23. Financial risk management In the ordinary course of its activities, the Group actively manages a variety of financial risks including credit risk, liquidity risk and market risk. The Group identifies, measures and monitors risk through various control mechanisms as detailed in the following sections, including maximum approved counterparty exposure and diversifying exposures and activities across a variety of instruments, markets and counterparties.
(a) Credit risk Credit risk is the risk that the Group would incur a financial loss if a counterparty fails to discharge their obligations to the Group.
Credit risk exposure The Group is subject to credit risk from its financial assets held by various counterparties and the risk is particularly concentrated on its investment cash balances and certificates of deposit due to the significant value of these balances. The following table details the Group‘s maximum exposure to credit risk as at 30 September:
2011 £m
Interest-bearing securities
Derivative financial instrument asset positions Investment cash balances and certificates of deposit Cash collateral held
Accrued income from investments
Proceeds receivable on sale of investments Other investment debtor balances Programme related investment loans Other debtors
Term deposits and cash
31.0 48.5
445.9 50.8 11.1 27.9 12.7 4.2
13.7 34.1
679.9 None of the Group’s financial assets subject to credit risk are past their due date or were impaired during the year.
Risk management policies and procedures The objective of managing credit risk is to minimise counterparty default on the Group’s financial assets causing financial loss to the Group. The Group aims to mitigate its counterparty credit risk exposure by monitoring the size of its credit exposure to and the creditworthiness of counterparties, including setting appropriate exposure limits and maturities. Counterparties are selected based on their financial ratings, regulatory environments and specific circumstances.
The following details the risk management policies applied to the financial assets exposed to credit risk:
• for interest-bearing securities the credit rating of the issuer is taken into account to minimise the risk to the Group of default. Investments are made across a variety of industry sectors and issuers to reduce concentrations of credit risk;
• transactions involving derivative financial instruments are entered into only with reputable banks, the credit ratings of which are taken into account to minimise credit risk. Derivative financial instrument asset positions exposed to credit risk comprise the Group’s forward currency contracts;
• direct cash management mandate is limited to the use of deposits with selected banks (the credit ratings of which are taken into account to minimise credit risk), the purchase of short dated UK Government securities and the controlled use of AAA rated money market funds; and
• sale and purchases of investments are carried out with a small number of brokers, whose credit quality forms part of the initial and ongoing reviews by the investment managers.
These policies and procedures were applied and reviewed during the year. At the balance sheet date, in addition to the securities on loan discussed in note 15(a), forward currency contract assets of value £3.2 million (2010: £37.0 million) were secured by cash collateral. There were no other credit enhancements.
(b) Liquidity risk Liquidity risk is the risk that the Group will encounter difficulties raising cash to meet its obligations when they fall due.
Liquidity risk exposure This is a risk to the Group, given the value of the Group’s commitments to charitable and investment activities.
Annual Report 2011 | 69
2010 £m
23.5 45.3
916.5 81.9 11.6 68.4 23.6 3.6
15.2 26.8
1,216.4
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