration.
Other staff are recruited to meet specific staffing needs, particularly for positions that require
specialised skills and experience that are not currently available within the Office. During the
year, a new position of Manager, Residential Mortgage-backed Securities and a vacancy for the
Compliance Manager role were filled by the recruitment of staff with extensive relevant work
experience.
The Office provides challenging and interesting work in a professional work environment with
opportunities for learning and career development. A broad-banded classification structure
allows staff to advance between work levels within classification grades subject to work
availability and performance without formal competitive selection processes. Promotions across
grades are made via merit selection. This strategy has been successful in attracting and retaining
highly qualified professional staff. The retention rate for 2008-09 was 91 per cent, with an
average of 74 per cent over the previous five years.
Training and development

Eighty-three per cent of AOFM staff have degree qualifications, with 14 per cent holding higher
degrees and 28 per cent double degrees. Twenty-five percent have professional qualifications.
Staff are encouraged to participate in training and development activities to develop their work
skills and enhance their career prospects. Learning is fostered through on-the-job training,
external courses, conferences, workshops and seminars.
Over the last five financial years, an average of 75.1 per cent of staff have participated in training
or development supported by the Office. During this period, training averaged 3.8 days
per full-time equivalent staff member (FTE) per year and the direct costs of training (paid to
48
external parties) averaged $2,377 per FTE per year. In 2008-09, 75 per cent of employees
participated in training, 3.5 days per FTE were invested in skill development and $1,949 per FTE
was paid to external providers. Payments for training and development activity over the year
amounted to 2.6 per cent of direct salary costs.
The AOFM workforce

As at 30 June 2009, the AOFM employed 32.8 full-time equivalent staff under the Public Service
Act 1999. Table 1 shows this workforce by broadband classification.
Table 1: Operative and paid inoperative staff as at 30 June 2008 and 2009
Ongoing Non-ongoing
Full-time Part-time Full-time Part-time
Classification Male Female Male Female Male Female Male Female Total
2009
AOFM1 0 2 0 0 0 0 0 0 2
AOFM2 16 6 0 2 1 0 0 0 25
AOFM3 4 1 0 0 0 0 0 0 5
AOFM4 1 0 0 0 0 0 0 0 1
CEO 1 0 0 0 0 0 0 0 1
Total 22 9 0 2 1 0 0 0 34
2008
AOFM1 0 2 0 0 0 0 0 0 2
AOFM2 12 7 1 3 1 0 0 0 24
AOFM3 4 0 0 0 2 0 0 0 6
AOFM4 1 0 0 0 0 0 0 0 1
CEO 1 0 0 0 0 0 0 0 1
Total 18 9 1 3 3 0 0 0 34
Note: AOFM broadband classifications are nominally linked to Australian Public Service classifications as
follows: AOFM1 corresponds to APS1 to APS4, AOFM2 corresponds to APS5 to EL1, AOFM3 corresponds
to EL2 and AOFM4 covers higher level EL2.
Two staff were located overseas during the year to support capacity building in sovereign debt
management in Papua New Guinea and the Solomon Islands under the Strongim Gavman
Program and the Regional Assistance Mission to the Solomon Islands respectively.
Changes to senior management

There were no changes to senior management during the period.
Other staffing changes

Five ongoing employees and one non-ongoing employee were recruited during 2008-09 to the
AOFM2 level. They included four graduates who joined in the middle of the financial year.
There were three staff departures during the year, two of whom were non-ongoing employees.
For ongoing employees, departures represented 3.4 per cent of average staffing levels in 2008-09
(20.5 per cent in 2007-08).
49
Employment arrangements
Most staff are employed under Australian Workplace Agreements with the AOFM that were
executed prior to the change in Government policy in February 2008. The Office is working
towards establishing a collective agreement to cover all staff other than the CEO. As an interim
arrangement new staff recruited during the year were employed under common law contracts.
Section 24(1) determinations under the Public Service Act 1999 have been used to supplement
terms and conditions for staff deployed overseas.
Individual workplace agreements and contracts specify employment terms and conditions, with
remuneration outcomes based on job classification and performance
The CEO is employed under an Australian Workplace Agreement with the Treasury.
Remuneration
Staff remuneration (Table 2) is reviewed annually, taking account of market rates for
conservative financial services organisations using data provided by the Financial Institutions
Remuneration Group. This data covers a wide range of public and private sector financial
institutions, including banks, corporate treasuries and State debt management agencies. Mercer
Human Resource Consulting provided independent advice in applying the data to the AOFM.
Table 2: AOFM salary ranges

30 June 2009
Base Rate Grade Rate
Classification $ $
AOFM1 38,825 63,857
AOFM2 60,502 123,046
AOFM3 141,766 177,208
AOFM4 190,671 238,339
Remuneration within the range for the classification depends on individual performance ratings.
Performance appraisals assess outputs achieved and behaviours in producing those outputs.
However, performance-linked bonuses are not paid.
Non-salary benefits provided to staff principally comprise superannuation and support for
professional development through studies assistance, short courses and payment of job-relevant
professional society membership fees. A mobile phone or laptop computer may be provided
where there is a business need. Executive remuneration is reported in Note 12 of Part 4:
Financial statements.
Occupational health and safety

Occupational health and safety services are provided by the Treasury under a Service Level
Agreement. The Office has one Health and Safety Representative who assists employees in
50
accord with Health and Safety Management Arrangements and the Occupational Health and
Safety Act 1991.
Staff members have access to a number of ongoing health activities, including posture and
flexibility, yoga, Tai Chi, Pilates and aerobics classes. Flu vaccinations, health assessments,
health information, and dietary assistance were also provided in 2008-09. To prevent injuries in
the workplace and to enhance the safety of staff, workplace assessments were conducted for all
new starters. Counselling and other support is available under an Employee Assistance Program
provided by Davidson Trahaire.
There were no compensable injury claims in 2008-09 and no accidents, injuries or dangerous
occurrences were reported. The Office was not the subject of any directions under section 45 of
the Occupational Health and Safety Act 1991 and received no notices under this Act.
Australian Government Disability Strategy

The AOFM follows the Treasury’s Workplace Diversity Program and Disability Action Plan in
line with the Australian Government Disability Strategy to help eliminate, as far as possible,
discrimination on the grounds of disability.
Assets management
The physical assets of the AOFM are managed in accordance with policies and procedures set
out in the AOFM’s Chief Executive Instructions. The assets are predominantly computers,
equipment and leasehold improvements.
Purchasing
The AOFM’s policy and procedures on purchasing goods and services comply with legislative
requirements and Government policy, in particular the requirements in the Commonwealth
Procurement Guidelines (December 2008).
Consultants
During 2008-09, 5 new consultancy contracts were entered into involving total actual
expenditure of $20,994. In addition, 2 ongoing consultancy contracts were active during the
2008-09 year, involving total actual expenditure of $131,336.
The numbers for new and ongoing consultancy contracts over the last three years, and
expenditure on them, are summarised in Table 3. Details of consultancy contracts of $10,000 or
more let during 2008-09 are provided in Table 4.
51
Table 3: Consultancy contracts

2006-07 2007-08 2008-09
Number of consultancy contracts
New Contracts 7 8 5
Ongoing contracts 2 2 2
Expenditure (including GST)
New Contracts $59,483 $69,885 $20,994
Ongoing contracts $154,184 $130,289 $131,336
Table 4: Consultancy contracts of $10,000 or more let during 2008-09

Consultant name Description Price
Nil to report
Total $0
ANAO access clauses and exempt contracts

Only one contract for $100,000 or more was let during the reporting period that did not provide
for the Auditor-General to have to access the contractor’s premises. This was an agreement to
allow the AOFM to participate in the Austraclear System, which is an electronic depository and
settlement system for Commonwealth Government Securities, semi-government securities and
private-sector debt securities, including residential mortgage-backed securities. It is a licensed
clearing and settlement facility under the Corporations Act 2001 and each participant must
comply with the Austraclear System Regulations, which represent a legally binding contract
between each participant and Austraclear Limited (the owner of the Austraclear System and a
subsidiary of the Australian Securities Exchange). The Austraclear System Regulations represent
formal ‘Operating Rules’ under the Corporation Act 2001. The contract let during the year
provides for AOFM participation for the period 2009-12 at a cost of $492,810.
No contract in excess of $10,000 (including GST) or standing offer has been exempted from being
published in the Purchasing and Disposals Gazette on the basis that it would disclose exempt
matters under the Freedom of Information Act 1982.
52
PART 4: FINANCIAL STATEMENTS
External Auditor’s Report ................................................................................................................ 55

Statement by the Chief Executive Officer and Chief Finance Officer......................................... 57
Income statement .............................................................................................................................. 58
Balance sheet...................................................................................................................................... 59
Statement of changes in equity........................................................................................................ 60
Cash flow statement.......................................................................................................................... 61
Schedule of commitments ................................................................................................................ 62
Schedule of administered items ...................................................................................................... 63
53
Part 4: Financial statements
55
56
AUSTRALIAN OFFICE OF FINANCIAL MANAGEMENT
Statement by the Chief Executive Officer and Chief Finance Officer
In our opinion, the attached financial statements for the year ended 30 June 2009 are based on
properly maintained records and give a true and fair view of the matters required by the Finance
Minister’s Orders made under the Financial Management and Accountability Act 1997, as amended.
Signed Signed
N Hyden P Raccosta
Chief Executive Officer Chief Finance Officer
21 August 2009 21 August 2009
57
Income statement
for the year ended 30 June 2009
Notes 2009 2008
$'000 $'000
REVENUE
Revenue from government 4A 8,467 8,489
Other revenue 4B 1,034 1,464
Resources received free of charge 4C 286 269
Reversals of previous asset write-downs and impairments 4D 59 -
Total revenue 9,846 10,222
EXPENSES
Employee benefits 5A 4,395 4,319
Suppliers 5B 3,199 2,786
Depreciation and amortisation 5C 281 317
Write-down and impairment of assets 5D - 90
Total expenses 7,875 7,512
Surplus 1,971 2,710
The above statement should be read in conjunction with the accompanying notes.
58
Balance sheet
as at 30 June 2009
Notes 2009 2008
$'000 $'000
ASSETS
Financial assets
Cash and cash equivalents 63 159
Trade and other receivables 6A 16,887 14,454
Total financial assets 16,950 14,613
Non-financial assets
Infrastructure, plant and equipment 7A,7C 555 620
Intangibles 7B,7C 377 418
Other non-financial assets 7D 90 40
Total non-financial assets 1,022 1,078
Total assets 17,972 15,691
LIABILITIES
Payables
Suppliers 8A 223 97
Other payables 8B 7 2
Total payables 230 99
Provisions
Employee provisions 9A 1,245 1,071
Other provisions 9B 125 120
Total provisions 1,370 1,191
Total liabilities 1,600 1,290
Net assets 16,372 14,401
EQUITY(a)
Retained surplus 12,949 10,978
Contributed equity 3,423 3,423
Total equity 16,372 14,401
Current assets 319 609

Non-current assets 17,653 15,082
Current liabilities 1,229 971
Non-current liabilities 371 319
(a) Refer to the Statement of changes in equity.
59
Statement of changes in equity

Notes 2009 2008
$'000 $'000
RETAINED SURPLUS
Opening balance 10,978 8,268
Changes for the period:
Surplus 1,971 2,710
Closing balance as at 30 June 12,949 10,978
CONTRIBUTED EQUITY
Opening balance 3,423 3,423
Changes for the period:
Capital injections - -
Closing balance as at 30 June 3,423 3,423
Total equity 16,372 14,401
60
Cash flow statement

Notes 2009 2008
$'000 $'000
OPERATING ACTIVITIES
Cash received
Appropriations 5,790 5,525
GST received 51 50
Goods and services 1,326 1,254
Total cash received 7,167 6,829
Cash used
Employees 4,218 4,326
Suppliers 2,889 2,553
GST paid 40 50
Total cash used 7,147 6,929
Net cash from (used by) operating activities 10 20 (100)
INVESTING ACTIVITIES
Cash used
Purchase of property, plant and equipment and intangibles 116 53
Total cash used 116 53
Net cash from (used by) investing activities (116) (53)
FINANCING ACTIVITIES
Appropriations - contributed equity - -
Net cash from (used by) financing activities - -
Net increase (decrease) in cash held (96) (153)
Cash at the beginning of the reporting period 159 312
Cash at the end of the reporting period 63 159
61
Schedule of commitments
as at 30 June 2009
Notes 2009 2008
$'000 $'000
BY TYPE
Other commitments
Operating leases(a) 2,186 2,424
Other commitments(b) 2,184 3,501
Total other commitments 4,370 5,925
Commitments receivable - GST recoverable
on commitments 44 85
Net commitments by type 4,326 5,840
BY MATURITY
Operating lease commitments
One year or less 333 323
From one to five years 1,334 1,279
Over five years 519 822
Total operating lease commitments by maturity 2,186 2,424
Other commitments
One year or less 1,693 1,808
From one to five years 490 1,692
Over five years 1 1
Total other commitments by maturity 2,184 3,501
Commitments receivable
One year or less 40 41
From one to five years 4 44
Total commitments receivable by maturity 44 85
Net commitments by maturity 4,326 5,840
The above schedule should be read in conjunction with the accompanying notes.
Note: Commitments are GST inclusive and where an input tax credit is available to the AOFM, the
recoverable GST is reported in commitments receivable.
(a) Operating leases included are effectively non-cancellable and comprise:
Nature of lease General description of leasing arrangement
Lease for office • The lease term is for 15 years less one day with no option to renew; and
accommodation • lease payments are subject to review on each second anniversary of the
lease commencement date (22 December 2000).
Motor vehicle leases • The novation of lease rental payments over motor vehicles.
(b) Other commitments relate to contractual obligations for the provision of internal audit services, payroll
services, market data and news services, fiscal agency agreements and service agreements with other
parties, including Commonwealth bodies.
62
Schedule of administered items

Notes 2009 2008
$'000 $'000
Income and expenses administered on
behalf of government
Income before re-measurements
Non-taxation revenue
Interest 16A 2,527,570 2,995,083
Other revenue 16B 3,328 2,266
Total revenue before re-measurements 2,530,898 2,997,349
Expenses before re-measurements
Grants 17A 28 30
Interest 17B 4,962,327 5,350,972
Total expenses before re-measurements 4,962,355 5,351,002
Administered gains before re-measurements
Net foreign exchange gains (losses) 18A (1,049) 754
Net gains (losses) on sale of financial instruments 18B 1,034,245 -
Total administered gains before re-measurements 1,033,196 754
Administered operating result before re-measurements (1,398,261) (2,352,899)

Administered re-measurements
Net market revaluation gains (losses) 19 (232,211) (117,648)
Total administered re-measurements (232,211) (117,648)
Net administered result (1,630,472) (2,470,547)
63
Schedule of administered items (continued)

Notes 2009 2008
$'000 $'000
Assets and liabilities administered on
behalf of government
as at 30 June 2009
ASSETS
Financial assets
Cash and cash equivalents 20A 622 622
Receivables 20B 2,833,391 2,836,521
Investments (under FMA section 39)(a) 20C 35,486,265 29,098,675
Accrued revenue 20D 490 502
Total financial assets 38,320,768 31,936,320
Total assets 38,320,768 31,936,320
LIABILITIES
Interest bearing liabilities
Commonwealth Government Securities 21A 107,313,801 58,399,722
Total interest bearing liabilities 107,313,801 58,399,722
Payables
Other payables 21B 104 1,040,988
Total payables 104 1,040,988
Total liabilities 107,313,905 59,440,710
Net assets administered on behalf of
government 22 (68,993,137) (27,504,390)
Current assets 27,876,792 29,101,411

Non-current assets 10,443,976 2,834,909
Current liabilities 22,758,081 5,328,765
Non-current liabilities 84,555,824 54,111,945
(a) FMA = Financial Management and Accountability Act 1997.
64

Notes 2009 2008
$'000 $'000
Administered cash flows
OPERATING ACTIVITIES
Cash received
Interest(a) 1,573,173 1,362,492
Other(b) 1,034,620 2,266
Total cash received 2,607,793 1,364,758
Cash used
Interest(a) 3,755,241 3,589,697
Total cash used 3,755,241 3,589,697
Net cash from (used by) operating activities (1,147,448) (2,224,939)
INVESTING ACTIVITIES
Cash received
Capital proceeds from term deposits 375,350,000 310,050,000
Capital proceeds from fixed interest securities 3,195,972 -
Capital proceeds from discount securities 11,507,500 -
Repayments from residential mortgage-backed securities 179,281 -
Repayments from advances and loans 91,260 88,650
Cash used
Acquisition of term deposits 372,800,000 318,750,000
Acquisition of fixed interest securities 5,247,136 -
Acquisition of discount securities 12,503,360 -
Acquisition of residential mortgage-backed securities 6,203,420 -
Total cash used 396,753,916 318,750,000
Net cash from (used by) investing activities (6,429,903) (8,611,350)
FINANCING ACTIVITIES
Cash received
Capital proceeds from borrowings 54,520,821 4,937,916
Receipt of collateral 101,000 -
Other receipts 86 361
Cash used
Repayment of borrowings(c) 7,085,282 2,922,910
Return of collateral 101,000 -
Total cash used 7,186,282 2,922,910
Net cash from (used by) financing activities 47,435,625 2,015,367
(a) Master Agreements between the Australian Government and interest rate swap counterparties provide
for transactions to be settled on a net basis. Amounts above are reported on a net basis. Net swap
interest receipts for 2008-09 were $55.771 million ($36.479 million for 2007-08), whilst aggregate swap
interest receipts for 2008-09 were $1,102.751 million ($1,698.469 million for 2007-08). Net swap interest
payments for 2008-09 were $219.230 million ($150.478 million for 2007-08), whilst aggregate swap
interest payments for 2008-09 were $1,266.210 million ($1,812.468 million for 2007-08).
(b) 2008-09 figure includes $1,031.292 million from termination of interest rate swaps.
(c) Includes redemption of debt issued on behalf of the States.
65

Notes 2009 2008
$'000 $'000
Administered cash flows
for the year ended 30 June 2009 (continued)
Net increase (decrease) in cash held 39,858,274 (8,820,922)
Cash at the beginning of the reporting period 622 867
Cash from Official Public Account:
Appropriations 405,936,466 325,333,975
Special accounts 38 394
405,936,504 325,334,369
Cash to Official Public Account:
Receipts (445,794,692) (316,513,331)
Special accounts (86) (361)
(445,794,778) (316,513,692)
Cash at the end of the reporting period 622 622
66
Notes to and forming part of the financial statements

Note Description Page
1 Summary of significant accounting policies 68
2 Objectives of the AOFM 84
3 Financial risk management 87
4 Revenue 92
5 Expenses 93
6 Financial assets 94
7 Non-financial assets 95
8 Payables 98
9 Provisions 99
10 Cash flow reconciliation 100
11 Contingent liabilities and assets 101
12 Executive remuneration 101
13 Remuneration of auditors 102
14 Average staffing level 102
15 Compensation and debt relief in special circumstances 102
16 Revenue before re-measurements administered on behalf of government 103
17 Expenses before re-measurements administered on behalf of government 103
18 Administered gains before re-measurements 104
19 Administered re-measurements 104
20 Assets administered on behalf of government 105
21 Liabilities administered on behalf of government 107
22 Administered reconciliation table 108
23 Administered contingent liabilities and assets 108
24 Administered financial instruments 109
25 Market risk sensitivity of administered financial instruments 127
26 Securities lending facility 135
27 Disclosures of appropriations 137
28 Reporting of outcomes 146
29 Major departmental revenue and expenses by output group and output 146
30 Major classes of administered revenue and expenses by outcome 146
31 Communications Fund 147
32 Events occurring after reporting date 147
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Note 1: Summary of significant accounting policies
1.1 Basis of preparation of the financial statements
The Australian Office of Financial Management (AOFM), a ‘prescribed agency’ under the
Financial Management and Accountability Act 1997 (Commonwealth), is a specialised agency
responsible for the management of Australian Government debt and financial assets. The
financial statements cover the AOFM as an individual entity and are for the reporting period
1 July 2008 to 30 June 2009. They are required by section 49 of the Financial Management and
Accountability Act 1997, and are a general purpose financial report prepared on a going concern
basis.
The financial statements have been prepared in accordance with:
• the Finance Minister’s Orders (FMOs) (being the Financial Management and Accountability
Orders (Financial Statements for reporting periods ending on or after 1 July 2008));
• Australian Accounting Standards, including Interpretations issued by the Australian

Accounting Standards Board (AASB) that apply for the reporting period; and
• other authoritative pronouncements of the AASB, which includes the Framework for
the Preparation and Presentation of Financial Statements.
Since 2005 the AASB has adopted International Financial Reporting Standards of the
International Accounting Standards Board for the purposes of setting Australian Accounting
Standards, but not in their entirety and with some modification for the private and public
not-for-profit sectors.
The financial statements have been prepared on an accruals basis under the historic cost
accounting convention, as modified by the revaluation of certain classes of financial assets and
financial liabilities (including derivative financial instruments), certain classes of property, plant
and equipment and employee entitlements.
The financial statements are presented in Australian dollars and values are rounded to the
nearest thousand dollars unless disclosure of the full amount is specifically required by the
FMOs.
Liabilities and assets which are unrecognised in the departmental Balance Sheet or the Schedule
of Assets and Liabilities Administered on Behalf of Government are reported in Note 11
(departmental) and Note 23 (administered).
The continued existence of the AOFM in its present form, and with its present program, is
dependent on government policy and on continuing appropriations by Parliament for the
AOFM’s administration and program.
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Administered revenue, expenses, assets, liabilities and cash flows reported in the Schedule of
Administered Items and related notes are accounted for on the same basis and using the same
policies as for departmental items, except where otherwise stated.
1.2 Communications Fund
In 2005-06 the Communications Fund was established under the Telecommunications (Consumer
Protection and Service Standards) Act 1999 to fund improvements in telecommunication services in
regional, rural and remote parts of Australia. The AOFM was authorised by the responsible
Ministers (the Minister for Broadband, Communications and the Digital Economy and the
Minister for Finance and Deregulation) to make investments on behalf of the Department of
Broadband, Communications and the Digital Economy (DBCDE). These investments and their
earnings are reported by DBCDE and not the AOFM. See Note 31 for additional information.
On 1 January 2009, the Communications Fund was closed and its balance transferred to the
Building Australia Fund. The investments of the Building Australia Fund are managed by the
Future Fund Board of Guardians.
1.3 Significant accounting estimates and judgments
No accounting assumptions or estimates have been identified that have a significant risk of
causing a material adjustment to carrying amounts of assets and liabilities within the next
reporting period.
1.4 Statement of compliance with International Financial Reporting Standards
In some circumstances compliance with Australian Accounting Standards will not lead to
compliance with International Financial Reporting Standards. Paragraph 14 of AASB 101
Presentation of Financial Statements requires that where an entity’s financial statements comply
with International Financial Reporting Standards, then such compliance shall be made in an
explicit and unreserved statement in the notes to the financial statements.
These financial statements and associated notes do not fully comply with International Financial
Reporting Standards, due to the application of not-for-profit provisions in AASB 116 Property,
Plant and Equipment relating to the accounting treatment arising from revaluations.
(a) New Australian Accounting Standards applicable to the reporting period

During 2008-09 an amendment was made to AASB 139 Financial Instruments: Recognition and
Measurement to allow reporting entities to reclassify, in limited circumstances, financial assets
out of the category fair value through profit and loss. The AOFM did not utilise this amendment
to reclassify financial assets.
Other amendments to Australian Accounting Standards that became effective in 2008-09 have
not impacted on the AOFM.
69
(b) New Australian Accounting Standards applicable in future reporting periods

The AOFM is not aware of any new Australian Accounting Standard that has been issued but is
not yet effective whose application will have an impact on the AOFM’s financial results or
financial position in future reporting periods.
In accordance with section 11 of the FMOs, the AOFM is not permitted to adopt a new
Australian Accounting Standard or AASB Interpretation earlier than its effective date of
application without the approval of the Department of Finance and Deregulation Chief
Executive. The AOFM has not early adopted a new Australian Accounting Standard or AASB
Interpretation.
1.5 Departmental and administered items
Departmental assets, liabilities, revenue and expenses are those items that are controlled by the
AOFM and used or incurred to deliver goods and services to government, including:
• computers, plant and equipment;
• liabilities for employee entitlements;
• revenue deemed appropriated under the Financial Management and Accountability

Act 1997; and
• employee expenses and other administrative expenses.
Administered assets, liabilities, revenue and expenses are those items which are controlled by
the government and managed or overseen by the AOFM on behalf of the government. These
items include debt issued to finance the government’s fiscal requirements, investments of funds
surplus to the government’s immediate financing needs and investment in residential
mortgage-backed securities to support competition in the residential mortgage market.
The purpose of the separation of administered and departmental items is to enable assessment
of the administrative efficiency of the AOFM in providing goods and services to the
government.
Administered items are identified separately in the financial statements by shading.
70
1.6 Revenue (Departmental)
The revenue described in this note is revenue relating to the departmental activities of the
AOFM.
(a) Revenue from government — output appropriations

The full amount of the appropriation for departmental outputs for the year (less any formal
reductions) is recognised as revenue.
Appropriation receivables are recognised (at their nominal amounts) for output appropriations
that are undrawn by the AOFM and have not lapsed.
(b) Resources received free of charge

Resources received free of charge are recognised as revenue when, and only when, a fair value
can be reliably determined and the services would have been purchased if they had not been
donated. Use of those resources is recognised as an expense.
Contributions of assets at no cost of acquisition are recognised as revenue at their fair value
when the assets qualify for recognition.
(c) Other revenue

Revenue from the rendering of a service is recognised by reference to the stage of completion of
contracts or other agreements to provide the service.
1.7 Transactions with the government as owner (Departmental)
(a) Capital injections

Appropriations designated as ‘capital injections’ (less any formal reductions) are recognised
directly in Contributed Equity in the Balance Sheet in the financial year that the appropriation
takes effect.
Appropriation receivables are recognised (at their nominal amounts) for capital injections that
are undrawn by the AOFM and have not lapsed.
The AOFM was not appropriated any capital injections from government for 2008-09
(nil for 2007-08).
(b) Distributions to owners

Distributions to owners are debited to Contributed Equity in the Balance Sheet unless the
distributions are in the nature of a dividend. Dividends are debited to Retained Surplus in the
Balance Sheet.
The AOFM did not make a distribution to owners during 2008-09 (nil for 2007-08).
71
1.8 Employee benefits (Departmental)
Liabilities for services rendered by employees are recognised at the end of the financial year to
the extent that they have not been settled.
(a) Leave
The liability for employee benefits includes provisions for annual leave and long service leave.
No provision has been made for sick leave as all sick leave is non-vesting and the average sick
leave taken in future years by employees of the AOFM is estimated to be less than the annual
entitlement for sick leave.
The leave liabilities are calculated on the basis of employees’ remuneration at the end of the
financial year adjusted for expected increases in remuneration effective from 1 July 2009.
Liabilities for short-term employee benefits (such as wages and salaries and annual leave
expected to be settled within 12 months from the end of the financial year) are measured at their
nominal amounts.
All long service leave employee benefits are measured at the present value of the estimated
future cash flows to be made in respect of all employees at the end of the financial year. In
determining the present value of the long service leave liability, the AOFM has commissioned an
actuarial assessment by the Australian Government Actuary of the anticipated attrition rates and
pay increases through promotion and inflation. The Australian Government Actuary has
recommended the application of the shorthand method, as prescribed by the FMOs, for
determining the present value of the long service leave liability.
(b) Superannuation
Staff and contractors of the AOFM contribute to the Commonwealth Superannuation Scheme
(Defined Benefit), Public Sector Superannuation Scheme (Defined Benefit), Public Sector
Superannuation Scheme (Accumulation Plan) and other nominated schemes. Employer
contributions (including productivity contributions and salary sacrificed superannuation
contributions) of $719,393 were made to these schemes during the financial year
(2007-08: $715,371).
The AOFM makes employer contributions to the Australian Government at rates determined by
an actuary to be sufficient to meet the cost to the government of the superannuation entitlements
of its employees. The liability for defined superannuation benefits payable to an employee upon
termination of employment with the Australian Government is recognised in the financial
statements of the Department of Finance and Deregulation and is settled by the Australian
Government in due course.
An on-cost liability, based on actuarial assessment, has been recognised in the Balance Sheet for
employer superannuation contributions payable on accrued annual leave and long service leave
72
as at the end of the financial year. Employer superannuation contributions are payable on leave
benefits that are taken during service, but are not payable on leave benefits paid out on
termination.
In addition, a liability has been recognised at the end of the financial year for outstanding
superannuation contributions payable in relation to the final fortnight of the financial year.
1.9 Leases (Departmental)
A distinction is made between finance leases and operating leases. Finance leases effectively
transfer from the lessor to the lessee substantially all risks and benefits incidental to ownership
of leased non-current assets. Under operating leases the lessor effectively retains substantially all
such risks and benefits.
The AOFM holds operating leases only. Operating lease payments are charged to the Income
Statement on a straight-line basis which is representative of the pattern of benefits derived from
the leased assets.
1.10 Cash (Departmental)
Cash means notes and coins held and any deposits held at call with a bank. Deposits held with a
bank that are not at call are classified as investments. Cash is recognised at its nominal amount.
1.11 Financial instruments (Departmental)
The AOFM recognises a financial asset or financial liability on its Balance Sheet when and only
when it becomes a party to the contractual provisions of the instrument. A financial asset is
de-recognised when the right to receive cash flows from the financial asset has expired and
substantially all the risks and rewards of ownership have been transferred to another party. A
financial liability is de-recognised when the obligation in the contract is discharged, cancelled or
has expired.
The AOFM classifies its departmental financial assets as loans and receivables. Loans and
receivables primarily comprise amounts due from other parties for the reimbursement of staff
costs associated with staff secondments. Loans and receivables are initially recognised at fair
value and are subsequently measured at amortised cost. Amounts due from the Official Public
Account (OPA) for undrawn departmental appropriations are not financial instruments as they
are not contractually based.
Financial liabilities represent trade creditors and accruals and are recognised at the amounts at
which they are expected to be settled.
All departmental financial assets and financial liabilities are denominated in Australian dollars,
are non-interest bearing and their fair values approximate their carrying values. Accordingly,
73
the AOFM is not exposed to interest rate risk or exchange rate risk on its departmental financial
instruments. The AOFM’s maximum exposure to credit risk on departmental financial assets
approximates their carrying values. The AOFM’s exposure to credit risk on its departmental
financial instruments is immaterial.
1.12 Infrastructure, plant and equipment (Departmental)
(a) Asset recognition threshold on acquisition

Purchases of infrastructure, plant and equipment are recognised initially at cost in the Balance
Sheet, except for purchases costing less than $500, which are expensed at the time of acquisition.
The asset recognition threshold is applied to each functional asset. That is, items or components
that form an integral part of an asset are grouped as a single asset.
(b) Revaluations
Basis
Following initial recognition at cost, valuations are conducted with sufficient frequency to
ensure that the carrying amounts of assets do not materially differ from the assets’ fair values as
at the reporting date, in accordance with AASB 116 Property, Plant and Equipment.
Fair value has been determined as depreciated replacement cost for leasehold improvements
and market selling price in an active market for computers, plant and equipment.
Revaluation adjustments are made on a class basis. Revaluation increments for a class are
credited directly to the revaluation reserve in Equity except to the extent that they reverse a
previous revaluation decrement of the same asset class. Revaluation decrements for a class of
assets are recognised as an expense directly through the Income Statement except to the extent
that they reverse a previous revaluation increment for that class. Upon disposal, any revaluation
reserve relating to the asset sold is transferred to Retained Surplus.
For all assets, excluding leasehold improvements, any accumulated depreciation or amortisation
as at the revaluation date is eliminated against the gross carrying amount of the asset. For
leasehold improvements, accumulated amortisation on revaluation is restated proportionately in
accordance with the gross carrying amount of the asset.
Frequency
Infrastructure, plant and equipment assets are formally revalued every three years. All
infrastructure, plant and equipment assets were last revalued as at 31 March 2009.
Assets acquired after the commencement of a revaluation are not captured by the revaluation
then in progress.
Conduct
All valuations are conducted by an independent qualified valuer.
74
(c) Impairment
All infrastructure, plant and equipment assets were assessed for impairment at the end of the
financial year. An impairment provision was not required.
(d) Depreciation and amortisation

The depreciable value of infrastructure, plant and equipment assets is written off over the
estimated useful lives of the assets to the AOFM using the straight-line method of depreciation.
Leasehold improvements are amortised on a straight-line basis over the lesser of the estimated
useful life of the improvements and the unexpired period of the lease. The depreciable value of
infrastructure, plant and equipment assets is based on a zero residual value.
Depreciation and amortisation rates (useful lives) are reviewed regularly and necessary
adjustments are recognised in the current, or current and future reporting periods as
appropriate. During the year the AOFM revised the useful lives of the majority of its assets to
reflect latest estimated replacement dates. The financial effect of this revision to useful lives was
a reduction in depreciation and amortisation expenses for 2008-09 of $9,257.
Depreciation and amortisation expenses have been determined by applying rates to new
depreciable assets based on the following useful lives:
Sub-class of depreciable asset 2009 2008
Leasehold improvements lease term lease term
Computers 3-5 years 3-5 years
Office equipment 5 years 5 years
Furniture 10 years 10 years
The aggregate amount of depreciation and amortisation allocated to each class of asset during
the reporting period is disclosed at Note 5C.
1.13 Computer software (Departmental)
Purchases of computer software are recognised at cost in the Balance Sheet except for purchases
costing less than $10,000, which are expensed at the time of acquisition.
An item of software represents:
• a software licence granted for greater than 12 months; or
• a developed software application.
Developed software is recognised by capitalising all directly attributable internal and external
costs that enhance the software’s functionality and therefore service potential.
Software assets are amortised on a straight-line basis over their anticipated useful lives, being
three to five years (2007-08: three to five years). Software assets are not subject to revaluation.
75
An impairment assessment was made as at the end of the financial year and an impairment
provision was not required.
1.14 Taxation (Departmental)
The AOFM is exempt from all forms of taxation except for Fringe Benefits Tax (FBT) and the
Goods and Services Tax (GST).
Revenue, expenses, assets and liabilities are recognised net of GST, except:
• where the amount of GST incurred is not recoverable from the Australian Taxation
Office; and
• for receivables and payables (where GST is applicable).
Receipts and payments in the Cash Flow Statement are recorded in gross terms (that is, at their
GST inclusive amounts).
All supplies provided by the AOFM are input taxed under the GST legislation, except for
remuneration benefits provided to staff, services arising from the management of the
Communications Fund and staff secondments in Australia. In accordance with applicable GST
regulations the AOFM is entitled to a reduced input tax credit (equal to 75 per cent of the GST
paid) on some purchases, such as security transaction services, which are applied in making
input taxed supplies.
1.15 Reporting of administered activities
Administered revenue, expenses, assets, liabilities and cash flows are presented in the
Schedule of Administered Items and related notes. Except where otherwise stated,
administered items are prepared on the same basis of accounting and using the same policies
as for departmental items, including the application of Australian Accounting Standards.
(a) Administered cash transfers to and from the Official Public Account (OPA)
Administered appropriations from the OPA (such as appropriations for the repayment of
maturing debt) or transfers by the AOFM of administered receipts to the OPA (such as
proceeds from the issuance of debt) are not reported in the administered financial statements.
This accounting treatment seeks to report the government’s transactions with parties outside
the General Government Sector and acknowledges that these transactions with the OPA are
internal to the Administered entity. An exception to the above policy relates to the disclosure
of administered cash flows, given that cash transferred between the OPA and the AOFM’s
administered bank accounts is necessary for the completeness of the cash flow disclosures.
76
1.16 Exemption from FMOs
Section 17.5 of the FMOs provides an exemption to the AOFM from presenting the Schedule
of Income and Expenses Administered on Behalf of Government, and associated notes, as set
out in the Annexure to the FMOs. Instead, the AOFM is required to comply with AASB 101
Presentation of Financial Statements for presenting its administered revenue and expenses.
Paragraph 83 of AASB 101 encourages reporting entities to adopt an Income Statement

presentation that is most relevant to users in understanding the entity’s financial
performance.
With the adoption of fair value through profit or loss measurement for certain classes of
financial assets and financial liabilities the AOFM has presented its administered revenue and
expenses into two categories:
• administered operating result before re-measurements; and
• administered re-measurements.
The category ‘administered operating result before re-measurements’ records a financial

result that is consistent with an accruals (or amortised cost) basis of accounting under the
historic cost accounting convention and is most relevant to the AOFM’s role in managing its
debt portfolio whereby debt and financial instruments are predominately issued and held to
maturity (and with portfolio restructuring a rarity). Where a financial asset is sold or financial
liability is bought back prior to maturity the realised gain or loss on sale, calculated on an
amortised cost basis, is recognised within this category. Realised and unrealised foreign
currency gains and losses are also included in this category.
The category ‘administered re-measurements’ provides information on the unrealised

changes in the market valuation of the portfolio of administered financial assets and financial
liabilities during the financial year. This is relevant for assessing changes in financial risk
exposures and the value of transactions managed from year to year. The revaluation effect
will net to zero over the life of a financial instrument.
1.17 Recognition and de-recognition of financial instruments
The AOFM recognises a financial asset or financial liability in its Schedule of Assets and
Liabilities Administered on Behalf of Government when and only when it becomes a party to
the contractual provisions of the instrument. A financial asset is de-recognised when the right
to receive cash flows from the financial asset has expired and substantially all the risks and
rewards of ownership have been transferred to another party. A financial liability is
de-recognised when the obligation in the contract is discharged, cancelled or has expired.
The AOFM currently accounts for purchases and sales of financial instruments on a trade date
77
basis, that is, the date on which transactions are entered into. Depending on the transaction
type this may be several days prior to settlement.
1.18 Classification and measurement of financial instruments
The AOFM classifies its administered financial assets into the following categories: financial
assets at fair value through profit or loss and loans and receivables. The AOFM classifies its
financial liabilities in the following categories: financial liabilities at fair value through profit
or loss and other financial liabilities. See Note 24A for further details of the AOFM’s financial
instrument categories.
The AOFM has determined the classifications on the basis of how it manages and assesses the
performance of its financial assets and financial liabilities. Where the AOFM’s management
monitors cost and risk in mark-to-market terms (and not necessarily only in those terms), the
AOFM has classified the relevant financial assets and liabilities at fair value through profit or
loss.
(a) Non-derivative financial assets at fair value through profit or loss

This category comprises short term Australian dollar denominated deposits, bank accepted
bills and negotiable certificates of deposit and longer term Australian dollar denominated
semi-government debt, debt issued by foreign government and supranational institutions and
residential mortgage-backed securities. Under section 39(2) of the Financial Management and
Accountability Act 1997, the AOFM invests public money for the purpose of managing the
balance of the OPA, for supporting competition in the residential mortgage market and, for a
period during 2008-09, for investing the proceeds from the issuance of Treasury Bonds over
and above what was required to meet maturing debt and financing requirements in fixed
interest debt securities to offset cost and risk of the additional issuance.
These assets are measured at fair value on initial recognition and at fair value on subsequent
measurement. Changes in carrying value are attributed between changes in amortised cost of
the asset and other changes. Changes in carrying value attributable to amortised cost are
recognised as Interest Revenue in the Schedule of Income and Expenses Administered on
Behalf of Government. That is, where a security is acquired at a premium or discount to its
par value, the premium or discount is recognised at that time and included in the carrying
value of the asset. The premium or discount is amortised over the life of the security using the
effective interest method and recognised in Interest Revenue. Other changes in carrying value
(including unrealised changes in valuation due to a change in interest rates) are recognised as
Administered Re-measurements in the Schedule of the Income and Expenses Administered
on Behalf of Government.
(b) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable
payments that are not quoted in an active market. The AOFM classifies a financial asset as a
78
loan and receivable (as opposed to a financial asset at fair value through profit or loss) in
circumstances where the cost and risk of the asset are not being managed in mark-to-market
terms.
Currently, this category comprises debt on allocation to, and advances made to the State and
Territory governments.
Until July 1990, the Australian Government borrowed on behalf of the State and Territory
governments and allocated a portion of the proceeds of its Treasury Bond raisings to those
governments to fund the redemption of previous allocations of raisings. Until 1986, the
Australian Government also borrowed on behalf of the State and Territory governments to
raise new borrowings. In addition to Treasury Bond allocations, there are outstanding
balances on stock issued by the States prior to 1 January 1924 and taken over by the
Australian Government in 1927 (under the original Financial Agreement Act). The States and
Territories are responsible for meeting all obligations as to interest and principal on the debt
on allocation to them in accordance with the provisions of the Financial Agreement Act 1994
(the current agreement). As at 30 June 2009 approximately $10 million of perpetual debt with
no fixed maturity date issued by New South Wales, Victoria and South Australia remained
outstanding under the arrangements governed by the Financial Agreement Act 1994
($11 million as at 30 June 2008). All other debt has been redeemed. Redemption of the
perpetual debt is at the discretion of the relevant State.
In addition to debt governed by the Financial Agreement Act 1994, the Australian Government,
from 1945 to 1989, made advances to the State and Territory governments under
Commonwealth-State financing arrangements, which were not evidenced by the issue of
securities (namely, housing advances and specific purpose capital advances). The principal
value of these advances outstanding (for which the AOFM is responsible for administering)
was $3,162 million as at 30 June 2009 ($3,253 million as at 30 June 2008).
Loans and receivables assets are measured at fair value on initial recognition and at amortised
cost on subsequent measurement using the effective interest method. Changes in carrying
value, including amortisation of premiums or discounts are recognised as Interest Revenue in
the Schedule of Income and Expenses Administered on Behalf of Government.
For financial assets measured at amortised cost, interest revenue earned but not yet received is
recognised as Accrued Revenue in the Schedule of Assets Administered on Behalf of
Government.
(c) Non-derivative financial liabilities at fair value through profit or loss

Currently this category comprises all Commonwealth Government Securities (CGS) debt with
the exception of debt on allocation to State and Territory governments and overdues.
These liabilities are measured at fair value on initial recognition and at fair value on
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subsequent measurement. Changes in carrying value are attributed between changes in

amortised cost of the liability and other changes. Changes in carrying value attributable to
amortised cost are recognised as Interest Expense in the Schedule of Income and Expenses
Administered on Behalf of Government. That is, where a security is issued at a premium or
discount to its par value, the premium or discount is recognised at that time and included in
the carrying value of the liability. The premium or discount is amortised over the life of the
security using the effective interest method and recognised in Interest Expense. Other changes
in carrying value (including unrealised changes in valuation due to a change in interest rates)
are recognised as Administered Re-measurements in the Schedule of Income and Expenses
Administered on Behalf of Government.
For Treasury Capital Indexed Bonds, the principal value appreciates over time with the rate of
inflation (in line with a six month lagged consumer price index). As future inflation rates are
uncertain, an estimate of the Australian Government’s future redemption cost on maturity is
not disclosed in the financial statements. Capital accretion is recognised in Interest Expense.
There are no options available to either the Australian Government or the holder of the
securities to exchange or convert CGS. There are also no options to either party for early
redemption.
(d) Other non-derivative financial liabilities

This category comprises debt on allocation to State and Territory governments and overdues.
These liabilities are measured at fair value on initial recognition and at amortised cost on
subsequent measurement using the effective interest method. Changes in carrying value are
recognised as Interest Expense in the Schedule of Income and Expenses Administered on
Behalf of Government.
For financial liabilities measured at amortised cost, interest incurred but not yet paid is
recognised as Payables in the Schedule of Liabilities Administered on Behalf of Government.
(e) Derivative financial instruments

Derivatives are required by AASB 139 Financial Instruments: Recognition and Measurement to be
measured at fair value on initial recognition and at fair value on subsequent measurement.
The accounting treatment for changes in fair value depends on whether the derivative is
designated as a hedging instrument, and on the nature of the hedge.
The AOFM has not designated a hedge relationship between its derivatives and physical CGS
debt portfolio. Accordingly, the AOFM’s domestic interest rate swaps must be classified at
fair value through profit or loss. Refer to Note 2 and Note 3 for details on the AOFM’s use of
interest rate swaps.
Changes in the carrying value of interest rate swaps are attributed between changes in
amortised cost of the swaps and other changes. Changes in carrying value attributable to
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amortised cost are recognised as Interest Expense (for the pay leg) and as Interest Revenue
(for the receive leg) in the Schedule of Income and Expenses Administered on Behalf of
Government. Other changes in carrying value (including unrealised changes in valuation due
to a change in interest rates) are recognised as Administered Re-measurements in the
Schedule of Income and Expenses Administered on Behalf of Government.
No swap debtors have been assessed as being unable to meet contractual obligations due to
the Australian Government as at 30 June 2009 (nil for 30 June 2008). Consequently, the AOFM
has not included an allowance for uncollectability of amounts due on interest rate swap
contracts.
1.19 Fair value estimation of financial instruments
Where a financial instrument is traded in an active market, fair value is based on quoted
market rates, as at the end of the financial year. Where market rates are unavailable because a
financial asset or financial liability is not traded in an active market, valuation techniques are
used, including quotes for similar instruments and discounted cash flow analysis.
Fair value is synonymous with market value and represents the estimated exchange
equivalent price using relevant inputs from reference markets and valuation techniques. Fair
value is determined on the presumption that the reporting entity is a going concern and is
operating in an active market under normal conditions, without any intention or need to
liquidate, curtail materially the size of its activities or undertake transactions on adverse
terms. Where markets are distorted or illiquid, with pricing not necessarily reflective of
underlying credit and cash flow fundamentals, assumptions may be necessary to derive the
fair value of a financial instrument.
(a) Non-derivative financial instruments at fair value

The fair value of domestic CGS is based on discounted cash flows using a zero coupon curve
valuation methodology created from observable market rates. The zero coupon curve is based
on market yields of the most liquid components of the domestic CGS debt portfolio as at the
end of the financial year.
The fair values of domestic semi-government and foreign government and supranational
institutions debt investments are based on observable market quotes for each issue.
The fair value of term deposit investments with the RBA is based on a zero coupon curve
using the overnight cash rate and overnight indexed swap rates. These yields reflect the
default free credit risk status of the RBA. The fair value of short term marketable securities is
based on a zero coupon curve using the overnight cash rate and bank bill swap rates.
For residential mortgage-backed securities each issue is modelled to determine its weighted
average life, which is tested and compared against other sources where available. Fair value is
determined using the weighted average life, market quotes (where available) and
81
assumptions based on credit quality considerations.
As the secondary market for the Australian Government’s foreign currency denominated debt
is largely illiquid, the valuation approach for foreign currency denominated debt is based on
deposit and swap rates in each relevant foreign currency.
(b) Derivative financial instruments

The net fair value of domestic interest rate swaps is based on discounted cash flows using a
zero coupon curve valuation methodology created from observable market swap rates as at
the end of the financial year.
1.20 Other significant administered accounting policies
(a) Revenue
All administered revenue is revenue relating to the activities performed by the AOFM on
behalf of the Australian Government.
Interest revenue is earned on loans to State and Territory governments, residential

mortgage-backed securities, term deposits, fixed interest and discount securities and the
receive legs of interest rate swaps. Interest is credited to revenue as it accrues and is calculated
on an amortised cost basis using the effective interest method.
Net interest earnings on securities lending are reported as revenue when received.
(b) Grants
Under the Financial Agreement Act 1994, the Australian Government assists the State and
Territory governments to redeem maturing debt on allocation to them. Payments made to the
State and Territory governments under these arrangements are recognised as grants expenses
as and when they fall due and payable.
(c) Borrowing costs

In accordance with section 20.1 of the FMOs borrowing costs are expensed as incurred. Under
AASB 123 Borrowing Costs, borrowing costs attributable to a qualifying asset may be
capitalised or expensed. A qualifying asset is an asset that takes a substantial period of time to
get ready for its intended use or sale. The AOFM’s borrowing program does not specifically
raise funds for qualifying assets.
(d) Cash
The AOFM maintains a number of administered operational bank accounts with the RBA.
Interest is not paid on these accounts. Deposits are recognised at their nominal amounts.
(e) Securities lending facility

The AOFM has a securities lending facility available for Treasury Bonds. The facility is
operated by the RBA and is governed by the terms and conditions of an agency agreement
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between the RBA and the AOFM. The purpose of the facility is to enhance the efficiency of the
bond market by allowing bond market participants to borrow Treasury Bonds (generally for a
period of no more than several days) when they are not readily available from other sources
in the market.
The securities lending facility operates by entering into two simultaneous repurchase
agreements with the party wishing to borrow securities — a repurchase agreement (the sale of
Treasury Bonds to the party and agreement to buy them back at a future time at an agreed
price) and a reverse-repurchase agreement (the purchase of securities from the party and
agreement to sell them back at a future time at an agreed price). The net effect of these two
transactions is that the Australian Government holds securities as collateral, and not cash.
In 2008-09 the range of securities accepted as collateral was widened to include all securities
accepted by the RBA as general collateral in repurchase agreements that the RBA undertakes
with the market. The securities lending facility was also widened to include intra-day (as well
as overnight) borrowing of Treasury Bonds.
The exchange of securities is market value matched subject to a 2 per cent initial margin
imposed by the AOFM for credit risk mitigation purposes. There is provision for making
margin calls after initial exchange where the securities pledged as collateral by the other party
fall in value relative to the Treasury Bonds loaned under the facility. The repurchase and
reverse-repurchase agreements are at-call, that is, they do not have set terms.
Interest is payable under the facility where lending is overnight. The interest rate payable by
the other party is the RBA target cash rate. The interest rate payable by the Australian
Government is the target cash rate less a margin determined by the AOFM. Net interest
earnings of the Australian Government are reported as revenue when received. The
temporary sale of CGS under the facility is recorded off-balance sheet. See Note 26 for details
of transactions undertaken during the financial year under the facility.
(f) Foreign currency

Transactions denominated in a foreign currency are converted at the exchange rate at the date
of the transaction. Foreign currency receivables and payables are translated at the exchange
rates current as at the end of the financial year. Net foreign exchange gains and losses (both
realised and unrealised) arising from foreign currency transactions are reported in the
Schedule of Income and Expenses Administered on Behalf of Government.
83
Note 2: Objectives of the AOFM
The AOFM manages a portfolio of debt and financial assets on behalf of the Australian
Government. It issues Treasury Bonds to finance projected budget deficits and support interest
rate markets and Treasury Notes to manage the within-year financing task. It also manages the
government’s cash in the Official Public Account (OPA) which is surplus to immediate
requirements by making investments in short term deposits with the RBA and debt securities. It
undertakes the administration, financial and operational risk management, and financial
reporting of its portfolio of debt and assets.
From 2003 until recently, debt issuance by the AOFM had been undertaken solely with the
objective of maintaining the Treasury Bond and Treasury Bond futures markets rather than for
budget funding purposes. Successive budget surpluses removed the need to borrow to fund the
budget. Issuance was maintained at levels that matched maturing debt obligations to support
the continued operation of these markets, as they allow market participants to better manage
their interest rate risk and thereby contribute to a lower cost of capital in Australia. They also
help strengthen the financial system against the potential impacts of financial shocks. For a
period (between August 2008 and February 2009) additional debt was issued over and above
what was required to meet maturing debt obligations in order to further support the liquidity of
the Treasury Bond market. The proceeds of this additional issuance were invested in fixed
interest assets to offset the cost and risk of the additional issuance.
Since the release of the Updated Economic and Fiscal Outlook on 3 February 2009, the proceeds of
issuance have been used for budget funding. The Outlook presented revised fiscal forecasts for
budget deficits in 2008-09 and subsequent years. This required the AOFM to increase its
financing program and resume Treasury Note issuance. The Treasury Bond market has moved
from a relatively steady state to one where the debt on issue is increasing and where new
issuance is competing with other AAA rated issues (including other sovereigns,
semi-governments and institutions issuing government guaranteed debt). To assist with the
efficient placement of debt, the AOFM will initiate a promotional program to intensify its market
liaison with investors and intermediaries.
Until 2008 the AOFM used interest rate swaps to reduce the cost of its borrowing. However, due
to changing yield curves and reductions in the term premium, the potential to make savings in
debt servicing costs has declined. No new swaps have been executed since late in 2007 and in
2008-09 the AOFM was running down its portfolio of interest rate swaps.
The AOFM manages the overall level of cash in the OPA by making short term deposits with the
RBA and buying short-dated discount securities to offset fluctuations in the daily flows in and
out of the OPA. It may also make short term borrowings from the public by issuing Treasury
Notes. The OPA is part of the Balance Sheet of the Department of Finance and Deregulation and
not part of the AOFM’s Balance Sheet. The AOFM holds continuing balances of short term assets
and debt to allow it to respond flexibly and quickly to swings in cash requirements.
84
In September 2008, the government announced that the AOFM would invest up to $4 billion in
residential mortgage-backed securities (RMBS) to support competition in the Australian
residential mortgage market. In October 2008, this initiative was extended to $8 billion, of which
a maximum of $4 billion may be in RMBS securities issued by authorised deposit taking
institutions. The AOFM acquired a total of $6,203.420 million of AAA (or equivalent) rated
RMBS up to year end.
AOFM’s borrowing and portfolio management activities comply with applicable accounting
standards and legislative requirements. The key legislative mechanisms that governed these
activities during the reporting period were as follows:
• the Commonwealth Inscribed Stock Act 1911 and associated regulations represent the
Australian Government’s primary vehicle for the creation and issuance of domestic
stock prescribed under the Act, including Treasury Bonds and Treasury Notes;
– in July 2008, the Act was amended to provide the Treasurer with an authority to
borrow up to a limit of $75 billion. The limit excludes stock and securities on issue
on the commencement of the amendment, other than Treasury Bonds. A further
amendment was made in February 2009 to allow the Treasurer to increase the
limit by an additional $125 billion in special circumstances by making a
declaration. The Act provides for the Treasurer to delegate his borrowing power
to certain officials, which must be accompanied by a direction made in writing
and which specifies the maximum face value of stock and securities that may be
issued under the Act and the Loans Securities Act 1919. In March 2009 the
Treasurer made a declaration that special circumstances existed and increased the
limit to the maximum provided by the Act.
• the Loans Redemption and Conversion Act 1921 gives the Treasurer the power to borrow
money necessary for the purpose of paying off, repurchasing or redeeming any loan;
• the Loans Securities Act 1919 includes provision relating to overseas borrowings and
provides authority to enter into swaps and other financial agreements;
– in July 2008, the Act was amended to provide the Treasurer with an explicit
authority to enter into securities lending arrangements of up to a maximum of $5
billion at any time and for the collection of collateral.
• the Loans (Temporary Revenue Deficits) Act 1953 gives the Treasurer the power to
borrow to meet within-year deficits of the Consolidated Revenue Fund. All
borrowings raised under the authority of this Act must be repaid in the same financial
year;
85
• the Financial Agreement Act 1994 formalises debt consolidation and redemption
arrangements applying since 1 July 1990 between the Australian Government and the
States and Territories; and
• section 39 of the Financial Management and Accountability Act 1997 gives the Treasurer
the power to invest public money in authorised investments;
– in July 2008, the Act was amended to broaden the Treasurer’s investment powers
to allow investment for any purpose and not only for managing debt. The
amendment also widened the range of eligible investments.
86
Note 3: Financial risk management
The AOFM is exposed to risks arising from financial instruments on its administered Balance
Sheet comprising interest rate risk, exchange rate risk, liquidity risk, credit risk and prepayment
risk. These risks are managed within a financial risk management framework that includes
directions from the Treasurer, policies and limits approved by the Secretary to the Treasury and
overseen by the CEO and senior management of the AOFM. The Secretary to the Treasury is
advised by Treasury, the AOFM and the AOFM Advisory Board.
Timing mismatches between the Australian Government’s receipts and expenditures cause large
fluctuations in the volume of short term assets and liabilities held by the AOFM, and thus in the
overall size of its net portfolio, relative to the gross volume of debt outstanding. To provide
stability in the management of the longer term component of its debt, long term financing and
short term financing are managed through separate portfolios, the long term debt portfolio and
the cash management portfolio. The AOFM’s investments in residential mortgage-backed
securities are managed in a separate portfolio. Housing Advances to State and Territory
governments (which were not evidenced by the issue of securities) made under previous
Commonwealth-State financing arrangements are also held in a separate portfolio.
(a) Interest rate risk

Interest rate risk represents the risk to debt servicing costs and investment returns and to the
value of debt and financial assets caused by changes in interest rates. The AOFM largely holds
its debt and assets until maturity. Accordingly, the primary measure used to assess cost is the
accruals basis of accounting under the historic cost accounting convention. Market value cost
measures (which include unrealised changes in the valuation of financial assets and financial
liabilities due to changes in interest rates) are considered to be secondary.
Long term debt portfolio

Prior to 30 June 2008, the AOFM managed the cost and interest rate risk of its long term debt
portfolio in accordance with an interest rate risk management policy using domestic interest rate
swaps. This was guided by reference to a benchmark portfolio that reflected the desired
trade-off between expected cost and potential variability around the expected cost. In 2007-08, a
review of the benchmark portfolio and the assumptions supporting it concluded that the interest
rate risk management policy should be changed in 2008-09 and that interest rate swaps were no
longer to be undertaken. Given that they no longer served a policy objective, the AOFM
commenced a program in 2008-09 to run-down its portfolio of interest rate swaps by terminating
its agreements with counterparties. See Note 24B for details of the AOFM’s interest rate swap
portfolio.
With the increased issuance of debt in 2008-09 and subsequent years, the AOFM is able to
manage the interest rate structure of the long term debt portfolio through the choice of
instruments and bond series in issuing debt. The cost and interest rate risk of the long term debt
87
portfolio is regularly measured and reported to senior management, the Secretary to the
Treasury and the AOFM Advisory Board.
For a period during the financial year (and when the AOFM issued additional debt to maintain
market liquidity), the proceeds of debt issuance over and above what was required to meet
maturing debt obligations were invested in fixed interest assets to offset the cost and risk of the
additional issuance. This additional issuance and associated assets were managed within a
separate portfolio. With the deterioration in the budget position and the need to finance
projected budget deficits the portfolio was rolled into the long term debt portfolio. The assets are
gradually being liquidated as opportunities arise as an additional source of funding.
Cash management portfolio

The primary objective of the cash management portfolio is liquidity management but other
objectives are to minimise the net cost of funding and the cash balance and to invest excess
balances efficiently.

The objective set by the government for the AOFM’s investment in the residential
mortgage-backed securities market is to enhance competition in the residential mortgage market
in Australia. Interest earned on residential mortgage-backed securities comprises a floating
interest rate (set against the 1-month BBSW rate) plus a fixed margin set at the time each
investment is acquired. The AOFM monitors movements in these interest rates as part of its
management of the overall portfolio.
See Note 24C for details of the AOFM’s interest rate risk profile.
(b) Exchange rate risk

Exchange rate risk arises from debt denominated in foreign currency. Only a small residual
amount of such debt remains in the AOFM’s portfolio and the AOFM seeks to repurchase this
debt when available on acceptable terms. The volume of foreign currency debt remaining is
monitored by senior management. See Note 24D for details of the AOFM’s exposure to foreign
exchange risk.
(c) Liquidity risk

The AOFM manages the government’s liquidity risk by maintaining sufficient cash and short
term investments to ensure that the government can meet its financial obligations, both planned
and unplanned, as and when they fall due. In 2008-09 the AOFM resumed issuance of Treasury
Notes to assist in the management of the within-year financing task. The AOFM maintains the
daily volume of cash in the OPA, within limits set by the Treasurer and the Minister for Finance
and Deregulation, by monitoring the projected daily transactions of major spending and revenue
agencies and by undertaking investment of funds that are surplus to cash requirements and the
issuing of Treasury Notes to the wholesale market to meet short-falls in cash requirements. The
AOFM also has access to an overdraft facility with the RBA. The overdraft facility is not to be
88
used in normal day-to-day operations but only to cover temporary, unexpected shortfalls of cash
and it has a limit of $1 billion. Should circumstances arise for the overdraft to exceed this limit,
Ministerial approval is required.
Senior management monitors the daily balances in the OPA, holdings of short term assets and
the need for the issuance of Treasury Notes.
(d) Credit risk

Investments
The AOFM’s investment activity is made in accordance with legislative limits, delegations and
directions from the Treasurer and policies and limits established by the Secretary to the
Treasury. Section 39 of the Financial Management and Accountability Act 1997 and associated
regulations specify authorised investments. Directions from the Treasurer further limit the class
of acceptable assets. The Secretary to the Treasury sets class and individual issuer exposure
limits, including credit rating requirements.
Eligible investments are as follows:
• Securities issued or guaranteed by the Commonwealth, a State or Territory;
– individual issuer limits apply;
• AAA rated securities issued or guaranteed by the government of a foreign country in

Australian dollars;
• AAA rated securities issued by a financial institution or supranational in Australian

dollars;
• bills of exchange and negotiable certificates of deposit rated at least A1 or equivalent

issued in Australian dollars by an authorised deposit taking institution, where the
remaining term to maturity is no more than 12 months;
– class and individual issuer limits apply;
• commercial paper issued in Australian dollars rated at least A1+ or equivalent where
the remaining term to maturity is no more than 12 months;
– class and individual issuer limits apply;
• deposits with the Reserve Bank of Australia; and
– no limits exist for this class;
• AAA rated or equivalent residential mortgage-backed securities;
89
– a program limit of $8 billion, of which a maximum of $4 billion may be in

securities issued by authorised deposit taking institutions, with no single issuer
limits.
The AOFM CEO approves the individual issuer names eligible for investment and from time to
time may impose further restrictions on class and individual issuer exposure limits.
Residential mortgage-backed securities (RMBS)

The credit quality of the RMBS derives from the underlying quality of the mortgage assets and
structural enhancements such as lenders mortgage insurance, liquidity facilities, and the issue of
different classes of securities. At the time of acquisition, each RMBS issue must meet a range of
eligibility criteria set by the AOFM, including AAA (or equivalent) credit rating by at least
two ratings agencies, denomination in Australian dollars and fully amortising. Mortgages
backing the securities must be secured by a first registered prime mortgage over Australian
residential property and meet various limits, including mortgage loan size and loan-to-value
ratios. Each mortgage pool must be subject to independent review by a leading accounting firm
to provide assurance that the eligibility criteria have been met. The AOFM monitors the
performance of each RMBS issue through a monthly report by the issuer on mortgage portfolio
characteristics. See Note 24E for details of the AOFM’s portfolio of RMBS.
Interest rate swaps

Credit risk exposures arise when domestic interest rate swaps that the AOFM has executed with
counterparties have a positive market value in favour of the AOFM. The AOFM ensures that
these counterparty credit risk exposures remain acceptable by containing key measures of credit
risk within approved limits. Its credit risk policy establishes credit risk management principles
and controls, credit risk mitigation strategies, measures for assessing counterparty credit quality,
exposure limits and reporting in relation to interest rate swaps.
Under the credit risk policy:
• interest rate swaps may only be executed with those counterparties who have a
Master Agreement with the AOFM which includes netting arrangements,
right-to-break clauses and early termination clauses for credit rating downgrades;
– the credit risk associated with favourable contractual positions is reduced by

netting arrangements to the extent that if a default event occurs, all amounts with
the counterparty are terminated and settled on a net basis;
• swap counterparties must have a long term senior credit rating of at least A (by
Standard and Poor’s) and A2 (by Moody’s) where a Collateral Support Annexe is in
place, and AA- (by Standard and Poor’s) and Aa3 (by Moody’s) where a Collateral
Support Annexe is not in place;
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– a Collateral Support Annexe requires a counterparty to post collateral in the form

of Australian dollars with the AOFM to offset some of the AOFM’s credit
exposure to it, where the current exposure reaches a specified level;
• credit risk limits apply to the current exposure and potential exposure for each
counterparty;
– current exposure is the current mark-to-market value of all swaps with a

counterparty;
– potential exposure is a conservative estimate of the extent to which the current

exposure could vary over time with changes in interest rates; and
• regular reporting is provided to senior management of the current and potential

exposures by counterparty, and together with the results of stress testing current
exposure for credit downgrades and changes in market interest rates.
Other assets and credit exposures

The AOFM has a credit risk exposure on its advances (not evidenced by the issue of securities) to
the State and Northern Territory governments. This risk is regarded as minimal.
To protect the Australian Government’s financial position with respect to securities lending
arrangements, the market value of the collateral securities taken from counterparties is at least
2 per cent greater than the market value of the Treasury Bonds lent. The AOFM has the right to
seek additional collateral if there is a decline in the market value of the collateral securities
relative to the lent securities.
(e) Prepayment risk

The residential mortgage-backed securities acquired by the AOFM are fully amortising, pass
through instruments. This means that the principal collections from the underlying portfolio of
mortgages are repaid to the holders of the securities thereby reducing the principal outstanding
on them.
Principal and interest on the underlying loans are received by the servicer and paid to an issuer
bank account. On a scheduled basis, typically monthly, in accordance with a set priority of
payments (a ‘cash flow waterfall’), the cash collected is used to pay any taxes, fees and expenses
of the issuer, and interest and principal due on each class of outstanding RMBS. Due to the pass
through nature of the RMBS, the repayment of principal of the RMBS is dependent upon the
timing of principal repayments on the underlying mortgages and the operation of the cash flow
waterfall. Accordingly, the rate at which principal is repaid on the RMBS varies over time and
the actual date that the securities will be repaid in full cannot be precisely determined (this is
referred to a prepayment risk). The AOFM monitors the performance of each RMBS issue
through a monthly report made available by the issuer. The report provides details of cash
received from payments on the underlying mortgages, payments made under the cash flow
waterfall, the rate of loan principal repayments ahead of scheduled principal payments and the
estimated weighted average remaining life of the RMBS.
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Note 4: Revenue
2009 2008
$'000 $'000
Note 4A: Revenue from government
Appropriations:
Departmental outputs 8,467 8,489
Total revenue from government 8,467 8,489
Note 4B: Other revenue

Staff secondments to other agencies 642 802
Fees for management of the Communications Fund 164 316
Other 228 346
Total other revenue 1,034 1,464
Note 4C: Resources received free of charge

ANAO audit services 286 261
Other - 8
Total resources received free of charge 286 269
Note 4D: Reversals of previous asset write-downs and impairments
Asset revaluation increment - leasehold improvements 4 -

Asset revaluation increment - computers, plant and equipment 55 -
Total reversals of previous asset write-downs and impairments
59 -
Total revenue 9,846 10,222
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Note 5: Expenses
2009 2008
$'000 $'000
Note 5A: Employee benefits
Wages and salaries 3,238 3,272
Superannuation 716 693
Leave and other entitlements 137 (27)
Other employee expenses 304 381
Total employee benefits 4,395 4,319
Note 5B: Suppliers

Provision of goods:
external entities 45 51
related entities 1 1
Rendering of services:
external entities 1,428 1,194
related entities 1,403 1,208
Operating lease rentals(a) 309 321
Workers compensation premium (related entity) 13 11
Total suppliers 3,199 2,786
Note 5C: Depreciation and amortisation

Depreciation of infrastructure, plant and equipment:
Computers, plant and equipment 99 142
Leasehold improvements 64 58
Amortisation of intangibles:
Computer software 118 117
Total depreciation and amortisation 281 317
Note 5D: Write-down and impairment of assets

Computers, plant and equipment - disposed - 90
Total write-down and impairment of assets - 90
Total expenses 7,875 7,512
(a) Amounts relate to minimum lease payments only. Novated lease payments from salary packaging of
motor vehicles are disclosed in ‘other employee expenses’.
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Note 6: Financial assets

2009 2008
$'000 $'000
Note 6A: Trade and other receivables
Appropriations receivable - undrawn(a) 16,721 14,044
Other 166 410
Total receivables 16,887 14,454
Current receivables 166 410

Non-current receivables 16,721 14,044
Receivables are aged as follows:

Not past due 16,887 14,454
Overdue - -
Total receivables (gross) 16,887 14,454
(a) Appropriations receivable-undrawn are appropriations controlled by the AOFM but held in the OPA under
the government’s ‘just-in-time’ drawdown arrangements. As at 30 June 2009, the balance comprised
undrawn equity injections of $949,070 ($949,070 as at 30 June 2008) and undrawn output
appropriations of $15,771,575 ($13,094,575 as at 30 June 2008).
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Note 7: Non-financial assets

2009 2008
$'000 $'000
Note 7A: Infrastructure, plant and equipment
Computers, plant and equipment - at cost 6 94
Accumulated depreciation - (26)
6 68
Computers, plant and equipment - at 2006 valuation (fair value) - 370
Accumulated depreciation - (292)
- 78
Computers, plant and equipment - at 2009 valuation (fair value) 180 -
Accumulated depreciation (45) -
135 -
Total computers, plant and equipment 141 146
Leasehold improvements - at 2006 valuation (fair value) - 922
Accumulated amortisation - (448)
- 474
Leasehold improvements - at 2009 valuation (fair value) 955 -
Accumulated amortisation (541) -
414 -
Total leasehold improvements 414 474
Total infrastructure, plant and equipment 555 620
Current infrastructure, plant and equipment - -

Non-current infrastructure, plant and equipment 555 620
Note 7B: Intangibles

Computer software purchased - at cost 3,018 2,941
Accumulated amortisation (2,641) (2,523)
Total intangibles 377 418
Current intangibles - -
Non-current intangibles 377 418
All revaluations are independent and are conducted in accordance with the revaluation policy
stated at Note 1.12. In 2008-09, the revaluations were conducted by an independent valuer, the
Australian Valuation Office. As at 31 March 2009, a revaluation increment was made of $58,642
being $4,015 for leasehold improvements and $54,627 for computers, plant and equipment. The
full value of the revaluation increments for each class of assets was recognised in revenue to
reverse previous revaluation decrements recognised as expenses.
95
Note 7: Non-financial assets (continued)

Leasehold Computers, Computer Total
improvements plant and software
equipment (purchased)
$'000 $'000 $'000 $'000
30 June 2009
Note 7C: Reconciliation of the opening and
closing balances of property, plant and
equipment and intangibles
Opening values as at 1 July 2008
Gross book value 922 464 2,941 4,327
Accumulated depreciation/
amortisation (448) (318) (2,523) (3,289)
Net book value as at 1 July 2008 474 146 418 1,038
Additions:
Purchases - 39 77 116
Depreciation/amortisation charge (64) (99) (118) (281)
Revaluation:
Gross book value 33 (317) - (284)
amortisation (29) 372 - 343
As at 30 June 2009
Gross book value 955 186 3,018 4,159
amortisation (541) (45) (2,641) (3,227)
Net book value as at 30 June 2009 414 141 377 932
96

Leasehold Computers, Computer Total
improvements plant and software
equipment (purchased)
$'000 $'000 $'000 $'000
30 June 2008
Note 7C: Reconciliation of the opening and
closing balances of property, plant and
equipment and intangibles (continued)
Opening values as at 1 July 2007
Gross book value 1,110 433 2,931 4,474
amortisation (499) (185) (2,406) (3,090)
Net book value as at 1 July 2007 611 248 525 1,384
Additions:
Purchases - 43 10 53
Resources received free of 8 - - 8
charge
Disposals:
Gross book value (196) (12) - (208)
amortisation 109 9 - 118
Depreciation/amortisation charge (58) (142) (117) (317)
As at 30 June 2008
Gross book value 922 464 2,941 4,327
amortisation (448) (318) (2,523) (3,289)
Net book value as at 30 June 2008 474 146 418 1,038
97

2009 2008
$'000 $'000
Note 7D: Other non-financial assets
Prepayments 90 40
Total other non-financial assets 90 40
Current prepayments 90 40
Non-current prepayments - -
Note 8: Payables
2009 2008
$'000 $'000
Note 8A: Suppliers
Trade creditors(a) 223 97
Total suppliers 223 97
Current suppliers 223 97

Non-current suppliers - -
Note 8B: Other payables

Tax payable 7 2
Total other payables 7 2
Current other payables 7 2

Non-current other payables - -
(a) Settlement is usually made net 30 days.
98
Note 9: Provisions
2009 2008
$'000 $'000
Note 9A: Employee provisions
Salaries and wages 54 35
Annual leave 330 316
Long service leave 701 578
Superannuation 160 142
Total employee provisions 1,245 1,071
Current employee provisions(a) 999 872

Non-current employee provisions 246 199
Note 9B: Other provisions

Make-good on leasehold premises:(b)
Opening balance 120 135
Additional provision made 5 (15)
Total other provisions 125 120
Current other provisions - -

Non-current other provisions 125 120
(a) Under AASB 101 Presentation of Financial Statements, liabilities are to be classified as current where
the creditor has a legal right to payment within 12 months, even where payment is not expected.
The value of employee entitlement provisions expected to be settled over the next 12 months is
$0.338 million ($0.312 million as at 30 June 2008).
(b) In accordance with the terms of its lease agreement for office accommodation, the AOFM is required to
restore its leased premises to original condition at the conclusion of the lease. The AOFM has made a
provision to recognise this obligation.
99
Note 10: Cash flow reconciliation

2009 2008
$'000 $'000
Reconciliation of cash and cash equivalents as per Balance
Sheet to Cash Flow Statement
Reported cash and cash equivalents as per:
Cash Flow Statement 63 159
Balance Sheet 63 159
Reconciliation of surplus to net cash from (used by)

operating activities:
Surplus 1,971 2,710
Adjustments to surplus:
Depreciation and amortisation 281 317
Write-down of non-financial assets - 90
Capitalised resources received free of charge - (8)
Revaluation increments (59) -
Changes in assets:
(Increase) decrease in receivables (2,433) (3,174)
(Increase) decrease in other assets (50) 31
Changes in liabilities:
Increase (decrease) in employee provisions 174 1
Increase (decrease) in other provisions 5 (15)
Increase (decrease) in other payables 5 (17)
Increase (decrease) in supplier payables 126 (35)
Net cash from (used by) operating activities 20 (100)
100
Note 11: Contingent liabilities and assets

Unquantifiable contingencies
The AOFM is not aware of any unquantifiable contingencies as of the signing date that require
disclosure in the financial statements.
Remote contingencies
The AOFM has indemnified a number of contractors providing goods and services under
contract for losses incurred by the contractor due to, amongst other things, the AOFM’s failure
to observe certain terms of contract, or for wrongful, unlawful or negligent acts committed by
the AOFM. The AOFM is not aware of any event that has occurred that may trigger action under
the indemnities.
Note 12: Executive remuneration

The number of Senior Executive Service employees who received or were due to receive total
remuneration of $130,000 or more is as follows:
2009 2008
$310,000 to $324,999 - 1
$355,000 to $369,999 1 -
The aggregate amount of total remuneration of executives shown above $368,534 $317,060
The aggregate amount of separation and redundancy payments during
the year to executives shown above - -
Remuneration means any money, consideration or benefit including wages, salaries,

performance pay, accrued leave entitlements (excluding superannuation on-costs),
superannuation contributions (including notional contributions made to defined benefits
schemes at a rate determined by the Department of Finance and Deregulation), the cost of motor
vehicles, housing, commuting, fringe benefits tax and allowances. Remuneration does not
include reimbursement of out-of-pocket expenses incurred for work related purposes. Where the
AOFM is not entitled to an input tax credit, remuneration includes the non-recoverable GST
amount.
101
Note 13: Remuneration of auditors

Financial statement audit services are provided free of charge to the AOFM. The fair value of the
audit services provided by the Australian National Audit Office was:
2009 2008
$ $
Remuneration of auditors 285,623 261,000
Auditors’ remuneration is disclosed inclusive of GST.
No other services were provided by the Auditor-General.
Note 14: Average staffing level

The average staffing level for the AOFM during the year was:
2009 2008
Average staffing level (ASL)(a) 30 29
(a) Paid ASL only.
Note 15: Compensation and debt relief in special circumstances

Departmental
No ‘Act of Grace’ payments were made during the reporting period (nil for 2007-08).
No waivers of amounts owing to the government were made pursuant to subsection 34(1) of the Financial
Management and Accountability Act 1997 during the reporting period (nil for 2007-08).
No payments were made under the ‘Defective Administration Scheme’ during the reporting period
(nil for 2007-08).
No payments were made under section 73 of the Public Service Act 1999 during the reporting period
(nil for 2007-08).
No payments were made under ex-gratia programs during the reporting period (nil for 2007-08).
Administered
No ‘Act of Grace’ payments were made during the reporting period (nil for 2007-08).
One waiver of amounts owing to the government was made pursuant to subsection 34(1) of the Financial
Management and Accountability Act 1997 during the reporting period for $21 (nil for 2007-08).
No payments were made under the ‘Defective Administration Scheme’ during the reporting period
(nil for 2007-08).
No payments were made under section 73 of the Public Service Act 1999 during the reporting period
(nil for 2007-08).
No payments were made under ex-gratia programs during the reporting period (nil for 2007-08).
102
Note 16: Revenue before re-measurements administered on behalf of government (a)

2009 2008
$'000 $'000
Note 16A: Interest
Loans to State and Territory governments:
State and Territory debt 318 325
Housing advances 166,348 170,635
Deposits 981,342 1,197,227
Discount securities 138,521 -
Fixed interest securities 161,205 -
Residential mortgage-backed securities 89,230 -
Swaps interest 990,606 1,626,896
Total interest 2,527,570 2,995,083
Note 16B: Other revenue

Securities lending and other revenue 3,328 2,266
Total other revenue 3,328 2,266
Total revenue administered on behalf of government 2,530,898 2,997,349
(a) All revenue is recognised using the effective interest method.
Note 17: Expenses before re-measurements administered on behalf of government (a)

2009 2008
$'000 $'000
Note 17A: Grants
Public Sector:
State and Territory governments 28 30
Total grants 28 30
Note 17B: Interest

Commonwealth Government Securities interest 3,945,064 3,541,938
Swaps interest 1,016,186 1,807,023
Other costs 1,077 2,011
Total interest 4,962,327 5,350,972
Total expenses administered on behalf of government 4,962,355 5,351,002

(a) All expenses are recognised using the effective interest method.
103
Note 18: Administered gains before re-measurements

2009 2008
$'000 $'000
Note 18A: Net foreign exchange gains (losses)
Foreign exchange gains (losses) on foreign currency denominated loans and
securities (1,049) 754
Total net foreign exchange gains (losses) (1,049) 754
Note 18B: Net gains (losses) on sale of financial instruments

Net gains on termination of interest rate swaps 994,675 -
Net gains on sale of fixed interest assets 38,065 -
Net gains on sale of discount securities 1,505 -
Total net gains (losses) on sale of financial instruments(a) 1,034,245 -
Total administered gains before re-measurements 1,033,196 754
(a) Total net gains (losses) on sale of financial instruments represents the total proceeds received or
receivable from the sale or termination, less the amortised cost carrying value using the effective interest
method at the time of sale or termination.
Note 19: Administered re-measurements

2009 2008
$'000 $'000
Commonwealth Government Securities (1,067,433) 276,100
Deposits and discount securities 21 (61)
Fixed interest securities (34,762) -
Residential mortgage-backed securities (136,422) -
Interest rate swaps 1,006,385 (393,687)
Total net market revaluation gains (losses)(a) (232,211) (117,648)
(a) Net market revaluation gains (losses) represents the unrealised fair value gains (losses) on the portfolio
of administered financial assets and financial liabilities. Changes in the carrying value of financial assets
and financial liabilities are attributed between changes in the amortised cost carrying value and other
changes in carrying value. Changes attributable to amortised cost are recognised in revenue before
re-measurements or expenses before re-measurements. Other changes in carrying value (including due
to a change in interest rates) are recognised as administered re-measurements. Where a financial asset
is sold or a financial liability is repurchased during the financial year, the cumulative unrealised market
value gain or loss at the time of the sale is reversed against administered re-measurements. The
revaluation effect will net to zero over the life of a financial instrument, either at maturity or on termination
prior to maturity.
104
Note 20: Assets administered on behalf of government (a)

2009 2008
$'000 $'000
Note 20A: Cash and cash equivalents
Cash at bank 622 622
Total Cash 622 622
Current cash 622 622

Non-current cash - -
Note 20B: Receivables

Loans to State and Territory governments at amortised cost -
principal value 3,172,488 3,263,802
Less:
Balance of special account(b) (546) (447)
Unamortised net discounts (405,314) (426,834)
Total loans to State and Territory governments at amortised cost 2,766,628 2,836,521
Interest rate swaps at fair value through profit or loss 66,763 -
Total receivables 2,833,391 2,836,521
Current receivables 68,533 1,612

Non-current receivables 2,764,858 2,834,909
Receivables maturing:(c)
Within one year 68,533 1,612
In one to five years 24,238 24,374
In more than five years 2,740,620 2,810,535
2,833,391 2,836,521
Receivables are aged as follows:

Not past due 2,833,391 2,836,521
Overdue - -
2,833,391 2,836,521
(a) Where the AOFM applies fair value accounting to a financial asset, the aggregate value of the financial
asset is recorded against a single financial statement class. Where the historic cost accounting
convention is applied, the value of a financial asset is disaggregated and recorded against several
financial statement classes (for example, the principal value of a financial asset is classified separately to
coupons receivable on the asset).
(b) Refer to Note 27F for special account balances.
(c) The maturity profile is based on contractual re-pricing dates.
105
Note 20: Assets administered on behalf of government (continued)

2009 2008
$'000 $'000
Note 20C: Investments (under FMA section 39)
Deposits at fair value through profit or loss 26,515,639 29,098,675
Discount securities at fair value through profit or loss 998,432 -
Residential mortgage-backed securities at fair value through profit -
or loss 5,900,534
Fixed interest securities at fair value through profit or loss 2,071,660 -
Total investments (under FMA section 39)(a) 35,486,265 29,098,675
Current investments 27,807,147 29,098,675

Non-current investments 7,679,118 -
Investments maturing:(b)
Within one year 27,807,147 29,098,675
In one to five years 6,088,231 -
In more than five years 1,590,887 -
35,486,265 29,098,675
Note 20D: Accrued revenue
Accrued interest on loans to State and Territory governments 490 502
Total accrued revenue 490 502
Current accrued revenue 490 502

Non-current accrued revenue - -
Total assets administered on behalf of government 38,320,768 31,936,320

(a) FMA = Financial Management and Accountability Act 1997.
(b) The maturity profile is based on contractual re-pricing dates, with the exception of residential
mortgage-backed securities. For residential mortgage-backed securities the maturity profile is based on
the weighted average life of each investment and disregarding estimated principal repayments prior to
that time.
106
Note 21: Liabilities administered on behalf of government (a)

2009 2008
$'000 $'000
Note 21A: Commonwealth Government Securities
Treasury Bonds at fair value through profit or loss 81,263,880 48,909,581
Treasury Capital Indexed Bonds at fair value through profit or loss 9,468,515 9,461,376
Treasury Notes at fair value through profit or loss 16,555,417 -
Other debt securities at fair value through profit or loss 8,936 11,326
Other debt securities at amortised cost 17,053 17,439
Total Commonwealth Government Securities 107,313,801 58,399,722
Current Commonwealth Government Securities 22,757,977 5,280,569

Non-current Commonwealth Government Securities 84,555,824 53,119,153
Commonwealth Government Securities maturing:(b)

Within one year 22,757,977 5,280,569
In one to five years 43,446,327 28,454,996
In more than five years 41,109,497 24,664,157
107,313,801 58,399,722
Note 21B: Other payables

Interest rate swaps at fair value through profit or loss - 1,040,883
Interest coupons payable on debt at amortised cost 104 105
Total other payables 104 1,040,988
Current other payables 104 48,196

Non-current other payables - 992,792
Other payables maturing:(b)
Within one year 104 48,196
In one to five years - 456,599
In more than five years - 536,193
104 1,040,988
Total liabilities administered on behalf of government 107,313,905 59,440,710

(a) Where the AOFM applies fair value accounting to a financial liability the aggregate value of the financial
liability is recorded against a single financial statement class. Where the historic cost accounting
convention is applied, the value of a financial liability is disaggregated and recorded against several
financial statement classes (for example: the principal value of a financial liability is classified separately
to coupons payable on the liability).
(b) The maturity profile is based on contractual re-pricing dates.
107
Note 22: Administered reconciliation table

2009 2008
$'000 $'000
Administered reconciliation table
Opening administered assets less administered liabilities
as at 1 July (27,504,390) (33,854,520)
Plus: Administered revenue (before re-measurements) 2,530,898 2,997,349
Administered gains (before re-measurements) 1,033,196 754
Less: Administered expenses (before re-measurements) (4,962,355) (5,351,002)
Administered transfers (to) from Australian Government:
Special appropriations (unlimited) 405,936,516 325,334,033
Transfers to OPA (445,794,692) (316,513,331)
Net market revaluation gains (losses) (232,211) (117,648)
Change in special account balance (99) (25)
Closing administered assets less administered liabilities
as at 30 June (68,993,137) (27,504,390)
Note 23: Administered contingent liabilities and assets

Unquantifiable contingencies
The AOFM is not aware of any unquantifiable contingencies as of the signing date that
require disclosure in the financial statements.
Remote contingencies
(i) The government has indemnified agents of foreign currency denominated loans
issued by the Australian Government outside Australia against any loss, liability, costs,
claims, charges, expenses, actions, or demands due to any misrepresentation by the
Australian Government and any breach of warranties. The AOFM is not aware of any event
that has occurred that may trigger action under the indemnities.
(ii) In the unlikely event of default by a borrower of Treasury Bonds under the securities
lending facility, the AOFM would be in a position to sell the securities pledged by the
borrower to offset the increased liability to the government. As at 30 June 2009 there were no
open transactions under the AOFM’s securities lending facility (nil as at 30 June 2008).
108
Note 24: Administered financial instruments

Note 24A: Categories of administered financial assets and liabilities
Under Australian Accounting Standards a financial instrument must be measured at fair value
on initial recognition. After initial recognition the accounting treatment for a financial
instrument is dependent on the category under which the financial instrument is classified. The
following table illustrates AOFM’s financial instruments by category:
2009 2008
$'000 $'000
Administered financial assets
Cash 622 622
Loans and receivables (at amortised cost)
Loans to State and Territory governments 2,767,118 2,837,023
Fair value through profit or loss (required by AASB 139)
Interest rate swaps 66,763 -
Fair value through profit or loss (designated by the AOFM)
Investments 35,486,265 29,098,675
Carrying amount of financial assets 38,320,768 31,936,320
Administered financial liabilities

Other financial liabilties (at amortised cost)
Debt on allocation to States and Northern Territory and overdues 17,157 17,544
Fair value through profit or loss (required by AASB 139)
Interest rate swaps - 1,040,883
Fair value through profit or loss (designated by the AOFM)
Commonwealth Government Securities, excluding debt on
allocation to the States and Northern Territory and overdues 107,296,748 58,382,283
Carrying amount of financial liabilities 107,313,905 59,440,710
Net assets (68,993,137) (27,504,390)
109
Note 24: Administered financial instruments (continued)

Note 24B: Interest rate swaps
Under the interest rate risk management framework which applied before 2008-09 for the
purposes of managing the cost and interest rate risk associated with the debt portfolio, the
AOFM entered into domestic interest rate swap contracts under which it is obliged to receive
and pay interest at fixed and/or floating interest rates. These swaps are not held for trading
purposes, nor are they designated for hedge accounting. No new swaps have been executed
since November 2007 and the AOFM is running down its portfolio.
The following table outlines the notional principal amount of swaps outstanding as at 30 June
2009. The notional principal amounts are not exchanged and act as a reference upon which
interest payments can be calculated.
2009 2008
$'000 $'000
INTEREST RATE SWAPS
Notional principal amounts
Pay — fixed swaps - 1,300,000
Receive — fixed swaps 2,425,000 21,850,000
2,425,000 23,150,000
Notional principal maturing:
Within one year 2,425,000 5,575,000
In one to five years - 11,225,000
In more than five years - 6,350,000
2,425,000 23,150,000
The following table contains details of swap terminations and maturities during 2008-09,
together with net proceeds received by the AOFM on termination of agreements.
2009 2008
$'000 $'000
INTEREST RATE SWAPS
Notional principal amounts
Opening balance 23,150,000 29,260,000
New swap transactions - 300,000
Matured (5,375,000) (6,410,000)
Terminated prior to maturity, maturing:
In current year (200,000) -
Within one year (300,000) -
In one to five years (10,750,000) -
In more than five years (4,100,000) -
Closing balance 2,425,000 23,150,000
Net receipts from termination
Proceeds from counterparties on termination 1,031,292 -
Payments to counterparties on termination - -
1,031,292 -
110

Note 24B: Interest rate swaps (continued)
During the year the AOFM made collateral calls on several interest rate swap counterparties
when the value of the swaps moved in its favour beyond a specified level. Collateral was posted
by the swap counterparties in the form of Australian dollars. The AOFM paid interest on these
funds at the actual overnight cash rate. Total interest paid by the AOFM for 2008-09 on collateral
held was $342,851 (2007-08: nil). With the termination of swaps with the relevant counterparties,
the exposures were subsequently restored to within acceptable limits and the funds were
returned.
Collateral transactions undertaken with interest 2009 2008

rate swap counterparties $'000 $'000
Opening balance of collateral held - -
Collateral received by the AOFM 101,000 -
Collateral returned by the AOFM 101,000 -
Closing balance of collateral held - -
111
112
Note 24C: Interest rate risk
The AOFM’s exposure to interest rate risk and corresponding weighted average effective interest rates as at 30 June 2009 for each class of financial assets and financial
liabilities is set out below. The maturity profile is based on contractual re-pricing dates except for residential mortgage-backed securities in which the maturity profile is
based on the weighted average life of each issue. Those financial instruments with a fixed interest rate expose the net debt portfolio to changes in fair value with
changes in interest rates, whilst those financial instruments at floating interest rates expose the net debt portfolio to changes in debt servicing costs with changes in
interest rates. The extent to which the AOFM can match the re-pricing profile of its physical assets with those of its physical liabilities is limited by the differences in the
volumes and the need for assets to be available for cash management or other purposes.
2009 Fixed Floating Non Maturing in Weighted

interest interest interest 1 year 1 to 5 5 years average
By instrument rate rate bearing or less years or more Total interest(b)
As at 30 June 2009 $'000 $'000 $'000 $'000 $'000 $'000 $'000 %
Financial assets
Cash at bank - - 622 622 - - 622 -
Interest rate swaps(a) 124,795 - - 124,795 - - 124,795 6.80
Loans to State and Territory
governments 2,767,114 - 4 2,260 24,238 2,740,620 2,767,118 5.88
Deposits 26,515,639 - - 26,515,639 - - 26,515,639 3.00
Discount securities 998,432 - - 998,432 - - 998,432 3.21
Fixed interest securities 2,071,660 - - - 480,773 1,590,887 2,071,660 5.54
Residential mortgage-backed
securities - 5,900,534 - 293,076 5,607,458 - 5,900,534 4.60
Total financial assets 32,477,640 5,900,534 626 27,934,824 6,112,469 4,331,507 38,378,800
Financial liabilities
Interest rate swaps(a) - 58,032 - 58,032 - - 58,032 3.05
Treasury Bonds 81,263,880 - - 6,195,999 41,141,393 33,926,488 81,263,880 5.21
Treasury Capital Indexed
Bonds 9,468,515 - - - 2,304,934 7,163,581 9,468,515 4.22
Treasury Notes 16,555,417 - - 16,555,417 - - 16,555,417 2.93
Other 19,532 - 6,561 6,665 - 19,428 26,093 3.66
Total financial liabilities 107,307,344 58,032 6,561 22,816,113 43,446,327 41,109,497 107,371,937
Net assets (74,829,704) 5,842,502 (5,935) 5,118,711 (37,333,858) (36,777,990) (68,993,137)

(a) Amounts are represented on a gross basis. This differs from the presentation in the Schedules of Assets and Liabilities Administered on Behalf of Government,
where amounts are on a net basis.
(b) Interest rates are nominal interest rates with exception to Treasury Capital Indexed Bonds (which are real interest rates).
Note 24C: Interest rate risk (continued)
By portfolio rate rate bearing or less years or more Total interest
As at 30 June 2009 $'000 $'000 $'000 $'000 $'000 $'000 $'000 %
Long term debt portfolio
Financial assets 2,206,505 - 4 124,903 480,773 1,600,833 2,206,509 6.22
Financial liabilities (90,751,926) (58,032) (6,561) (6,260,695) (43,446,327) (41,109,497) (90,816,519) (a)
Net assets (88,545,421) (58,032) (6,557) (6,135,792) (42,965,554) (39,508,664) (88,610,010)
Cash management portfolio
Financial assets 27,514,070 - 622 27,514,692 - - 27,514,692 3.00
Financial liabilities (16,555,417) - - (16,555,417) - - (16,555,417) 2.93
Net assets 10,958,653 - 622 10,959,275 - - 10,959,275
securities
Financial assets - 5,900,534 - 293,076 5,607,458 - 5,900,534 4.60
Financial liabilities - - - - - - - -
Net assets - 5,900,534 - 293,076 5,607,458 - 5,900,534
State and territory government

housing advances
Financial assets 2,757,064 - - 2,152 24,238 2,730,674 2,757,064 5.89

Net assets 2,757,064 - - 2,152 24,238 2,730,674 2,757,064
Total net assets (74,829,704) 5,842,502 (5,935) 5,118,711 (37,333,858) (36,777,990) (68,993,137)
(a) Financial liabilities in the long term debt portfolio comprise debt instruments that incur a nominal interest rate and debt instruments that incur a real interest rate. As
at 30 June 2009, the weighted average interest rate of debt instruments at nominal interest rates is 5.15 per cent and the weighted average interest rate of debt
instruments at real interest rates is 4.22 per cent.
113
114
By instrument rate rate bearing or less years or more Total interest(b)
As at 30 June 2008 $'000 $'000 $'000 $'000 $'000 $'000 $'000 %
Financial assets
Cash at bank - - 622 622 - - 622 -

Interest rate swaps(a) 4,222,801 58,701 - 245,763 1,992,664 2,043,075 4,281,502 6.33
Loans to state and territory
governments 2,837,019 - 4 2,114 24,374 2,810,535 2,837,023 5.88
Deposits 29,098,675 - - 29,098,675 - - 29,098,675 7.26
Total financial assets 36,158,495 58,701 626 29,347,174 2,017,038 4,853,610 36,217,822
Interest rate swaps (a) 41,417 5,280,968 - 293,854 2,449,263 2,579,268 5,322,385 7.75
Treasury Bonds 48,909,581 - - 5,269,521 26,222,924 17,417,136 48,909,581 6.04
Bonds 9,461,376 - - - 2,232,072 7,229,304 9,461,376 4.22
Treasury Notes - - - - - - - -
Other 21,976 - 6,894 11,153 - 17,717 28,870 4.00
Total financial liabilities 58,434,350 5,280,968 6,894 5,574,528 30,904,259 27,243,425 63,722,212
Net assets (22,275,855) (5,222,267) (6,268) 23,772,646 (28,887,221) (22,389,815) (27,504,390)
(a) Amounts are represented on a gross basis. This differs from the presentation in the Schedules of Assets and Liabilities Administered on Behalf of Government,
where amounts are on a net basis.
(b) Interest rates are nominal interest rates with exception to Treasury Capital Indexed Bonds (which are real interest rates).
By portfolio rate rate bearing or less years or more Total interest
As at 30 June 2008 $'000 $'000 $'000 $'000 $'000 $'000 $'000 %
Long term debt
Financial assets 4,233,005 58,701 4 245,872 1,992,664 2,053,174 4,291,710 6.33
Financial liabilities (58,434,350) (5,280,968) (6,894) (5,574,528) (30,904,259) (27,243,425) (63,722,212) (a)
Net assets (54,201,345) (5,222,267) (6,890) (5,328,656) (28,911,595) (25,190,251) (59,430,502)
Cash management
Financial assets 29,098,675 - 622 29,099,297 - - 29,099,297 7.26
Net assets 29,098,675 - 622 29,099,297 - - 29,099,297
State and territory government

housing advances
Financial assets 2,826,815 - - 2,005 24,374 2,800,436 2,826,815 5.89

Net assets 2,826,815 - - 2,005 24,374 2,800,436 2,826,815
Net assets (22,275,855) (5,222,267) (6,268) 23,772,646 (28,887,221) (22,389,815) (27,504,390)
(a) Financial liabilities in the long term debt portfolio comprise debt instruments that incur a nominal interest rate and debt instruments that incur a real interest rate. As
at 30 June 2008, the weighted average interest rate of debt instruments at nominal interest rates is 6.58 per cent and the weighted average interest rate of debt
instruments at real interest rates is 4.22 per cent.
115

Note 24D: Foreign exchange risk
Foreign exchange risk arises from debt the AOFM holds in foreign denominated currencies and
represents the risk to debt servicing costs and the value of the net debt portfolio caused by a
change in foreign exchange rates. Currently the AOFM’s foreign exchange risk arises from
contractual obligations on foreign currency loans and securities. The AOFM’s exposure to
foreign exchange risk is not material.
The Australian equivalent principal value of foreign currency loans and securities is disclosed in
the following table:
2009 2008
AUD $'000 AUD $'000
FOREIGN CURRENCY DENOMINATED LIABILITIES
Current
Pounds sterling 109 110
Japanese yen 5 4
Swiss francs 58 52
Deutsche marks 10 9
182 175
Non-current
United States dollars 6,558 5,528
Pounds sterling 1,031 1,040
7,589 6,568
Total foreign currency denominated liabilities 7,771 6,743
FOREIGN CURRENCY DENOMINATED ASSETS
Current
Pounds sterling 4 4
4 4
Non-current
Pounds sterling 1,031 1,040
1,031 1,040
Total foreign currency denominated assets 1,035 1,044
116
Note 24E: Residential mortgage-backed securities
The AOFM has acquired a portfolio of AAA rated (or equivalent) residential mortgage-backed securities with a face value of $6,203.420 million
(under a total program limit of $8,000 million). As at the end of the financial year the principal outstanding was $6,024.139 million. Details of
residential mortgage-backed securities acquired by the AOFM since the government announced this initiative in September 2008 are contained in the
following table:
Original Amount
Originator Issue amount Principal invested as at
invested repayments 30-Jun-09 Acquisition date Legal maturity date
Authorised deposit taking $'000 $'000 $'000
institutions
AMP Progress 2009-1 Trust 425,000 - 425,000 30 March 2009 28 July 2039
Bank of Queensland Reds Trust Series 2009-1 500,000 - 500,000 21 April 2009 21 April 2040
Bendigo and Adelaide Bank Torrens Series 2009-1 475,000 - 475,000 18 March 2009 17 April 2040
Credit Union Australia Harvey Trust 2009-1 350,000 - 350,000 26 March 2009 12 May 2040
Members Equity Bank SMHL Securitisation Fund 2008-2 500,000 45,438 454,562 9 December 2008 9 November 2041
Members Equity Bank SMHL Securitisation Fund 2009-1 500,000 - 500,000 14 May 2009 28 September 2041
2,750,000 45,438 2,704,562
Other institutions
Challenger Challenger Millenium Series 2008-2 500,000 38,564 461,436 12 December 2008 7 November 2039
Challenger Challenger Millenium Series 2009-1 500,000 - 500,000 24 April 2009 20 April 2040
Firstmac Firstmac Series 2-2008 496,000 35,080 460,920 21 November 2008 12 November 2039
Firstmac Firstmac Series 1-2009 498,620 - 498,620 5 June 2009 16 June 2040
Liberty Financial Liberty Prime Series 2009-1 500,000 30,807 469,193 20 April 2009 15 April 2040
Resimac Resimac Premier Series 2008-1 500,000 29,392 470,608 15 December 2008 15 December 2039
Resimac Resimac Premier Series 2009-1 458,800 - 458,800 28 May 2009 8 June 2040
3,453,420 133,843 3,319,577
Total 6,203,420 179,281 6,024,139
117
118
Note 24F: Credit risk
The AOFM’s assets are of strong credit quality. Over the reporting period the AOFM limited its financial investments to term deposits with the RBA
and investment grade money market securities. In addition, its loans comprise advances and debt on allocation to the State and Territory
governments.
The AOFM has an exposure to financial institutions in relation to its swap contracts. This risk is mitigated by the swap counterparties being reputable
financial institutions and the ability for the AOFM to obtain collateral against its main counterparties.
The AOFM’s exposure to credit risk under the securities lending facility is zero.
The following tables set out the AOFM’s credit risk by asset class and long term credit rating as at 30 June 2008 and 30 June 2009.
2009
S&P or Fitch long-term rating(a) AAA AA+ AA AA- A+ A A- Total
Moody’s long-term rating(a) Aaa Aa1 Aa2 Aa3 A1 A2 A3
$’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000
By instrument
Cash held with the RBA(b) 622 - - - - - - 622
governments 2,121,085 710,696 - - - - - 2,831,781
Deposits with the RBA(b) 26,515,639 - - - - - - 26,515,639
Discount securities - - 628,894 369,538 - - - 998,432
securities 5,900,534 - - - - - - 5,900,534
Fixed interest securities 1,243,132 828,528 - - - - - 2,071,660
Interest rate swaps - - 11,232 15,883 27,474 7,826 4,348 66,763
35,781,012 1,539,224 640,126 385,421 27,474 7,826 4,348 38,385,431
(a) Where a counterparty has a split rating, the AOFM’s exposure to the counterparty is allocated to the lower credit rating.
(b) The RBA does not issue debt in the wholesale market and accordingly does not have a credit rating. However, as Australia’s central bank it is deemed to have the
same credit rating as the Australian Government.
Note 24F: Credit risk (continued)
2009
$’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000
By portfolio
Long term debt 1,253,732 828,528 11,232 15,883 27,474 7,826 4,348 2,149,023
Cash management 26,516,261 - 628,894 369,538 - - - 27,514,693
Residential mortgage-backed securities 5,900,534 - - - - - - 5,900,534
State and Territory government housing
advances 2,110,485 710,696 - - - - - 2,821,181
Total 35,781,012 1,539,224 640,126 385,421 27,474 7,826 4,348 38,385,431
119
120
Note 24F: Credit risk (continued)
2008
$’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000
By instrument
Cash held with the RBA(b) 622 - - - - - - 622
governments 2,326,621 339,172 - - - - - 2,665,793
Investments with the RBA(b) 29,098,675 - - - - - - 29,098,675
Interest rate swaps - - - - - - - -
31,425,918 339,172 - - - - - 31,765,090
(b) The RBA does not issue debt in the wholesale market and accordingly does not have a credit rating. However, as Australia’s central bank it is deemed to have the
same rating as the Australian Government.
2008
$’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000
By portfolio
Long term debt 10,655 - - - - - - 10,655
Cash management 29,099,297 - - - - - - 29,099,297
Residential mortgage-backed securities - - - - - - - -
State and Territory government housing
advances 2,315,966 339,172 - - - - - 2,655,138
Total 31,425,918 339,172 - - - - - 31,765,090

Note 24G: Net fair values of administered financial assets and liabilities
2009 Principal Total Aggregate
value(a) carrying net fair
By instrument as at 30 June 2009 amount value
$'000 $'000 $'000
Administered financial assets (recognised)
Cash 622 622 622
Loans to State and Territory governments(b) 3,171,942 2,767,118 2,831,235
Deposits 26,500,000 26,515,639 26,515,639
Discount securities 1,000,000 998,432 998,432
Fixed interest securities 2,024,000 2,071,660 2,071,660
Residential mortgage-backed securities 6,024,139 5,900,534 5,900,534
Interest rate swaps - 66,763 66,763
Total financial assets (recognised)
38,720,703 38,320,768 38,384,885
Administered financial liabilities (recognised)

Treasury Bonds 78,403,136 81,263,880 81,263,880
Treasury Capital Indexed Bonds 8,891,967 9,468,515 9,468,515
Treasury Notes 16,700,000 16,555,417 16,555,417
Other 23,612 26,093 26,093
Total financial liabilities
(recognised) 104,018,715 107,313,905 107,313,905
Net financial assets (recognised) (65,298,012) (68,993,137) (68,929,020)
(a) Comprises the face value of financial instruments, with the exception of Treasury Capital Indexed Bonds
where the inflation adjusted capital value at the end of the financial year is included in the principal
figure. An estimate of the redemption value on maturity is not provided for Treasury Capital Indexed
Bonds. For all other financial liabilities the principal value represents the amount due on maturity.
(b) Loans to State and Territory governments are recognised at amortised cost in the Schedule of Assets
Administered on Behalf of Government. These transactions are not traded and, especially for those with
the longest terms to maturity, a direct market benchmark to underpin fair value measurement does not
exist. In estimating aggregate net fair value, the AOFM based its valuation from data on Treasury Bonds.
121

Note 24G: Net fair values of administered financial assets and liabilities (continued)
value carrying net fair
By portfolio as at 30 June 2009 amount value
$'000 $'000 $'000
Long term debt
Financial assets 2,033,950 2,148,477 2,148,477
Financial liabilities (87,318,715) (90,758,488) (90,758,488)
Net assets (85,284,765) (88,610,011) (88,610,011)
Cash management
Net assets 10,800,622 10,959,276 10,959,276
Financial liabilities - - -
Net assets 6,024,139 5,900,534 5,900,534
State and territory government housing
advances
Net assets 3,161,992 2,757,064 2,821,181
122

Note 24G: Net fair values of administered financial assets and liabilities (continued)
value(a) carrying net fair
By instrument as at 30 June 2008 amount value
$'000 $'000 $'000
Administered financial assets (recognised)
Cash 622 622 622
Loans to State and Territory governments(b) 3,263,355 2,837,023 2,665,346
Deposits 29,050,000 29,098,675 29,098,675
Total financial assets
(recognised) 32,313,977 31,936,320 31,764,643
Administered financial liabilities (recognised)

Treasury Bonds 49,395,141 48,909,581 48,909,581
Treasury Capital Indexed Bonds 8,624,263 9,461,376 9,461,376
Other 26,968 28,870 28,870
Interest rate swaps - 1,040,883 1,040,883
Total financial liabilities (recognised) 58,046,372 59,440,710 59,440,710
(a) Comprises the face value of financial instruments, with the exception of Treasury Capital Indexed Bonds
where the inflation adjusted capital value at the end of the financial year is included in the principal
figure. An estimate of the redemption value on maturity is not provided for Treasury Capital Indexed
Bonds. For all other financial liabilities the principal value represents the amount due on maturity.
(b) Loans to State and Territory governments are recognised at amortised cost in the Schedule of Assets
Administered on Behalf of Government. These transactions are not traded and, especially for those with
the longest term to maturity, a direct market benchmark to underpin fair value measurement does not
exist. In estimating aggregate net fair value, the AOFM based its valuation from data on Treasury Bonds.
2008 Principal value Total carrying Aggregate

amount net fair value
By portfolio as at 30 June 2008 $'000 $'000 $'000
Long term debt
Financial assets 10,103 10,208 10,208
Net assets (58,036,269) (59,430,502) (59,430,502)
Cash management
Net assets 29,050,622 29,099,297 29,099,297
Financial assets - - -
Net assets - - -
State and territory government housing
advances
Net assets 3,253,252 2,826,815 2,655,138
123

Note 24H: Contractual maturities of financial liabilities
The following table discloses the undiscounted value of the contractual maturities of financial
liabilities as at the end of the financial year, including estimated future interest payments.
2009
Contractual maturities 1 year or less 1 to 2 years 2 to 5 years >5 years Total
$’000 $’000 $’000 $’000 $’000
Treasury Bonds 10,433,541 21,401,748 30,061,773 40,437,284 102,334,346

Bonds(a) 355,679 2,540,732 796,720 7,664,308 11,357,439
Treasury Notes 16,700,000 - - - 16,700,000
Other debt securities(b) 549 549 1,648 8,205 10,951
27,489,769 23,943,029 30,860,141 48,109,797 130,402,736

(a) The interest payments and principal value are indexed against the (all groups) Australian Consumer
Price Index (CPI). There is a six month lag between the calculation period for the CPI and its impact on
the value of interest and principal. Interest payments and principal value on redemption are projected at
the CPI for the March quarter and held constant thereafter.
(b) Perpetual debt and overdue debt has been excluded from this analysis.
2008
Contractual maturities 1 year or less 1 to 2 years 2 to 5 years >5 years Total
$’000 $’000 $’000 $’000 $’000
Treasury Bonds 7,987,582 8,165,674 25,718,455 22,768,407 64,640,118

Bonds(a) 344,971 344,971 2,979,405 7,691,130 11,360,477
Other debt securities(b) 4,628 463 1,389 7,380 13,860
Interest rate swaps(c) 298,564 264,264 606,104 230,486 1,399,418
8,635,745 8,775,372 29,305,353 30,697,403 77,413,873

(a) The interest payments and principal value are indexed against the (all groups) Australian Consumer
Price Index (CPI). There is a six month lag between the calculation period for the CPI and its impact on
the value of interest and principal. Interest payments and principal value on redemption are projected at
the CPI for the March quarter and held constant thereafter.
(b) Perpetual debt and overdue debt has been excluded from this analysis.
(c) Interest flows on swaps are disclosed on a net basis and floating interest rates are projected at the
relevant reference rate as at the end of the financial year from the first reset in 2008-09 and held
constant thereafter.
124

Note 24I: Movement in Commonwealth Government Securities on issue (face value)
2009 Maturities/
Reconciliation of the Opening Issuance Redemptions Other Closing
opening and closing balance balance
balance of CGS $'000 $'000 $'000 $'000 $'000
Treasury Bonds 49,395,141 34,102,000 (5,094,005) - 78,403,136

Bonds(a) 6,020,000 - - - 6,020,000
Treasury Notes - 18,700,000 (2,000,000) - 16,700,000
Other(b) 26,968 - (4,384) 1,028 23,612
Total Commonwealth
Government Securities 55,442,109 52,802,000 (7,098,389) 1,028 101,146,748
(a) The inflation adjusted capital accretion for Treasury Capital Indexed Bonds is excluded from these
amounts.
(b) This includes foreign currency denominated amounts. Changes in value due to foreign currency
translation are shown in the ‘Other’ column. The foreign currency denominated face value is restated into
Australian dollars for the opening and closing values using end of year exchange rates.
2008 Maturities/
Reconciliation of the Opening Issuance Redemptions Other Closing
opening and closing balance balance
balance of CGS $'000 $'000 $'000 $'000 $'000
Treasury Bonds 47,199,443 5,102,000 (2,906,302) - 49,395,141

Bonds(a) 6,020,000 - - - 6,020,000
Treasury Notes - - - - -
Other(b) 44,533 - (16,666) (899) 26,968
Total Commonwealth
Government Securities 53,263,976 5,102,000 (2,922,968) (899) 55,442,109
(a) The inflation adjusted capital accretion for Treasury Capital Indexed Bonds is excluded from these
amounts.
(b) This includes foreign currency denominated amounts. Changes in value due to foreign currency
translation are shown in the ‘Other’ column. The foreign currency denominated face value is restated into
Australian dollars for the opening and closing values using end of year exchange rates.
125

Note 24J: Movement in investments held (face value)
2009 Maturities/
Opening Acquisitions Redemptions Closing
Reconciliation of the opening and balance balance
closing balance of investments $'000 $'000 $'000 $'000
Term deposits with the RBA 29,050,000 372,800,000 (375,350,000) 26,500,000

Fixed interest securities - 5,174,000 (3,150,000) 2,024,000
Discount securities - 12,648,000 (11,648,000) 1,000,000
securities - 6,203,420 (179,281) 6,024,139
Total investments 29,050,000 396,825,420 (390,327,281) 35,548,139
2008 Maturities/
Reconciliation of the opening and Opening Acquisitions Redemptions Closing
closing balance of investments balance balance
$'000 $'000 $'000 $'000
Term deposits with the RBA 20,350,000 318,750,000 (310,050,000) 29,050,000
Fixed interest securities - - - -
Discount securities - - - -
securities - - - -
Total investments 20,350,000 318,750,000 (310,050,000) 29,050,000
126
Note 25: Market risk sensitivity of administered financial instruments

AASB 7 Financial Instruments: Disclosures requires each entity with financial instruments to
present a market risk sensitivity analysis for each type of market risk exposure arising from
financial instruments held. Market risk represents the risk that the fair value or future cash flows
of a financial instrument will fluctuate due to changes in market prices.
The main types of market risk the AOFM’s portfolio of debt and financial assets is exposed to are
domestic interest rate risk and domestic inflation risk. Moreover, by generally issuing/buying and
holding to maturity (and with portfolio restructuring a rarity), the market risk most relevant to
the AOFM is the risk of fluctuations to future principal amounts and future interest cash flows
arising from changes in interest rates and inflation. The risk of fluctuations in the fair value of
AOFM’s net debt portfolio is of a secondary order.
Accordingly, the AOFM has focused its market risk sensitivity analysis on an accruals (or
amortised cost) basis of accounting under the historic cost accounting convention, as it provides
the best predictive value of future cash flows (and hence costs and returns) arising from the
AOFM’s portfolio of debt and financial assets.
(a) Interest rate risk sensitivity analysis

Changes in domestic interest rates will impact on debt servicing costs of AOFM’s Treasury
Bonds and Treasury Notes when the AOFM enters the primary market to raise new borrowings
or refinance maturing debt. When the AOFM borrows to repay maturing debt, there is a risk that
debt servicing costs will change due to the interest rate on the new debt being higher or lower
than the interest rate on the maturing debt. Furthermore, when AOFM enters the market to raise
new borrowings the interest cost locked-in will be dependent on the absolute level of market
interest rates at that time. In a rising (falling) interest rate market, debt servicing costs will rise
(fall) each time the primary market is accessed to raise borrowings. Changes in interest rates
have no impact on future cash flows on principal amounts.
Australian dollar interest rate swaps, which comprise the AOFM receiving a fixed interest rate
and paying a floating interest rate (or vice-versa), subject the portfolio to fluctuations in future
net cash flows at the time each floating rate leg is reset against the relevant reference market
interest rate. When interest rates rise (fall), net swap interest revenue will fall (rise).
For a period during the 2008-09 financial year the proceeds of debt issuance over and above
what was required to meet maturing debt obligations were invested in fixed interest assets to
offset the cost and risk of the additional issuance. Since the release of the Updated Economic and
Fiscal Outlook in February 2009, and the need to finance projected budget deficits, the assets are
being liquidated as opportunities arise. When these investments mature or are sold they will not
be re-invested, and accordingly there is no reinvestment risk. However, changes in interest rates
will have an impact on the value of proceeds realised on their sale, and as a result the yield
earned on them.
127
Note 25: Market risk sensitivity of administered financial instruments (continued)

Australian dollar denominated residential mortgage-backed security investments held by the
AOFM comprise the AOFM receiving interest at a floating interest rate plus a fixed margin set at
the time the investment is acquired. When interest rates rise (fall), investment return will also
rise (fall).
As the manager of the government’s liquidity, the AOFM holds a fluctuating portfolio of
Australian dollar short term deposits and discount securities. These investments have fixed
interest rates and given their use for cash management purposes they have very short terms to
maturity (generally no more than a few months). When these investments mature and are
re-invested at the prevailing market interest rate, the return may change due to re-investment at
a higher or lower interest rates. Changes in interest rates have no impact on future cash flows on
principal amounts.
Under previous Commonwealth-State financing arrangements the Commonwealth made

concessional Australian dollar loans to the States and the Northern Territory. These loans are of
a fixed interest credit foncier nature. Changes in market interest rates will not cause a fluctuation
on future cash flows of interest or principal.
At 1 July 2009, if domestic interest rates had experienced an immediate 100 basis point parallel
upward (downward) movement across the yield curve, and if that change were to persist for the
12 months to 30 June 2010, with all other variables held constant, the effect on AOFM’s operating
result before re-measurements (calculated on an accruals basis) and equity position for the year
ended 30 June 2010 would be as follows:
128

Operating result sensitivity to changes in domestic interest rates
(calculated on an accruals basis)
2009
Change in interest rates -1% +1%
from 1 July 2009 for 12
months to 30 June 2010 Carrying Impact in Impact in Impact in Impact in
amount as at 2009-10 on 2009-10 on 2009-10 on 2009-10 on
30 June 2009 profit equity profit equity
$'000 $'000 $'000 $'000 $'000
Financial assets
Cash 622 - - - -
governments 2,767,118 - - - -
Term deposit investments 26,515,639 (257,401) (257,401) 257,401 257,401
Discount security investments 998,432 - - - -
security investments 5,900,534 (68,986) (68,986) 68,986 68,986
Fixed interest security
investments 2,071,660 - - - -
Interest rate swaps 66,763 6,722 6,722 (6,722) (6,722)
Treasury Bonds 81,263,880 232,656 232,656 (211,137) (211,137)
Treasury Capital Indexed Bonds 9,468,515 - - - -
Treasury Notes 16,555,417 121,459 121,459 (121,459) (121,459)
Other debt 26,093 - - - -
Total increase (decrease)
in accrual result
(before re-measurements) 34,450 34,450 (12,931) (12,931)
129

The corresponding figures for the previous 12 months are as follows:
Operating result sensitivity to changes in domestic interest rates

(calculated on an accruals basis)
2008
Change in interest rates -1% +1%
from 1 July 2008 for 12
$'000 $'000 $'000 $'000 $'000
Financial assets
Cash 622 - - - -
governments 2,837,023 - - - -
Term deposit investments 29,098,675 (281,562) (281,562) 281,562 281,562
Treasury Bonds 48,909,581 15,188 15,188 (12,835) (12,835)
Treasury Capital Indexed Bonds 9,461,376 - - - -
Other debt 28,870 - - - -
Interest rate swaps 1,040,883 146,551 146,551 (146,551) (146,551)
in accrual result
(before re-measurements) (119,823) (119,823) 122,176 122,176
(b) Inflation risk sensitivity analysis

The AOFM currently has three series of Treasury Capital Indexed Bonds on issue. These
instruments have their principal value indexed against the (all Groups) Australian Consumer
Price Index (CPI). The interest is a fixed rate of interest payable on the accreted principal value.
Accordingly they expose the AOFM to cash flow risk on interest payments and the value of
principal payable on maturity. There is a six month lag between the calculation period for the
CPI and its impact on the value of interest and principal. As the CPI increases, debt servicing
costs and the principal payable on maturity will also rise.
130

At 1 July 2009, if the CPI were to experience an immediate 1 per cent increase (decrease) and that
change were to persist for 12 months to 30 June 2010, with all other variables held constant, the
effect on the AOFM’s operating result before re-measurements (calculated on an accruals basis)
and equity position for the year ended 30 June 2010 would be as follows:
Operating result sensitivity to changes in the consumer price index (calculated on an accruals basis)
2009
Change in consumer price -1% +1%
index from 1 July 2009 for 12
$'000 $'000 $'000 $'000 $'000
Financial assets
Cash 622 - - - -
governments 2,767,118 - - - -
Term deposit investments 26,515,639 - - - -
Discount security investments 998,432 - - - -
security investments 5,900,534 - - - -
Fixed interest security
investments 2,071,660 - - - -
Interest rate swaps 66,763 - - - -
Treasury Bonds 81,263,880 - - - -
Treasury Capital Indexed Bonds 9,468,515 92,306 92,306 (92,176) (92,176)
Treasury Notes 16,555,417 - - - -
Other debt 26,093 - - - -
in accrual result
131

The corresponding figures for the previous 12 months are as follows:
Sensitivity to changes in the consumer price index (calculated on an accruals basis)

2008
Change in consumer price -1% +1%
index from 1 July 2008 for 12
$'000 $'000 $'000 $'000 $'000
Financial assets
Cash 622 - - - -
governments 2,837,023 - - - -
Term deposit investments 29,098,675 - - - -
Treasury Bonds 48,909,581 - - - -
Treasury Capital Indexed Bonds 9,461,376 90,067 90,067 (91,869) (91,869)
Other debt 28,870 - - - -
Interest rate swaps 1,040,883 - - - -
in accrual result
(c) Assumptions and methods used

Interest rate risk sensitivity has been measured assuming that for the next 12 months domestic
interest rates are 100 basis points higher and lower across the entire yield curve than those
observed as at year end. The analysis was performed as follows:
• the sensitivity of debt servicing costs for the next 12 months on Treasury Bonds
comprised a comparison of:
– debt servicing costs on the planned issuance program to refinance maturing debt
and to raise new borrowings for the next 12 months at the observed or estimated
market yield for the relevant line of stock as at year end; and
– debt servicing costs on the planned issuance program to refinance maturing debt
and to raise new borrowings for the next 12 months at yields that are 100 basis
points higher and lower than the observed or estimated market yield for the
relevant line of stock as at year end;
• the sensitivity of debt serving costs for the next 12 months on Treasury Notes
comprised a comparison of:
132

– debt servicing costs on Treasury Notes held at the end of the financial year for the
full 12 months at the observed 3-month Treasury Note rate as at year end; and
– debt servicing costs on Treasury Notes held at the end of the financial year for the
full 12 months at yields 100 basis points higher and lower than the observed
3-month Treasury Note rate as at year end. The 100 basis point shift is applied
from the date the positions held as at 30 June 2009 mature and is held constant at
that level thereafter;
• the sensitivity of returns for the next 12 months on interest rate swaps comprised a
comparison of:
– the return on each floating rate leg at the relevant reference market interest rate
(being either the 3-month or 6-month BBSW rate) as at year end; and
– the return on each floating rate leg at a yield that is 100 basis points higher and
lower than the relevant reference market interest rate as at year end. The 100 basis
point shift is applied from the date of the first rate re-set for the next financial year
for each floating rate leg and is held constant at that level thereafter;
• the sensitivity of returns for the next 12 months on residential mortgage-backed

securities comprised a comparison of:
– the return at the relevant reference market interest rate (being the 1-month BBSW
rate plus specific fixed margin set for each deal at the time of acquisition); and
– the return at a yield that is 100 basis points higher and lower than the relevant
reference market interest rate as at year end plus the fixed margin for each deal.
The 100 basis point shift is applied from the date of the first rate re-set for the next
financial year and is held constant at that level thereafter;
• the sensitivity of returns for the next 12 months on term deposits comprised a
comparison of:
– the return on term deposits held at end of the financial year for the full 12 months
at the relevant reference market interest rate (being the 1-month Overnight
Indexed Swap (OIS) rate) as at year end; and
– the return on term deposits held at the end of the financial year for the full
12 months at a yield that is 100 basis points higher and lower than the 1-month
OIS rate as at year end. The 100 basis point shift is applied from the date of the
first re-investment and is held constant at that level thereafter.
133

Inflation risk sensitivity has been measured assuming that for each quarter in the next financial
year the CPI is 1 per cent higher and lower (when compared to the year before) than in the base
case. The analysis was performed as follows:
• the sensitivity of debt servicing costs for the next financial year on Treasury Capital
Indexed Bonds comprised a comparison of:
– debt servicing costs for the next financial year on the basis that inflation persists at
the average rate experienced in the financial year (base case); and
– debt servicing costs for the next financial year on the basis that the CPI index is
higher and lower by 1 per cent than the assumed base case level for each quarter.
For the purposes of calculating sensitivity analysis, it has been assumed that the AOFM will
issue $59,000 million of Treasury Bonds during the 2009-10 financial year (2008-09:
$5,300 million). It is also assumed that the volume of Treasury Notes outstanding as at 30 June
2009 of $16,700 million remains unchanged throughout the 2009-10 financial year (2008-09: nil).
In addition it is assumed that the volume of term deposit investments will remain at levels as at
30 June 2009 of $26,500 million for the full 12 months to 30 June 2010 (2008-09: $29,050 million).
Residential mortgage-backed securities will have a principal repayment rate based on an
estimated cash flow waterfall for each issue acquired to 30 June 2009. During 2009-10 the AOFM
will make further investments of $1,750 million in RMBS. These new issues have been modelled
on a 24 per cent per annum principal repayment rate, with a deferred start. Interest earned on
investments is assumed to be returned to the OPA when received and not re-invested. It is
further assumed for the purposes of the sensitivity analysis that the AOFM will not run down its
remaining interest rate swaps or fixed interest investments, nor will it undertake issuance of
Treasury Capital Indexed Bonds during 2009-10 (2008-09: nil).
The sensitivity analysis does not consider possible adjustments that the AOFM might make to
the composition of its portfolio in response to the assumed interest rate changes.
(d) Fair value sensitivity

The fair value sensitivity of the portfolio (excluding loans to State and Territory governments,
which are measured on an accruals basis) to changes in domestic interest rates as at 30 June 2009
was $35.966 million per basis point ($19.5 million per basis point as at 30 June 2008). A 1 basis
point parallel increase (decrease) in interest rates across the yield curve would result in a
favourable (unfavourable) change of $35.966 million in the fair value of the portfolio as at
30 June 2009 ($19.5 million as at 30 June 2008).
The risk of fluctuations in the fair value of the AOFM’s net debt portfolio is of a secondary order.
134
Note 26: Securities lending facility

Details of Treasury Bonds loaned to bond market participants on an overnight basis under the
securities lending facility are as follows:
2009
Bond series Number of Face value of Treasury Net income earned
transactions Bonds loaned
$’000 $’000
(i) Open transactions as at the beginning of the financial year
Nil
(ii) New transactions completed during the financial year
September 2009 56 1,570,000 280
August 2010 87 3,101,300 690
June 2011 57 1,229,200 347
May 2013 28 1,349,450 202
June 2014 26 636,300 176
April 2015 64 2,136,544 356
February 2017 28 1,255,870 284
May 2021 28 1,479,600 280
374 12,758,264 2,615
(iii) Open transactions as at the end of the financial year
Nil
2008
Bond series Number of Face value of Treasury Net income earned
transactions Bonds loaned
$’000 $’000
(i) Open transactions as at the beginning of the financial year
Nil
(ii) New transactions completed during the financial year
August 2008 3 68,200 7
September 2009 20 481,500 48
August 2010 6 75,900 6
June 2011 20 700,072 76
April 2012 3 94,000 8
May 2013 10 382,300 58
April 2015 15 308,700 45
February 2017 9 370,000 32
May 2021 2 34,100 3
88 2,514,772 283
(iii) Open transactions as at the end of the financial year
Nil
135
Note 26: Securities lending facility (continued)

In 2008-09 the securities lending facility was widened to allow intra-day borrowing of Treasury
Bonds. Interest is not payable under the facility for intra-day lending. Intra-day lending during
2008-09 was as follows:
2009
Bond series Number of transactions Face value of Treasury Bonds loaned
$’000
September 2009 8 1,433,200
June 2011 3 176,500
May 2013 1 250,000
April 2015 4 96,500
16 1,956,200
136
Note 27: Disclosures of appropriations

Note 27A: Acquittal of authority to draw cash from the Consolidated Revenue Fund
(Appropriations) for Ordinary Annual Services Appropriations
Outcome 1 — Enhance the Commonwealth’s capacity to manage its net debt portfolio
Administered Departmental Total
Particulars expenses outputs
$'000 $'000 $'000
Year ended 30 June 2009 (current year)
Balance carried from previous year 10 13,255 13,265
Appropriation Act:
Appropriation Act (No. 1) 2008-2009 10 8,467 8,477
Reduction (10) - (10)
Financial Management and Accountability Act:
Appropriation for recoverable GST (section 30A) - 51 51
Annotations to net appropriations (section 31) - 1,326 1,326
Total appropriations available for payment 10 23,099 23,109
Cash payments made during the year
(GST inclusive) - (7,263) (7,263)
Balance of Authority to draw cash from the
Consolidated Revenue Fund for Ordinary
Annual Services Appropriations 10 15,836 15,846
Balance carried forward to next year

represented by:
Cash at bank - 63 63
Departmental appropriation receivable - 15,772 15,772
Net GST receivable from the ATO(a) - 1 1
Undrawn, unlapsed administered appropriation(b) 10 - 10
Total 10 15,836 15,846
(a) Included in Other Receivables in Note 6A.
(b) The undrawn, unlapsed administered appropriation of $10,000.00 is not required by AOFM and under
section 11 of Appropriation Act (No. 1) 2008-09 is formally relinquished when the AOFM’s 2008-09
annual report is tabled in Parliament. The reduction is effective in 2009-10 and will be shown in next
year’s financial statements as a reduction.
137
Note 27: Disclosures of appropriations (continued)

Note 27A: Acquittal of authority to draw cash from the Consolidated Revenue Fund
(Appropriations) for Ordinary Annual Services Appropriations (continued)
Administered Departmental Total
Particulars expenses outputs
$'000 $'000 $'000
Year ended 30 June 2008 (comparative year)
Balance carried from previous year 10 10,447 10,457
Appropriation Act:
Appropriation Act (No. 1) 2007-2008 10 8,528 8,538
Reduction (10) (39) (49)
Financial Management and Accountability Act:
Appropriation for recoverable GST (section 30A) - 47 47
Annotations to net appropriations (section 31) - 1,254 1,254
Total appropriations available for payment 10 20,237 20,247
Cash payments made during the year
(GST inclusive) - (6,982) (6,982)
Balance of Authority to draw cash from the
Consolidated Revenue Fund for Ordinary
Annual Services Appropriations 10 13,255 13,265
Balance carried to next year
represented by:
Cash at bank - 159 159
Departmental appropriation receivable - 13,095 13,095
Net GST receivable from the ATO - 1 1
Undrawn, unlapsed administered appropriation(a) 10 - 10
Total 10 13,255 13,265
(a) The undrawn, unlapsed administered appropriation was formally lapsed by the Minister for Finance and
Deregulation in 2008-09.
138

Note 27B: Acquittal of authority to draw cash from the Consolidated Revenue Fund
(Appropriations) for Other than Ordinary Annual Services Appropriations
Departmental equity injection
2009 2008
Particulars $'000 $'000
Balance carried from previous year 949 949
Appropriations - -
Total appropriations available for payment 949 949
Cash payments made during the year (GST inclusive) - -
Balance of Authority to draw cash from the Consolidated
Revenue Fund for Other than Ordinary Annual Services 949 949
Balance carried to next year represented by:

Departmental capital injection appropriation receivable 949 949
Total 949 949
139

Note 27C: Acquittal of authority to draw cash from the Consolidated Revenue Fund —
Administered Special Appropriations (unlimited amount)
2009 2008
$'000 $'000
Airports (Transitional) Act 1996 , section 78
Purpose: payment of principal and interest on former debts of the
Federal Airports Corporation
Cash payments made during year - principal (expenditure) - -
Cash payments made during year - interest (expenditure) - -
Appropriations credited to Special Accounts - -
Refunds credited (net) (FMA section 30) - -
Total charged to appropriation - -
Estimated actual - principal (expenditure) - -
Estimated actual - interest (expenditure) - -
Australian National Railways Sale Act 1997 , section 67AW
National Railways Commission
Commonwealth Inscribed Stock Act 1911 , section 6
Purpose: payment of principal and interest on money raised by Stock
issued under the Act
Cash payments made during year - principal (expenditure) 7,081,473 2,906,516
Cash payments made during year - interest (expenditure) 3,952,756 3,508,605
Total charged to appropriation 11,034,229 6,415,121
Estimated actual - principal (expenditure) 7,142,610 2,913,978
Estimated actual - interest (expenditure) 4,181,200 3,507,000
Financial Agreement Act 1994 , section 5
Purpose: debt redemption assistance and payment of interest to
bond holders on behalf of the States and Northern Territory
on public debt under the Act
Cash payments made during year - (expenditure) 336 350
Appropriations credited to Special Accounts (included in above) 51 58
Total charged to appropriation 336 350
Estimated actual - (expenditure) - -
140

Administered Special Appropriations (unlimited amount) (continued)
2009 2008
$'000 $'000
Financial Management and Accountability Act 1997 , section 30A
Purpose: payments of recoverable GST
Cash payments made during year - (expenditure) - -
Estimated actual - (expenditure) - -
Financial Management and Accountability Act 1997 , section 39(9)
Purpose: to make investments in the name of the
Commonwealth of Australia(a)
Cash payments made during year - principal (expenditure) 396,819,404 318,750,000
Estimated actual - principal (expenditure) 359,452,700 292,166,000
Loans Redemption and Conversion Act 1921 , section 5
Purpose: payment of principal, interest and the costs of converting
loans made in accordance with the Act
Loans Securities Act 1919 , section 4
Purpose: payment of principal and interest on money raised by Stock
issued under the Act
Cash payments made during year - interest (expenditure) 621 503
Total charged to appropriation 621 503
Estimated actual - interest (expenditure) 1,000 1,000
(a) The AOFM draws appropriations to make investments. Some of these investments are used to manage
the daily variations in the balance of the Official Public Account (OPA). The cash flows into and out of the
OPA are highly variable from day-to-day and so in consequence are the number, size and timing of
these investments.
141

2009 2008
$'000 $'000
Loans Securities Act 1919 , section 5B
Purpose: payment of money under a swap agreement and any
expenditure in connection with the negotiation, management or
service of, or a repayment under any such agreement(b)
Cash payments made during year - principal (expenditure) 101,000 -
Cash payments made during year - interest (expenditure) 1,266,553 1,812,468
Estimated actual - interest (expenditure) 1,278,800 1,812,390
Moomba - Sydney Pipeline System Sale Act 1994 , section 19
Pipeline Authority
Qantas Sale Act 1992 , section 18
Purpose: payment of principal and interest on former debts of Qantas
Snowy Hydro Corporatisation Act 1997 , section 22
Snowy Mountains Hydro Electricity Authority
Cash payments made during year - principal (expenditure) 4,000 16,000
Cash payments made during year - interest (expenditure) 165 1,146
Total charged to appropriation 4,165 17,146
Estimated actual - principal (expenditure) 4,000 16,000
Estimated actual - interest (expenditure) 165 1,146
(b) Master Agreements executed between the Commonwealth and swap counterparties provide for
settlement of interest rate swaps on a net basis per transaction. All amounts in relation to these
transactions are disclosed in this note on an aggregate basis.
142

2009 2008
$'000 $'000
Treasury Bills Act 1914 , section 6
Purpose: payment of principal and interest on money raised by
issuance of Treasury Bills
Total
Total budget estimate (expenditure) 372,060,475 300,417,514
Total payments made (expenditure) 409,226,308 326,995,588
Appropriations credited to Special Accounts (included in
above) 51 58
Refunds credited (section 30) - -
143

Note 27D: Acquittal of authority to draw cash from the Consolidated Revenue Fund —
Special Appropriations (Refund Provisions)
In 2008-09 the AOFM did not utilise section 28 of the Financial Management and Accountability
Act 1997. In 2007-08 the AOFM drew down $50,000 under section 28 of the Financial Management
and Accountability Act 1997 to repay monies received from a counterparty in error.
Note 27E: Acquittal of authority to draw cash from the Consolidated Revenue Fund —
Special Appropriations (FMA section 39)
Administered investment of Public Money: 2009 2008
Special Appropriations under FMA section 39(a) $'000 $'000
Balance carried from previous period (at face value) 29,050,000 20,350,000
Prior year investments redeemed in current year (29,050,000) (20,350,000)
Investments made 396,825,420 318,750,000
Redemptions of current year investments (361,277,281) (289,700,000)
Total balance carried to next year (at face value) 35,548,139 29,050,000
FMA = Financial Management and Accountability Act 1997.
(a) See Note 24J for further details.
144

Note 27F: Special accounts (Administered)
Debt Retirement Reserve Trust Account (DRRTA)
• Legal Authority — Financial Management and Accountability Act 1997, section 21.
• Purpose —to fund the redemption of the State and Territory debt governed by the
Financial Agreement Act 1994. Monies standing to the credit of the DRRTA are applied
to repurchase debt of the States and the Northern Territory.
Debt Retirement Reserve Trust Account 2009 2008

$'000 $'000
Balance carried from previous period 447 422

Interest amounts credited 23 28
Appropriations for reporting period 28 30
Other receipts:
State and Territory contributions 86 361
Available for payment 584 841
Payments made:
Debt repayments (38) (394)
Balance carried to next year 546 447
Balance carried represented by:

Cash on call held in the Official Public Account 546 447
Total balance carried to next year 546 447
Note 27G: Assets held in trust (Administered)

Monies standing to the credit of the Debt Retirement Reserve Trust Account are held on behalf
of the States and Northern Territory. These monies are held for the purposes prescribed by the
Financial Agreement Act 1994.
Details of balances, payments and receipts in relation to the Debt Retirement Reserve Trust
Account are provided in Note 27F: Special accounts (Administered).
145
Note 28: Reporting of outcomes

Note 28A: Net cost of outcome delivery
Outcome 1 Outcome 1
2009 2008
$'000 $'000
Expenses
Administered expenses 4,962,355 5,351,002
Departmental expenses 7,875 7,512
Total expenses 4,970,230 5,358,514
Costs recovered from provision of goods and services to
the non-government sector
Administered - -
Departmental - -
Total costs recovered - -
Other external revenue
Administered
Interest 2,527,570 2,995,083
Other 3,328 2,266
Gains (losses) 800,985 (116,894)
Total administered 3,331,883 2,880,455
Departmental
Other 1,093 1,464
Total departmental 1,093 1,464
Total other external revenue 3,332,976 2,881,919
Net cost of outcome 1,637,254 2,476,595
Note 29: Major departmental revenue and expenses by output group and output
The AOFM delivers a single output — debt management. The Income Statement provides the
major classes of departmental revenue earned and expenses incurred to support this output.
Note 30: Major classes of administered revenue and expenses by outcome

The AOFM delivers a single outcome — to enhance the Commonwealth’s capacity to manage its
net debt portfolio, offering the prospect of savings in debt servicing costs and an improvement
in the net worth of the Commonwealth over time. The Schedule of Income and Expenses
Administered on Behalf of Government provides the major classes of administered revenue and
expenses attributable to this outcome.
146
Note 31: Communications Fund

Until 1 January 2009, the AOFM acted as an agent for the Department of Broadband,
Communications and the Digital Economy (DBCDE) in making investments on behalf of the
Communications Fund. These investments and their earnings are reported by DBCDE and not
the AOFM.
The Communications Fund was established by Part 9C of the Telecommunications (Consumer

Protection and Service Standards) Act 1999. The Communications Fund consists of a special
account and investments.
Telecommunications (Consumer Protection DBCDE DBCDE

and Service Standards) Act 1999 (Part 9C) (Responsible Agency) (Responsible Agency)
2009 2008
$’000 $’000
Opening Balance (at cost) 2,356,419 2,215,986
Investment earnings receipts 94,457 140,592
Expense payments (158) (159)
Transfers to Building Australia Fund (at cost) (2,450,718) -
Balance of investments (at cost) — 30 June - 2,356,419
This table is prepared on a cash basis, showing net receipts and payments.
In the 2008-09 Budget it was announced that the Communications Fund would close during the
year and its assets would be transferred to the Building Australia Fund (managed by the Future
Fund Board of Guardians). On 1 January 2009 the Communications Fund was abolished and its
investments were transferred to the Building Australia Fund. The market value of the
investments transferred on 1 January 2009 was $2,468,395,373. Following the transfer, the
Building Australia Fund paid investment management costs of $163,830 (excluding GST)
incurred, but not paid, by the Communications Fund.
Note 32: Events occurring after reporting date

There have been no significant events occurring after the reporting date that would materially
affect these financial statements.
147
PART 5: OTHER INFORMATION
Structure of the AOFM’s portfolio ................................................................................................ 151

Funding ............................................................................................................................................ 152
Appropriations and other sources of funding............................................................................. 153
Advertising and market research.................................................................................................. 155
Grant programs ............................................................................................................................... 155
Freedom of information ................................................................................................................. 155
Ecologically sustainable development ......................................................................................... 157
149
OTHER INFORMATION
Structure of the AOFM’s portfolio

The assets and liabilities managed by the AOFM and held on its administered balance sheet as at
the end of June 2009 were Commonwealth Government Securities (Treasury Bonds, Treasury
Indexed Bonds, Treasury Notes and other securities), short-term money market investments,
term deposits placed with the Reserve Bank of Australia, residential-mortgage backed securities
(RMBS), housing advances to the States under the Commonwealth-State Housing Agreements
and interest rate swaps.1
For financial and risk management purposes, these assets and liabilities are allocated between
four portfolios: the Long-Term Debt Portfolio, the RMBS Portfolio, the Housing Advances
Portfolio and the Cash Management Portfolio. This allocation recognises the different objectives,
risks and management approach required in each area.
The Long-Term Debt Portfolio contains debt denominated in Australian dollars and in foreign
currencies. It includes Commonwealth Government Securities (other than Treasury Notes issued
for cash management purposes), and residual interest rate swaps that were previously used to
manage the cost and risk of the Portfolio. For part of 2008-09 it also included assets purchased
with the proceeds of ‘additional’ Treasury Bond issuance. These assets have subsequently been
sold.
As no borrowings have been undertaken in foreign currencies since 1987 the Portfolio holds only
a residual amount of foreign currency debt.
The volume of the Long-Term Debt Portfolio was adjusted over the course of the financial year
to smooth the impact of discontinuities that would otherwise be produced by large transactions
in the issuance of Treasury Bonds and maturities. This was achieved through short-term internal
transfers between the Portfolio and the Cash Management Portfolio.
The RMBS Portfolio contains residential mortgage-backed securities purchased by the AOFM
under the Government’s policy to maintain competition in lending for housing.
The Housing Advances Portfolio comprises loans for public housing made by the
Commonwealth to the States and Territories. These loans, which were not evidenced by the
1 Until 1 January 2009 the AOFM also invested monies for the Communications Fund on behalf of the
Department of Broadband, Communications and the Digital Economy.
151
Part 5: Other information
issue of securities, were made under previous Commonwealth-State financing arrangements.

The last maturity is due on 30 June 2042.
The Cash Management Portfolio manages the within-year variability in the Australian
Government’s financing requirement due to within-year mismatches in the timing of
Government receipts and outlays. It contains all the assets and liabilities not held in the other
three portfolios.
Funding
Table 1 places the AOFM’s asset and liability management activities in 2008-09 in the context of
the overall flow of funds for the Australian Government General Government Sector. Flows
managed by the AOFM are shown in green.
Table 1: General Government Sector funding requirement and funding sources

Actual Actual
2008-09 2008-09
Source of funds ($billion) Use of funds ($billion)
Headline budget balance 31.3
Debt issuance[a] Debt redemption[a]
Treasury Bonds 36.4 Maturing CGS debt 5.1
Treasury Indexed Bonds 0.0 Early CGS debt repurchases ..
Treasury Notes (net) 16.5 Other general government sector
redemptions (net) 0.2
Total 52.9 Total 5.3
Financial assets Other applications of funds
Change in short-term Swap interest (net) 0.2
asset holdings 1.6 Other (net)[b] 0.3
Total 1.6 Total 0.5
Financial assets
Change in Official Public Account
balance at the RBA ..
Change in other general government
sector investments 17.4
Total 17.4
Total 54.4 Total 54.4
(a) Cash flows rather than face value of securities.
(b) Includes other general government sector flows not elsewhere classified.
(c) Not all totals may sum exactly due to rounding.
(d) .. not zero but less than $0.05 billion.
152
Appropriations and other sources of funding

Table 2 summarises the gross resources applied by the AOFM in 2008-09 and budgeted for
2009-10, both from appropriations and other sources and for recurrent and capital purposes.
Agency recurrent funding is used to meet operating expenses such as employee remuneration
and supplier payments.
Administered recurrent funding is used to meet operating expenses such as interest on

Australian Government debt and swap interest payments.
Capital funding is used to meet the cost of maturing Australian Government debt and to make
investments.
153
Table 2: AOFM gross appropriations and other funding

Budget(b) Actual Budget
2008-09 2008-09 2009-10
($'000) ($'000) ($'000)
FUNDING FOR CURRENT PURPOSES
ADMINISTERED EXPENSES(a)
Annual appropriations 10 - 10
Special appropriations 4,828,134 4,963,376 6,425,400
Total administered appropriations 4,828,144 4,963,376 6,425,410
DEPARTMENTAL
Annual appropriations 8,467 8,467 12,638
Total revenue from government (appropriations)
contibuting to price of agency outputs 8,467 8,467 12,638
Percentage of total price of outputs 87.1% 86.0% 92.1%
Revenue from other sources
Other sources 1,256 1,379 1,089
Total revenue from other sources 1,256 1,379 1,089
Total price of agency outputs 9,723 9,846 13,727
Total resourcing - recurrent purposes 4,837,867 4,973,222 6,439,137
FUNDING FOR CAPITAL PURPOSES(c)
ADMINISTERED
Special appropriations 366,599,310 404,005,877 373,654,000
Total administered appropriations 366,599,310 404,005,877 373,654,000
AGENCY
Agency equity injections(d) - - -
Total resourcing - capital purposes 366,599,310 404,005,877 373,654,000
Total resourcing for AOFM Outcome(e) 371,437,177 408,979,099 380,093,137
Administered 371,427,454 408,969,253 380,079,410
Departmental 9,723 9,846 13,727
Budget(a) Actual Budget
2008-09 2008-09 2009-10
Average staffing level (number) 31 30 43
(a) Excludes unrealised fair value revaluations.
(b) The Budget figure for 2008-09 is the ‘estimated actual 2008-09 balance’ reported in the Portfolio Budget
Statements 2009-10.
(c) Excludes repayments of debt made on behalf of the State and Territory governments through the Debt
Retirement Reserve Trust Account, a special account governed by the Financial Agreement Act 1994.
(d) During 2008-09 the AOFM did not use any agency equity injections.
(e) Part 1: AOFM overview specifies the AOFM outcome.
154
Advertising and market research

During the 2008-09 financial year, the AOFM made no payments to advertising agencies for
campaign advertising. The AOFM had a total expenditure of $63,430 to advertising agencies for
non-campaign advertising (recruitment) in the 2008-2009 financial year. The following table lists
individual expenditures of $10,900 or more in that category.
Table 3: 2008-09 non-campaign advertising expenditure $10,900 or more

Entity Cost
HMA Blaze $11,010
Grant programs
Under the Financial Agreement Act 1994 the Commonwealth is required to contribute to the Debt
Retirement Reserve Trust Account to assist the State and Northern Territory governments to
redeem maturing debt on allocation to them. Monies standing to the credit of this Account are
held for the purposes prescribed by the Financial Agreement Act 1994.
The contributions made by the Commonwealth are accounted for as grants.
Freedom of information
Section 8 of the Freedom of Information Act 1982 requires agencies to publish information about:
• their organisation and decision making powers;
• what arrangements they make for public involvement in their work;
• what types of documents they hold; and
• how the public can access these documents.
Freedom of information matters in respect of the AOFM are handled by the Treasury and the
statement required under section 8 of the Freedom of Information Act 1982 appears in the Treasury
Annual Report. In this material, references to ‘Department’ encompass the AOFM. Additional
details that relate specifically to the AOFM are provided below.
Organisation and decision-making

Details of the AOFM’s organisational structure are provided in Figure 1 in Part 1 of this report.
Its functions and decision-making are outlined in the section on AOFM’s role, functions,
155
outcome and output structure in Part 1 of this report and the section on senior management
committees in Part 3.
The Treasurer has delegated powers to AOFM officials under the following legislation:
• Commonwealth Inscribed Stock Act 1911 and the Commonwealth Inscribed Stock
Regulations;
• Loans Securities Act 1919;
• Financial Management and Accountability Act 1997; and
• other Acts with regard to appropriations as set out in Note 27 of the financial
statements included in this report.
The Minister for Finance and Deregulation has delegated powers to the Chief Executive Officer
of the AOFM under the Financial Management and Accountability Act 1997 and the Financial
Management and Accountability Regulations.
The Minister for Broadband, Communications and the Digital Economy and the Minister for
Finance and Deregulation have authorised the Chief Executive Officer of the AOFM to make
investments for the Communications Fund under the Telecommunications (Consumer Protection
and Service Standards) Act 1999. This authorisation operated until 1 January 2009 when the
Communications Fund was closed.
Arrangements for public involvement

The AOFM consults informally with financial market participants and investors affected by its
activities. It also obtains advice from the AOFM Advisory Board, described in Part 3 of this
report, which includes three members from the financial sector. Information on the Agency can
be found on its website www.aofm.gov.au and enquiries can be sent via post or email.
The AOFM does not issue Commonwealth Government Securities directly to the public, but
small parcels of these securities may be purchased or sold through the Reserve Bank of
Australia. Larger volumes may be traded through professional financial institutions.
Documents held by the AOFM

The AOFM holds correspondence, contracts and agreements, records of transactions, analysis
and advice, financial and statistical data, and drafts and internal working documents prepared
by its staff and relating to its functions of issuing and managing debt, investment and cash
management. It also holds personnel records, organisation and staffing records, financial and
expenditure records, and office procedures and instructions.
156
The AOFM places an indexed list of its policy file titles on the AOFM website every six months.
Access to documents
Applicants seeking access under the Freedom of Information Act 1982 to AOFM documents should
apply in writing to:
The Secretary
The Treasury
Langton Crescent
PARKES ACT 2600
Attention: Freedom of Information Coordinator
If a member of the public requests a document and the Treasury approves access, the Treasury
will provide copies of documents after the applicant pays any charges. Alternatively, applicants
may arrange to inspect documents at the Treasury, Langton Crescent, Parkes, ACT between
9.00 am and 5.00 pm, Monday to Friday (except public and public service holidays).
An application fee of $30 or a written request, pursuant to subsection 30A(1) of the Freedom of
Information Act, that the application fee be waived should accompany requests. Telephone
enquiries should be directed to the Freedom of Information Coordinator, telephone 02 6263 2111,
between 9.00 am and 5.00 pm Monday to Friday (except public or public service holidays).
Officers of the SES in Treasury can grant or refuse requests for access to documents under
section 23 of the Freedom of Information Act. In accordance with section 54 of the Act, an applicant
may, within 30 days of receiving notification of a decision under the Act, apply to the Secretary
to the Treasury, seeking an internal review of a decision to refuse a request. The prescribed fee of
$40 should accompany the application. Treasury Executive Directors are authorised under
section 23 to consider and make decisions on applications for internal review.
Freedom of information activity

The AOFM received no requests for access to documents under the Freedom of Information Act in
2008-09.
Ecologically sustainable development

The AOFM’s operations have an impact on the environment through the use of energy, water
and other materials, and the generation of waste. Procurement and facilities management
services are provided to the AOFM by Treasury under a Service Level Agreement. Information
on the environmental impact of these services is published in the Treasury’s Annual Report.
157
GLOSSARY
Accrual cost
A method of accounting based on recording revenue and expenses when they are incurred,
regardless of when cash is exchanged.
Bank Bill Swap Rates (BBSW)

Reference rates for bank bills accepted by approved banks published each business day by the
Australian Financial Markets Association.
Basis point
One hundredth of one per cent.
Benchmark
An index or notional portfolio used as a point of reference for the management of an actual
portfolio or the measurement of its performance.
Bid-ask spread
The difference between the price (or yield) at which a market maker is willing to buy and sell a
particular financial product or instrument.
Book value
(also known as carrying amount) The amount at which an asset or liability is recognised in the
balance sheet. Under a fair value methodology, measurement is by reference to current market
rates. Under an historic cost methodology, measurement is by reference to market value rates at
the time the transaction giving rise to the asset or liability was conducted. The AOFM’s assets
and liabilities are measured at fair value, except for Australian Government advances to State
and Territory governments for public housing, which are measured at historic cost.
159
Glossary
Cash Management Portfolio

The Cash Management Portfolio is a part of the overall portfolio of assets and liabilities
managed by the AOFM. It contains short-term assets and liabilities and is used to manage the
within-year variability in the Government’s cash flows.
Commonwealth Government securities (CGS)

Debt obligations of the Commonwealth evidenced by the issue of securities or, nowadays, issued
as inscribed stock. CGS on issue are predominantly Treasury Bonds, Treasury Indexed Bonds
and Treasury Notes but also include small residual volumes of Australian Savings Bonds, Peace
Saving Certificates and War Saving Certificates.
Coupon rate
The rate of fixed interest payment on a bond. In the case of Treasury Bonds coupon interest is
payable semi-annually and the coupon rate is set on the date of announcement of first issuance
of the bond line.
Credit risk
The risk of financial loss arising from a counterparty to a transaction defaulting on its financial
obligations under that transaction. Credit risk is contingent on both a default taking place and
there being pecuniary loss as a result. The AOFM faces credit risk in relation to its interest rate
swap and investment transactions.
Credit spread
The difference in yield between different securities due to different credit quality. The credit
spread reflects the additional net yield an investor can earn from a security with more credit risk
relative to one with less credit risk.
Discount
The amount by which the value of a security is less than its face, or par, value.
Discounting
Calculating the present value of a future amount.
160
Glossary
Duration
Duration (expressed in years) represents the ‘effective term’ of a bond. It is the weighted average
life of a bond or a portfolio of bonds. The weights are the relative cash flows associated with the
bond or portfolio (the coupon payments and principal), discounted to their present value. See
modified duration.
Exposure
The amount of money at risk in a portfolio. Exposure to a risk is calculated by measuring the
current mark-to-market value that is exposed to that risk.
Face value
The amount of money indicated on a security, or inscribed in relation to a security, as being due
to be paid on maturity.
Fixed leg
The component of an interest rate swap that provides interest at a fixed rate.
Fixed rate
An interest rate calculated as a constant percentage of the face value or notional principal and
generally payable quarterly semi-annually or annually. Treasury Bonds pay a fixed coupon rate
semi-annually.
Floating leg
The component of an interest rate swap that provides for the payment of interest at a floating
rate.
Floating rate
An interest rate that varies according to a particular indicator such as BBSW (Bank Bill Swap
Reference Rate). For example, the floating leg of an interest rate swap may provide for the
interest paid to be reset each six months in accordance with the BBSW.
Foreign Debt Portfolio

The non-domestic currency component of the Long-Term Debt Portfolio. Following the
elimination of the foreign currency derivatives exposure, this portfolio now consists of a single
US dollar denominated loan issued in the 1980s.
161
Glossary
Funding risk
The risk that an issuer is unable to raise funds, as required, in an orderly manner and without
financial penalty. For the Australian Government, funding risk encompasses both long-term
fund raising to cover future budget needs and the short-term mismatches in the timing of
government outlays and receipts.
Futures basket
A collection of like financial products or commodities, grouped together, that are used to define
a futures contract. For example, 3- and 10-year Treasury Bond futures baskets consist of
collections of Treasury Bond lines that have an average term to maturity of approximately three
and ten years respectively.
Futures contract
An agreement between two parties that commits one party to buy an underlying financial
instrument or commodity and one party to sell a financial instrument or commodity at a specific
price at a future date. The agreement is completed at a specified expiration date by physical
delivery or cash settlement or offset prior to the expiration date. In Australia standardised
futures contracts are traded on the Sydney Futures Exchange. Futures contracts traded on the
Sydney Futures Exchange include contracts for 3-year and 10-year Treasury Bonds.
Historic cost
Basis of measurement where an asset or liability is recorded at fair value on initial recognition
and after initial recognition by amortisation of the initial value using market rates at the time the
transaction giving rise to the asset or liability was conducted.
Interest rate risk

The risk that the value of a portfolio or security changes due to a change in interest rates. For
example, the market value of a bond drops as interest rates rise.
Issuance
The sale of debt securities in the primary market.
Kangaroo bonds
Australian dollar denominated bonds issued in the Australian capital market by foreign
borrowers.
162
Glossary
Liquidity
The capacity of a debt instrument to be sold readily and converted into cash. A liquid market
allows the buying or selling of large quantities of an instrument without significant movement
in price.
Liquidity also refers to the ability to meet cash payment obligations.
Liquidity risk
The risk that a financial instrument will not be able to be purchased or sold readily.
Long-Term Debt Portfolio

The Long-Term Debt Portfolio is a part of the overall portfolio of assets and liabilities managed
by the AOFM. It contains ongoing domestic and foreign currency liabilities and assets.
Market risk
The risk that the price (value) of a financial instrument or portfolio of financial instruments will
vary as market conditions change. In the case of a debt issuer and inverter such as the AOFM,
the principal source of market risk is from changes in interest rates.
Market value
The amount of money for which a security trades in the market at a particular point of time.
Modified duration
A measure of the sensitivity of the market value of a debt security to a change in interest rates. It
is measured as the percentage change in the market value of a debt instrument in response to a
one percentage point change in nominal interest rates. Portfolios with higher modified durations
tend to have more stable interest costs through time but have more volatile market values.
Modified duration is related to duration by the equation:
Modified duration = Duration (years)

1 + yield to maturity
At times, ‘modified duration’ is abbreviated to ‘duration’, desirably only in contexts where this
will not lead to confusion.
163
Glossary
Nominal debt
Debt that is not indexed to inflation. Treasury Notes and Treasury Bonds are examples of
nominal debt.
Nominal interest rate

Interest rate that does not take account of the effects of inflation (in contrast to the ‘real’ interest
rate).
Operational risk
The risk of loss, whether direct or indirect, arising from inadequate or failed internal processes,
people or systems, or from external events. It encompasses risks inherent in the agency’s
operating activities such as fraud risk, settlement risk, legal risk, accounting risk, personnel risk
and reputation risk.
Overnight Indexed Swap (OIS)

A fixed for floating interest rate swap in which one party agrees to pay the other party a fixed
interest rate in exchange for receiving the average overnight cash rate recorded over the term of
the swap. The terms to maturity of such swaps are typically between one week to one year.
Financial market participants enter into overnight indexed swaps to manage their exposures to
movement in the overnight cash rate.
Overnight indexed swaps are quoted by reference to the fixed interest rate leg of the swap. For
example, the 3 month OIS rate is the interest rate for the fixed leg of an overnight indexed swap
with a term to maturity of 3 months. Interest rates for term deposits placed by the AOFM with
the RBA are set by reference to quoted rates for overnight interest swaps.
Present value
The amount that corresponds to today’s value of a payment to be received in the future. If the
opportunity cost of funds, or discount rate is 10 per cent, the present value of $100 to be received
in two years is $100 x [1/(1 + 0.10)2] = $82.64.
Primary market
The market where bonds are issued for the first time and the sale proceeds go to the issuer. For
example, the primary market for Treasury Bonds is when the bonds are sold at tender by the
AOFM on behalf of the Australian Government.
164
Glossary
Real interest rate

Interest rate that has been adjusted to take account of the effects of inflation. For example, if the
coupon interest rate on a bond is 6.5 per cent and the inflation rate is 3 per cent then the real rate
of interest on that bond is 3.5 per cent.
Repurchase agreement (Repo)

An agreement under which the seller of a security agrees to buy it back at a specified time and
price.
Repricing risk
The risk that interest rates will have increased when maturing debt needs to be refinanced.
Whenever the AOFM enters the market to borrow funds, it is exposed to repricing risk.
Residential mortgage-backed security (RMBS)
A debt instrument issued by a special purpose vehicle to finance the securitisation of pool of
loans secured by residential mortgages.
Risk premium
The difference between the return available on a risk-free asset and the return available on a
riskier asset.
Secondary market
The market where securities are bought and sold subsequent to original issuance.
Securities lending
An activity whereby securities are lent to a financial market participant for a fee. This activity
may be conducted to alleviate temporary market shortages of specific lines of stock.
Securities Lending Facility

A facility established by the AOFM in 2004 that uses repurchase agreements to lend Treasury
Bonds to market participants for short periods when they are not readily available from other
sources. The facility is operated by the Reserve Bank of Australia on behalf of the AOFM.
165
Glossary
Securitisation
The process of converting a pool of assets into marketable financial instruments by turning them
into securities. The rights and obligations relating to the assets are assigned or transferred to a
special purpose vehicle (typically a trust), which issues securities to pay for the assets. The cash
flow from the asset pool is used to service the securities and any other costs of the special
purpose vehicle.
Semi-government bond
Bonds issued in the Australian capital market by Australian State or Territory governments.
Short-dated exposure
The proportion of the portfolio that will have its interest rate reset in the short term and thereby
has the potential to create variability in annual debt interest payments. A portfolio with high
short-dated exposure will tend to have more volatile annual interest payments than a portfolio
with low short-dated exposure.
Special purpose vehicle (SPV)

In the context of an Australian RMBS transaction, this vehicle is typically a bankruptcy-remote
trust established for the sole purpose of acquiring a pool of mortgages from a mortgage lender
and issuing RMBS to finance those mortgages.
Spread
The difference between two prices or rates.
Swap
A financial transaction in which two counterparties agree to exchange streams of payments
occurring over time according to predetermined rules.
Tender
A method of issuance whereby debt is sold through auction. The amount, coupon and maturity
date of the stock are announced by the issuer. Registered participants then bid for their desired
amounts of stock at interest rates at which they are prepared to buy. Bids are accepted from
lowest interest rate (yield) upward until the issue amount has been filled. Stock is therefore
allocated in order of lowest yield (and highest price).
166
Glossary
Tenor
The tenor of a financial instrument is its remaining term to maturity.
Term premium
The margin over the expected path of cash rates that investors require to compensate them for
investing at fixed interest in long-term debt.
Treasury Bond
A medium to long-term debt security issued by the Australian Government that carries an
annual rate of interest (the coupon) fixed over the life of the security, payable in six monthly
instalments (semi-annually) on the face, or par, value of the security. The bonds are repayable at
face value on maturity.
Treasury Indexed Bond

A security whose capital value is adjusted periodically according to movements in the
Consumer Price Index. Interest on the bonds is paid quarterly at a fixed rate on the adjusted
capital value. At maturity, investors receive the adjusted capital value of the bonds — that is, the
initial face value as adjusted for inflation over the life of the bonds. Interest Indexed Bonds,
another form of indexed bond, were also issued by the Commonwealth Government in the past
but these have all now matured.
Treasury Note
A short-term debt security issued by the Australian Government at a discount and redeemable
at par on maturity. The ‘interest’ payable on the notes is represented by the difference between
their issue value and their par or face value. Treasury Notes are issued to cover short-term
mismatches between the Australian Government’s outlay and revenue streams that cannot be
funded by other means, such as changes in the AOFM’s holdings of term deposits with the
Reserve Bank of Australia.
Two-way price
The provision by a market-maker of the prices (or yields) at which they are prepared to buy and
sell a particular financial product or instrument. That is, the quoting of both a bid and an offer.
UBS Australian Bank Bill Index

A performance benchmark designed to represent the performance of a passively managed
short-term money market portfolio. This index has an average term to maturity of
167
Glossary
approximately 45 days which is commensurate with the average term to maturity of assets
comprising major cash management trusts.
Yield curve
The graphical representation of the relationship between the yield on debt securities of the same
credit quality but different term to maturities on a specific date. When securities with longer
terms to maturity have a higher yield than securities with shorter terms to maturity, the curve is
said to have a positive slope. In the opposite case, the slope is said to be negative or inverse.
168
ACRONYMS
AASB Australian Accounting Standards Board
ANAO Australian National Audit Office
AOFM Australian Office of Financial Management
APEC Asia-Pacific Economic Cooperation
APS Australian Public Service
AUD Australian dollar
BBSW Bank Bill Swap Rate
CEO Chief Executive Officer
CGS Commonwealth Government securities
CPI Consumer Price Index
EL Executive Level (APS Classification)
FBT Fringe Benefit Tax
FMA Financial Management and Accountability Act 1997
FMO Finance Minister’s Orders
GDP Gross Domestic Product
GST Goods and Service Tax
IT Information technology
LTDP Long-term Debt Portfolio
OECD Organisation for Economic Co-operation and Development
OPA Official Public Account
RBA Reserve Bank of Australia
RITS Reserve Bank Information and Transfer System
RMBS Residential mortgage-backed security
SES Senior Executive Service
USD United States dollar
169
INDEX OF COMPLIANCE WITH REQUIREMENTS
Requirement Page
Letter of transmission iii
Aids to Access
Table of contents vii
Glossary 159
Acronyms 169
Alphabetical index 175
Contact details 174
Internet address 174
Review by Chief Executive Officer xi
Part 1: Departmental Overview 1
Role and functions 3
Outcome and output information 3
AOFM organisational structure 4
Part 2: Operations and performance 5
Report on performance 7-36
Discussion of financial performance 39
171
Index of compliance with requirements
Requirement (continued) Page

Part 3: Management and accountability 41
Corporate governance 43
Compliance with Commonwealth Fraud Control Guidelines 45
External scrutiny 45
Judicial decisions 48
Management of human resources 48
Staffing 48
Collective agreements, determinations, common law contracts and 50

Australian Workplace Agreements
Performance pay 50
Occupational health and safety 50
Assets management 51
Purchasing 51
ANAO Access Clauses 52
Contracts exempt from the AusTender 52
Australian Government Disability Strategy 51
Consultants 51
Competitive tendering and contracting 51
Part 4: Financial statements 53
Report by the Auditor-General 55
172
Index of compliance with requirements
Requirement (continued) Page

Part 5: Other information 149
AOFM financial and staffing resources summary 152
Summary resource table by outcome 154
Freedom of information 155
Advertising and market research 155
Grant programs 155
Ecologically sustainable development and environmental performance 157
173
CONTACT DETAILS
Enquiries
Enquiries regarding this report may be directed to:
Liaison Officer
Australian Office of Financial Management
Treasury Building
Langton Crescent
PARKES ACT 2600
Telephone: (61-2) 6263 1111

Fax: (61-2) 6263 1222
Email: [email protected]
Internet address
A copy of this document can be located on the AOFM web site at:
(http://www.aofm.gov.au/content/publications/reports.asp).
174
INDEX
A C
Administered recurrent funding, 153 Capital funding, 153
Advertising and market research, 155 Capital indexation, 20
Advisory Board, 43 Cash flow volatility, 152
AFMA Cash management, 17, 19
code of conduct, 37 achieving the objective, 17
ANAO objective, 17
access clauses, 52 performance, 18
exempt contracts, 52 Cash Management Portfolio, 151
AOFM Certificate of Compliance, 37
appropriations, 153 CGS debt, 23
compliance and reporting, 4 Chief Executive Instructions, 45
delegations, 156 Chief Executive Officer, 43, 49
finance, settlement and corporate functions, 4 Committees
financial risk management, 4 Asset and Liability, 44
function, 3 Audit, 45
funding, 152, 153 Executive, 44
operations and performance, 7 Human Resources, 44
organisational structure, 4 IT Steering, 44
outcome, 3 Operational Risk, 44
overview, 3 Senior management, 44
physical assets management, 51 Commonwealth Fraud Control Guidelines, 45
portfolio outcomes, xvii Commonwealth Government Securities (CGS),
role, 3 151
treasury operations, 4 Communications Fund, 36
Assets management, 51 performance, 36
Audit, 45 Consultants, 51
Audit Committee, 37, 45 Contract management, 45
Australian National Audit Office, 46 Cooperation with other debt managers, xix, 38
Australian Government Disability Strategy, 51 Corporate governance, 43
Credit management, 28
Credit risk, 28
B
Credit Support Annexes, 28
Bloomberg Professional Service, 38
Business continuity arrangements, 46, 47
175
Index
D H
Daily cash balance, 17 Historic accruals cost, 20
Daily cash balance 91-day moving average, 20 Human resources, 48
Debt Hedge Portfolio, 14
performance, 14
I
Debt servicing costs, 20, 23, 24, 25, 28
Delegations, 45 Inflation-linked debt, 20
Department of Broadband, Communications and Information Technology operations, 38
the Digital Economy, 3, 36 Interest rate swap terminations, xvi, 26
Derivatives, 20 Interest rate swaps, 21
Discretionary grants, 155 revenue, 25
Investment of the proceeds of additional
E Treasury Bond issuance, xiv, 13
Ecologically sustainable development and

J
environmental performance, 157
Employment arrangements, 50 Judicial decisions, 48
AWAs, 50
collective agreement, 50
K
common law contracts, 50
determinations, 50 Kangaroo bonds, 14
F L
Fair value, 21 Long-Term Debt Portfolio, 151
Financial Management and Accountability Act,
xix, 3, 37, 43
Financial performance, 39
M
Financial statements
Management of the portfolio, xv
Administered items, 63
Minimising debt servicing costs subject to
Cash flows, 61
acceptable risk, 20
Commitments, 62
achieving the objective, 21
Financial performance, 58
performance, 23
Financial position, 59
Notes, 67
Financial Statements, 57–147 N
Freedom of Information, 155–57
Net CGS debt portfolio, 26
Funding, 17
market value, 26
Net cost of funds, 23
Net debt portfolio, 23
176
Index
O Staffing, 48–51
graduates, 49
Occupational health and safety, 50, 51 training and development, 48
Official Public Account (OPA), 17
Operational limits, 19
T
Operational risk, xix, 36
Operational Risk Committee, 37 Term deposits
Operational risk management, 44 interest revenue, 25
Operations, 47 volume, 25
Overdraft facility, 17, 18 The Treasury
Overnight Indexed Swap (OIS) rate, 17 Secretary, 3, 43
Treasury Bond
P futures, 11
Treasury Bond issuance, 7
Papua New Guinea, 38, 49 consultation with financial market
Policies, 45 participants, 10
Public Register of Government Borrowings, xviii efficiency, 11
Purchasing, 51 funding the Budget, 8
market efficiency, 10
R objectives, 7
performance, 10
Realised market value gains and losses, 20 supporting the Treasury Bond market, 8
Remuneration, 48–51, 153 tender results, 12
Reserve Bank of Australia (RBA), 18, 38 Treasury Bond market, xiii
Residential mortgage-backed securities, xvi, 29 Treasury Bonds outstanding, 9
achieving the objective, 32
investments, 35
U
outcome and performance, 33
Weighted Average Life (WAL), 31 UBS Australian Bank Bill Index, 36
Review by the Chief Executive Officer, xiii Unrealised gains, 26
Unrealised market value, 21
S Updated Economic and Fiscal Outlook (UEFO), 7
Schedule of administered items, 63

Y
Schedule of commitments, 62
Securities lending facility, 9 Yield curve, 21
Securitisation, 30
Semi-government bonds, 14
Settlement operations, 38
Solomon Islands, 38, 49
Sovereign Risk Manager of the Year award, xx
Staff, xix
177

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The Hon Wayne Swan MP

The AOFM aims to advance economic growth and stability,

Review by the Chief Executive Officer.......................................................................................xi

Part 1: AOFM overview ............................................................................................................. 1

Part 2: Operations and performance ......................................................................................... 5

Part 3: Management and accountability ................................................................................. 41

Part 4: Financial statements .................................................................................................... 53

Part 5: Other Information ...................................................................................................... 149

Glossary ................................................................................................................................ 159

Acronyms .............................................................................................................................. 169

Index of compliance with requirements ................................................................................ 171

Contact details ...................................................................................................................... 174

Index ..................................................................................................................................... 175

Part 3: Management and accountability ................................................................................. 41

Part 4: Financial statements .................................................................................................... 53

Part 5: Other Information ...................................................................................................... 149

Part 2: Operations and performance ......................................................................................... 5

Treasury Bond market .....................................................................................................................xiii

Treasury Bond market

Additional Treasury Bond issuance and investment of the proceeds

Management of the portfolio

Interest rate swap terminations

Residential mortgage-backed securities

• The use in cash management of short-term money market investments in highly-rated

Public Register of Government Borrowings

• The Guarantee Act contains no provisions to ensure participation by State and

• The AOFM is unlikely to be able to form an opinion on the domicile of beneficial

• The Act contains no provisions to compel the provision of information by beneficial

• No other country has similar requirements.

Cooperation with other debt managers

Sovereign Risk Manager of the Year award

Role, function, outcome and output structure ................................................................................ 3

Role, function, outcome and output structure

• Financial risk management;

• Compliance and reporting; and

• Finance, settlement and corporate functions.

Figure 1: AOFM organisational structure

Chief Executive Officer

Financial Market Papua New

• funding the Budget through the issuance of Australian Government debt;

• managing the Australian Government’s daily cash balances through short-term

• undertaking investments in financial assets in accordance with Government policy

• supporting the efficient operation of Australia’s financial system.

Treasury Bond issuance

Achieving the objective

Supporting the Treasury Bond market

Funding the Budget

Chart 1: Treasury Bonds outstanding as at 30 June 2009 and issuance in 2008-09

Securities lending facility

Consultation with financial market participants

• The turnover of 3-year Treasury Bond futures contracts decreased by around

All Treasury Bond futures contract close-outs in 2008-09 occurred smoothly.

Table 1: Treasury Bond tender results — 2008-09

Table 1: Treasury Bond tender results — 2008-09 (continued)

Denotes switch tender

Investment of the proceeds of additional Treasury Bond issuance

Achieving the objective