## _tnm1202 - References to the “treasury” throughout this TNM are to the function, not to any particular organizational model

## Source details

**Canonical URL:** [_tnm1202 - References to the “treasury” throughout this TNM are to the function, not to any particular organizational model](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/tnm/2012/_tnm1202.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/tnm/2012/_tnm1202.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/tnm/2012/_tnm1202.pdf.json)

---

### Scope and objectives
- Technical note and manual (TNM) addresses:
  - Interaction between treasury cash management and monetary policy operations within the wider context of the respective economic responsibilities of the ministry of finance and the central bank.
  - Institutional arrangements for an effective relationship between the treasury and the central bank.
  - Contractual arrangements between the treasury and the central bank for the provision of banking and other services.
- Target audience: developing countries reforming cash management operations, contemplating more active cash management, or where operational policy differences exist between the treasury and the central bank.

### Key framing and risks
- Central bank potential concurrent roles:
  - Monetary authority, settlement and payment system manager, liquidity provider, fiscal agent, provider of banking services to government, potential financial counterparty, owner, or regulator.
  - Often also the treasury’s banker and operational service provider (managing the TSA, acting as fiscal agent, settlement agent, or bond registrar).
- Core risk:
  - Differences in policy priorities, balance-sheet responsibilities, and perceptions of risk between the treasury and the central bank can produce conflicting policy actions and wider economic damage without adequate governance, planning mechanisms, and goodwill.
- Framework objectives:
  - Policy understanding and operational coordination.
  - Service provision covering fiscal, financing, and monetary policy coordination, management of T-bill auctions, and government banking arrangements.

### Modern framework and institutional separation
- High-level lesson:
  - Debt management, and fiscal and monetary policy should be treated as separate arms of macroeconomic policy with specific objectives; coherence in the overall policy mix is necessary.
- Central bank independence:
  - Independence of the central bank with respect to monetary policy is a key feature, with variation by national constitutional structures and practices.
  - For most practical purposes, control over short-term rates is sufficient for central bank objectives, although some central banks also influence monetary aggregates directly.
- Separation rationale:
  - Weak links between debt management choices and monetary conditions (and between monetary conditions and inflation) allow greater separation between monetary policy operations and debt/cash management.
- Roles under the modern model:
  - Central bank: focus on monetary policy; may continue to provide services (e.g., managing the TSA) but typically acts as agent, not policy driver.
  - Treasury: pools all government liquidity, takes full responsibility for debt management, and manages cash actively to lower average cash balances and moderate money market volatility.
  - Banking sector: provides banking services to the treasury and MDAs on a transparently-costed basis, typically under competitively tendered minimum standard SLAs.

### Traditional model — summary and consequences
- Traditional roles:
  - Treasury: government payment office; TSA incomplete; passive cash management; maintained cash buffers; could ration cash and cause arrears.
  - Central bank: managed domestic monetary conditions (policy rates, OMOs, reserve ratios); acted as fiscal agent and often influenced issuance and financing policies; provided banking services and managed payment/settlement systems.
  - Commercial banks: provided banking services to MDAs and held substantial government cash balances.
- Consequences highlighted:
  - Excess government liquidity: idle balances in the banking sector are costly to the government and profitable for banks; implicit subsidy to banks.
  - Short-term volatility: government cash flows cause short-term volatility in money markets and bank liquidity, complicating banks’ liquidity management and central bank monetary operations.
  - Conflicts: central bank implementation of government cash and debt management can conflict with monetary policy goals and operations.
  - Central bank lending to government increases the monetary base with potential inflationary consequences.

### Development of a modern treasury system — governmental requirements (Section III.A)
- Core requirements for a modern treasury management function:
  - A comprehensive TSA:
    - Consolidates all government cash balances into a single account, usually and preferably at the central bank.
    - All government revenues are transferred immediately upon receipt to the TSA, including own-revenues received by MDAs.
  - An efficient government payments system:
    - Centralized or decentralized; if decentralized, all MDA bank accounts should be connected to the TSA and zero-balanced overnight, with cash balances swept back to the TSA.
    - Commercial banks must have capacity to perform sweeping operations with the central bank and provide electronic payments and reconciliation services.
  - A linked treasury-managed integrated financial management information system (IFMIS):
    - Enables management, monitoring, control, reconciliation, accounting, and reporting of budget execution and bank account balances, in particular the TSA.
  - A cash flow forecasting system:
    - Ability to make accurate projections of short-term cash inflows and outflows.
    - Forecasts of daily cash flows across the TSA should be available for at least three months ahead on a rolling basis, including at the end of the fiscal year.
    - Must be coupled with an ability to monitor actual changes in the aggregate balance of the TSA top account, preferably in as close to real time as possible.
  - Active cash management:
    - Use of short-term financial instruments (T-bills, repos and reverse repos, collateralized term deposits, etc.) to manage balances and timing mismatches.
    - Objectives: ensure availability of cash, avoid unnecessary idle cash balances, minimize net borrowing costs, and lower volatility of the government’s cash balance to facilitate the central bank’s monetary policy task.
    - As capabilities develop, possible to target a low and stable TSA balance, which should be remunerated.

### The TSA and Payment Systems (Box 2) — processing, decentralization, coordination
- Transaction processing options:
  - TSA can work with centralized, decentralized, or hybrid payment systems.
  - Two-by-two matrix of transaction processing responsibility:
    - Central Bank responsible for banking operations / Treasury responsible for payment processing
    - Central Bank responsible for banking operations / Spending units responsible for payment processing
    - Commercial banks responsible for banking operations / Treasury responsible for payment processing
    - Commercial banks responsible for banking operations / Spending units responsible for payment processing
  - Devolution of payment responsibility tends to be associated with use of commercial banks to manage transactions.
  - Common country placements: top left (e.g., France, Russia) or bottom right (UK, Australia); mixed arrangements include China, India, USA; South Africa mostly bottom left.
- Decentralized systems — operational requirements:
  - Each MDA processes its own transactions and directly operates each respective claim on cash.
  - Key requirement where commercial banks are used: any cash balances left with the banking system at the end of the day should be swept back into the TSA; transactional accounts should be zero-balance accounts.
  - Principle: separation of cash from the permission to spend; cash does not leave the TSA until the payment is finally discharged.
- Treasury capacity and coordination prerequisites:
  - Treasury systems and staffing often need substantial enhancement to support financial transactions.
  - New coordination structures needed for information sharing between cash managers, revenue-collecting agencies, and spending MDAs; close coordination/integration of debt and cash management; agreements between treasury and central bank on information flows and responsibilities.
  - Financial market prerequisites: reasonably liquid money market is especially important; thin markets constrain active cash management in low-income countries.
  - Reform focus in constrained environments often centers on the TSA and cash flow forecasts.
- Implications for the central bank as TSA develops:
  - Initial repatriation of cash from MDAs to the TSA moves liquidity away from the banking system, often improving the central bank’s ability to control domestic monetary conditions.
  - Removal of implicit subsidies to commercial banks where government had not been receiving full market rates.
  - If government later transfers surplus cash out of the central bank by spending, retiring domestic debt, or short-term investments in the banking system, there will be a monetary easing, other things being equal.
  - Improved cash plans enable smaller cash buffers; if balances are unremunerated, the central bank will lose the benefit of cheap deposits.
  - Medium-term benefits: low and stable TSA balances, reduced government influence on domestic monetary conditions, moderation of fluctuations in government deposits, and improved flow of forecast information from the treasury.

### Operational separation, market clarity, and cooperation
- Market clarity and separation of responsibilities are essential:
  - Treasury cash managers should have no contact with the central bank regarding interest rate decisions or prospective interest rate changes.
  - Treasury should not receive from within the government advance notice of policy statements or data releases that might affect market short-term interest rate expectations.
- Cooperation areas:
  - Development of the domestic financial market, particularly the money market, which supports monetary control through market-based instruments (including repos).
  - Handling exceptional payment and receipt flows jointly when needed.
- Operational recommendations to avoid market disruptions:
  - Tenders associated with the central bank’s OMOs should be held at a different time of day than those of the treasury.
  - Treasury should avoid actions that might appear to undermine OMOs, such as putting cash into the banking sector at exactly the same time the central bank is trying to drain cash.
- Market practice:
  - Most active cash managers develop their own front office capabilities (directly managing issuance of T-bills and T-bonds, conducting auctions, promoting active relationships with market operators).

### The importance of the money market (Box 3)
- Roles of a functioning money market:
  - Transactions across all instruments of less than one year form the cornerstone of market-based financial intermediation.
  - A functioning money market must be operating well before a government bond market can be fully developed.
  - Functions: facilitates monetary policy through market-based instruments; provides signals of market expectations; allows banks and customers to manage liquidity; strengthens competition in financial intermediation.
- Key conditions for development:
  - Market-based methods of implementing monetary policy.
  - Adequate management systems that provide reliable estimates of future government cash flows and forecasts of aggregate bank liquidity.
  - Presence of banks and other financial institutions with incentives to develop efficient liquidity and risk management services.
- Impact on debt and securities markets:
  - Efficient money market lowers liquidity risk premiums and enables investors to hold larger portfolios of longer-term instruments; evolves parallel to government securities market; well-functioning repo market and securities lending arrangements are important for secondary trading.
- Information exchange requirements:
  - Treasury should provide cash flow forecasts to the central bank so it can incorporate them into forecasts of banking sector liquidity.
  - Central bank should keep the treasury informed of flows and balances across the TSA, ideally in real time, and facilitate reconciliation with the treasury’s accounting system.
  - Arrangements should also cover developments in the money market.
- Implications for commercial banks:
  - Reform imposes requirements on banks: full electronic integration and collective access to an automated clearing and settlement system, ideally linked to an RTGS.
  - Benefits: same-day passing of revenues from peripheral branches to the TSA; use of zero balance accounts; same-day crediting of supplier/employee accounts; removal of prefinancing requirements except for residual peripheral inefficiencies.
  - Banks’ transaction services should be remunerated via unit fees under formal contracts or SLAs, set by competitive bidding to be repeated at three- to five-year intervals.
  - As cash management develops, direct contractual relationships based on market standards will be needed for repos and other money market instruments; the market should set transaction prices.

### Treasury–central bank policy challenges: Treasury Bills and Central Bank Bills (Box 3)
- Fragmentation risk:
  - If central bank issues its own bills (CB-bills) to mop up excess liquidity, use of different instruments for monetary policy and cash management risks fragmenting the market.
- Mitigation options:
  - Issue paper of different maturities (example: CB-bills of two weeks or less; T-bills of three months or more).
  - Treasury overfunding and depositing surplus cash in a sterilized account at the central bank, allowing central bank to conduct monetary policy via repo or government securities transactions in the secondary market.
  - Treasury selling additional T-bills at the central bank’s request as add-ons to normal auctions, with proceeds sterilized in a separate remuneration account at the discount rate set in the bill auction; treasury cannot draw on this account and the bills will be redeemed from it.
- Preconditions:
  - These arrangements require trust between the treasury and the central bank and may be difficult when the central bank’s borrowing needs exceed the treasury’s.
  - In some countries the central bank can issue T-bills at its discretion with proceeds passed directly to the government’s account, but this must be within a framework agreed with the treasury and be transparently explained to the market.
- Cost sharing and balance-sheet issues:
  - Cost of open market operations falls to the central bank as part of monetary policy.
  - Paying interest on treasury’s sterilized account at the same rate as materialized in the auction leaves the treasury unaffected and central bank pays broadly the same rate as if it had issued CB-bills.
  - Where liquidity surpluses are driven by credit to the government, the ministry of finance should be prepared to pay for costs of sterilizing that liquidity.
  - If the central bank is chronically in deficit, it should be recapitalized from the budget or from long-term government securities issued to it.

### TSA outside the central bank (Box 3)
- Alternatives and safeguards:
  - Government balances can be held partially or totally outside the central bank in a government-owned commercial bank, which can provide pooling and help protect the central bank from fluctuations in the government’s cash position.
  - Required safeguards: a clear agency agreement giving the treasury unambiguous control over all government balances with timely and detailed information; good coordination and information sharing; market-based risk assessment of the bank; financial and cost transparency.
- Risks and transitions:
  - Government-imposed requirements may leave intermediary bank ill-equipped to compete; dependence on government deposits may reduce competitiveness.
  - Rapid withdrawal of excess balances may require phased withdrawal to allow bank adjustment.
  - Governments may continue using the bank for transaction purposes in smaller towns and rural areas; over time internal cross-subsidies should be removed and social obligations subsidized transparently.

### Remuneration of treasury deposits by the central bank (Box 3 & Box 4)
- Principles:
  - Agreement needed on rates of interest paid on the TSA balance and any other government deposits at the central bank.
  - Good practice: pay a market-related interest rate to improve transparency and avoid implicit cross-subsidies.
  - Reciprocal arrangements (treasury paying transaction-related fees and central bank remunerating deposits) help avoid distortion of treasury investment choices.
- Short-term practicalities:
  - Legislative constraints or balance-sheet pressures may complicate immediate full remuneration.
  - Short-term expedient: treasury may forego interest on a portion of balances (e.g., below a threshold), preserving correct incentives on balances above the threshold.
- Benchmark rates observed internationally (examples as cited):
  - Rates available for nonbank deposits at commercial banks (Peru, Belarus, China).
  - Rates for interbank deposits (Mexico).
  - Rates received on recent T-bill or related tenders (Italy, South Africa, Canada).
  - Rates on counterpart assets held by the central banks (Brazil, Trinidad and Tobago, Eastern Caribbean Currency Union).
  - Rates linked to central banks’ policy or corridor rates (several Eurozone countries), with possible different rates depending on whether balances exceed target levels.
  - Size-related schedules (example: Mauritius).
- Practices and considerations:
  - Use of counterpart-asset-based rates can protect central bank balance sheet but raises governance questions on asset identification.
  - Term-deposit arrangements are a common compromise where central banks do not pay market interest on the main TSA current account.
  - International prevalence: payment of interest on TSA balances is relatively rare among sub-Saharan African countries (South Africa and Ethiopia exceptions); Latin America historically often did not pay interest though Peru and Mexico now pay, and Chile earns a market rate on most cash balances.
  - There are examples of below-market rates (Philippines, Macedonia, Vietnam); currently low international rates often make differentials negligible.
- Sound practice recommendation:
  - The interest rate paid to the treasury should be at the same level as the market overnight rate or the central bank’s policy rate.

### Other operational and policy considerations
- Overdrafts and structural balances:
  - In less developed money markets, TSA overdrafts at the central bank may be necessary; limitations on overdraft use should be defined and reasonable notice given to the central bank of any drawdown.
  - Overdrafts should be used only for very limited short-term borrowing and be repaid before the end of the fiscal year.
  - Countries with structural cash surpluses (for example from natural resources) may hold funds in the central bank outside the TSA (sovereign wealth funds); rules for creation and operation should be clearly defined, particularly regarding treasury ownership of the resources.
- Market operations coordination:
  - Avoid simultaneous market operations that confuse price signals (e.g., central bank OMOs and treasury tenders at same time).
  - Ensure transparency on which institution is responsible for which market activity to prevent fragmentation and to support liquidity in market instruments.

*Technical Notes and Manuals 12/02  |  2012*

### References to the “treasury” throughout this TNM are to the function, not to any particular organizational model,

### _tnm1202 - References to the “treasury” throughout this TNM are to the function, not to any particular organizational model,

### Scope and objectives
- This technical note and manual (TNM) addresses:
  - Interaction between treasury cash management and monetary policy operations within the wider context of the respective economic responsibilities of the ministry of finance and the central bank.
  - Institutional arrangements for an effective relationship between the treasury and the central bank.
  - Contractual arrangements between the treasury and the central bank for the provision of banking and other services.
- Target audience: developing countries reforming cash management operations, contemplating more active cash management, or where operational policy differences exist between the treasury and the central bank.

### Key framing and risks
- The central bank can act simultaneously as monetary authority, settlement and payment system manager, liquidity provider, fiscal agent, provider of banking services to government, and potentially as financial counterparty, owner, or regulator; at the same time it is often the treasury’s banker and operational service provider (managing the TSA, acting as fiscal agent, settlement agent, or bond registrar).
- Core risk: Differences in policy priorities, balance-sheet responsibilities, and perceptions of risk between the treasury and the central bank can lead to conflicting policy actions and wider economic damage without adequate governance, planning mechanisms, and goodwill.
- A framework is vital for:
  - Policy understanding and operational coordination.
  - Service provision covering fiscal, financing, and monetary policy coordination, management of T-bill auctions, and government banking arrangements.

### Modern framework (Section II)
- High-level lesson: debt management, and fiscal and monetary policy should be treated as separate arms of macroeconomic policy with specific objectives; coherence in the overall policy mix is necessary.
- Key feature: independence of the central bank with respect to monetary policy, noting variation by national constitutional structures and practices.
- For most practical purposes, control over short-term rates is sufficient for central bank objectives, although some central banks also influence monetary aggregates directly.
- Separation rationale: weak links between debt management choices and monetary conditions (and between monetary conditions and inflation) allow greater separation between monetary policy operations and debt/cash management.

### Traditional model of operational roles (summary)
- Treasury:
  - Main role as government payment office; TSA incomplete; passive cash management; maintained cash buffers; could ration cash and cause arrears.
- Central bank:
  - Managed domestic monetary conditions (policy rates, OMOs, reserve ratios).
  - Acted as fiscal agent, running bond and bill auctions and often influencing issuance and financing policies.
  - Provided banking services to government (cashier, processor of payments, lender of last resort), settlement, registry services; managed payment and settlement systems and often prudential oversight.
- Commercial banks:
  - Provided banking services to MDAs and held substantial government cash balances.

### Consequences of the traditional model
- Excess government liquidity:
  - Idle balances in the banking sector are costly to the government and profitable for banks; implicit subsidy to banks; lack of market-related interest rates gives wrong incentives.
- Government cash flows cause short-term volatility in money markets and bank liquidity, complicating commercial banks’ liquidity management and the central bank’s monetary operations.
- Central bank implementation of government cash and debt management can conflict with monetary policy goals and operations (notably interest rate setting and signaling).
- Central bank lending to government increases the monetary base with potential inflationary consequences.

### Modern institutional separation of roles (summary)
- Central bank:
  - Focuses on monetary policy (greater independence; emphasis on control of inflation).
  - May continue to provide services (e.g., managing the TSA) but typically acts as agent, not policy driver.
- Treasury:
  - Becomes a fully-fledged function: pools all government liquidity, takes full responsibility for debt management, and manages cash actively.
  - Effective cash management lowers average cash balances, reduces costs, and moderates money market volatility.
- Banking sector:
  - Provides banking services to the treasury and MDAs on a transparently-costed basis, typically under competitively tendered minimum standard SLAs.
  - Role depends on centralization of government payment processing.

### Development of a modern treasury system (Section III.A) — governmental requirements
- Core requirements for a modern treasury management function:
  - A comprehensive TSA:
    - Consolidates all government cash balances into a single account, usually and preferably at the central bank.
    - All government revenues are transferred immediately upon receipt to the TSA, including own-revenues received by MDAs.
  - An efficient government payments system:
    - May be centralized or decentralized to MDAs; if decentralized, all MDA bank accounts should be connected to the TSA and zero-balanced overnight, with cash balances swept back to the TSA.
    - Commercial banks must have capacity to perform sweeping operations with the central bank and provide electronic payments and reconciliation services.
  - A linked treasury-managed integrated financial management information system (IFMIS):
    - Enables management, monitoring, control, reconciliation, accounting, and reporting of budget execution and bank account balances, in particular the TSA.
  - A cash flow forecasting system:
    - Ability to make accurate projections of short-term cash inflows and outflows.
    - Forecasts of daily cash flows across the TSA should be available for at least three months ahead on a rolling basis, including at the end of the fiscal year.
    - Must be coupled with an ability to monitor actual changes in the aggregate balance of the TSA top account, preferably in as close to real time as possible.
  - Active cash management:
    - Use of short-term financial instruments on liability and asset sides (T-bills, repos and reverse repos, collateralized term deposits, etc.) to manage balances and timing mismatches.
    - Objectives: ensure availability of cash, avoid unnecessary idle cash balances, minimize net borrowing costs, and lower volatility of the government’s cash balance to facilitate the central bank’s monetary policy task.
    - As capabilities develop, possible to target a low and stable TSA balance, which should be remunerated.

### Institutional and market underpinnings (brief)
- Changes in the government’s cash balance at the central bank (changes in the main operational TSA account) are usually the largest autonomous influence on a domestic banking system’s liquidity (credit institutions’ net holdings of deposits at the central bank).
- If the government moderates fluctuations in balances at the central bank, the central bank’s domestic liquidity management task is reduced accordingly.

*Technical Notes and Manuals 12/02  |  2012*

### Box 2: The TSA and Payment Systems

### Box 2: The TSA and Payment Systems

### Processing arrangements and options
- The TSA can work with a variety of payment systems that are centralized, decentralized, or hybrid, whether in relation to approval, transaction processing, or accounting control.
- There is, in effect, a two-by-two matrix for transaction processing responsibility:
  - Central Bank responsible for banking operations / Treasury responsible for payment processing
  - Central Bank responsible for banking operations / Spending units responsible for payment processing
  - Commercial banks responsible for banking operations / Treasury responsible for payment processing
  - Commercial banks responsible for banking operations / Spending units responsible for payment processing
- Devolution of payment responsibility tends to be associated with the use of commercial banks to manage transactions.
- Most countries fall either into the top left cell of the matrix (such as France, Russia) or the bottom right (UK, Australia), although other examples exist (South Africa mostly in the bottom left cell).
- Several nations have mixed arrangements (China, India, USA).
- Centralization of payments is relatively more common in smaller or less developed countries, often as part of reform processes.
- Centralized transaction processing implies a concentration of authority in the treasury to process transactions and to access and operate the TSA; the treasury may approve as well as process payments.
- In some cases (Belarus, Argentina, Georgia), MDAs may be responsible and accountable for payments, although the treasury will process the payments.

### Decentralized systems and operational requirements
- In decentralized payment and accounting systems, each MDA processes its own transactions and directly operates each respective claim on cash.
- Key requirement where commercial banks are used:
  - Any cash balances left with the banking system at the end of the day should be swept back into the TSA.
  - Any transactional accounts should be opened as zero-balance accounts.
- Principle: separation of cash from the permission to spend; cash does not leave the TSA until the payment is finally discharged.
- Requirements apply to accounts used for disbursements or for the collection of government revenues; ultimately, all revenues are deposited in the TSA.

### Treasury capacity, coordination, and market prerequisites
- Treasury capacities (systems, staffing) and organizational structures often need to be substantially enhanced, not least to support financial transactions.
- New coordination structures are needed to cover:
  - Information sharing between the cash managers, revenue-collecting agencies, and spending MDAs (and any relevant ministry branch offices), in relation to payment and revenue flows, and cash flow forecasting.
  - The close coordination (or integration) of debt and cash management operations.
  - Agreements between the treasury and the central bank on information flows, respective responsibilities, and any operational interactions, including the development of the financial markets.
- Financial markets require a certain level of development and liquidity if cash is to be managed actively; a reasonably liquid money market is especially important.
- These sound practice elements apply equally to developed and to developing countries.
- Constraints in low-income countries: thin financial markets and poor liquidity in the money market limit active cash management; reform efforts tend to focus on the TSA and developing cash flow forecasts.
- Many emerging market and middle-income countries are increasingly using T-bills or bank deposits to smooth cash flows, building on improved forecasts.

### Implications for the central bank
- Modern treasury functions and improvements in government cash management have implications for the central bank, underpinned by the central bank having the operational responsibility for the conduct of monetary policy.
- Initial effects as TSA develops and cash is repatriated from MDAs’ balances in commercial banks to the TSA:
  - Liquidity will move away from the banking system, often helping the central bank by improving its ability to control domestic monetary conditions over this period.
  - If the government has not been receiving a full market rate on its cash balances, the implicit subsidy to commercial banks will, in essence, be removed.
  - Withdrawal of deposits from banks has implications for banks (discussed elsewhere).
- As government starts to manage surplus cash by transferring it out of the central bank—whether by spending, by retiring domestic debt, or through short-term investment in the banking system—there will be a monetary easing, other things being equal.
- A better cash plan will allow the treasury to hold smaller cash buffers to insure against an unexpected shortage of cash.13
- If balances are unremunerated, the central bank will lose the benefit of cheap deposits.
- Further negative impact on central bank profits may occur if it is required to drain cash to offset monetary easing, either by issuing its own bills or borrowing through repo.
- Medium-term benefits to the central bank:
  - Improved quality of cash plan projections leads to the treasury holding its cash balances at a low and stable level.
  - Government no longer exerts a significant influence on domestic monetary conditions.
  - Moderation of fluctuations in government deposits in the central bank provides a more stable environment for monetary policy operations.
  - Other autonomous influences on domestic liquidity—such as change in public demand for bank notes and net foreign currency inflows—remain but are more predictable or more directly controlled by the central bank.
  - Even when the treasury cannot smooth cash balances completely, the central bank should benefit from an improved flow of forecast information from the treasury on future changes in the TSA.

### Operational separation, market clarity, and cooperation
- The central bank may continue to act as fiscal agent for the conduct of auctions.
- Risk of confusion exists between central bank and treasury operations as money market transactions increase, particularly where the same group of market counterparties is involved.
- Most active cash managers develop their own front office capabilities (directly managing issuance of T-bills and T-bonds, conducting auctions, promoting an active relationship with market operators).
- Importance of market clarity: no misunderstanding as to which institution is responsible for which activity and their respective aims.
- Respective policy responsibilities must be clear:
  - Government cash managers usually have no contact with the central bank regarding interest rate decisions or prospective interest rate changes.
  - They should not receive from within the government any advance notice of policy statements or data releases that might affect the market’s short-term interest rate expectations.
- Cooperation area: development of the domestic financial market, particularly the money market, which supports monetary control through market-based instruments (including repos) and facilitates more active management of government short-term cash flows (see Box 3).
- Operational recommendations to avoid market disruptions:
  - Tenders associated with the central bank’s OMOs should be held at a different time of day than those of the treasury.
  - Treasury should avoid actions that might appear to undermine OMOs, such as putting cash into the banking sector at exactly the same time the central bank is trying to drain cash.
- The two institutions may need to cooperate in handling exceptional payment and receipt flows (for example, an unusually large tax payment could...).

*Source: Box 2, "The TSA and Payment Systems," Technical Notes and Manuals 12/02 | 2012.*

### Box 3: The Importance of the Money Market

### Box 3: The Importance of the Money Market

### Roles and importance of a functioning money market
- A functioning money market, usually defined as transactions across all instruments of less than one year, is the cornerstone of a competitive and efficient system of market-based financial intermediation.
- A country’s money market must be operating well before a government bond market (including an efficient primary market and a liquid secondary market) can be fully developed.
- A well-functioning money market plays several important roles:
  - it facilitates the conduct of monetary policy through market-based instruments, anchoring the short end of the yield curve and supporting the development of the foreign exchange market;
  - it provides the authorities with better signals of market expectations;
  - it allows banks and their customers to better manage their liquidity; and
  - it strengthens competition in financial intermediation.

### Key conditions for development
- The development of a well-performing money market requires three key conditions:1
  - Market-based methods of implementing monetary policy.
  - Adequate management systems that provide reliable estimates of future government cash flows and forecasts of aggregate bank liquidity.
  - The presence of banks and other financial institutions with incentives to develop efficient liquidity and risk management services.

### Impact on debt and securities markets
- An efficient money market stimulates the development of more active debt securities markets by lowering liquidity risk premiums and enabling investors to hold larger portfolios of longer-term instruments.
- It should evolve parallel to the government securities market.
- Access to liquidity and securities, with a well-functioning repo market and securities lending arrangement, is important for proper secondary trading activities.
- A well-developed money market also helps promote private issuance of negotiable certificates of deposit, promissory notes, and commercial papers.
- Active markets in short-term instruments support the development of longer-term corporate bond markets.

### Information exchange and TSA interactions
- Three main regular requirements for information exchange:
  - The treasury should provide cash flow forecasts to the central bank so that it can take these into account in its own forecasts of banking sector liquidity.
  - The central bank should keep the treasury informed of flows and balances across the TSA, ideally in real time, and facilitate the reconciliation with the accounting system managed by the treasury.
  - Arrangements for information exchange should also cover developments in the money market.15

### Implications for commercial banks
- Reform of cash management changes the treasury’s relationship with the banking system and imposes requirements on banks, notably full electronic integration and collective access to a modern automated clearing and settlement system.16
- Such a system should either be, or be linked to, a real time gross settlement system (RTGS), to allow low risk real-time settlement of high-value payments across accounts at the central bank. Such arrangements would:
  - Allow revenues to be passed from a peripheral rural branch to the bank’s head office and the TSA on the same day.15
  - Make it possible, under dispersed payment systems, to use zero balance accounts, with any balances being swept into the TSA at the end of the day (and, if necessary, returned the next day).
  - Enable same-day crediting of the bank accounts of suppliers or employees.
  - Remove the requirement for expenditures to be prefinanced, or any government float or “seed financing”, except perhaps to handle residual inefficiencies at the periphery.17
- Where the banking system lags, the treasury should take the initiative with the central bank to map out a development program, using regulation or incentives as necessary.
- The ability of banks to hold onto tax revenues for a time without paying interest has been a traditional source of income; modernization and repatriation of balances reduce this source of profit.
- Banks’ transactions services should be remunerated via unit fees for each transaction based on a formal contract or SLA, avoiding implicit cross-subsidies:
  - Fees should not simply be cost-plus or read off publicly available tariffs; a competitive process is necessary, to be repeated at three- to five-year intervals.
  - The government should request bids against specified minimum standards and may need to split business between more than one bank if necessary.
- As cash management develops, direct contractual relationships based on market standards will be needed for repos and other money market instruments.18
- The market should set the price of transactions, whether through auctions, tenders, deals over the counter, or across trading exchanges.

### Treasury–central bank policy challenges: Treasury Bills and Central Bank Bills
- Strains arise when the central bank lacks sufficient means (collateral) to mop up excess domestic liquidity through repo operations; this may lead the central bank to issue its own bills (CB-bills).
- Use of different, but comparable, instruments for monetary policy and cash management risks market fragmentation and reduced liquidity because demand is spread over two instrument types.
- Ways to mitigate fragmentation:
  - Agree to issue paper of different maturities (for example, CB-bills of two weeks or less; T-bills of three months or more) and market differently.
  - Treasury may overfund borrowing requirements by issuing extra T-bills or T-bonds, depositing surplus cash in a sterilized account at the central bank, and allowing the central bank to conduct monetary policy via repo or outright government securities transactions in the secondary market (examples: Mexico and Singapore).
  - Treasury can sell additional T-bills at the central bank’s request as an add-on to normal auctions, with proceeds sterilized in a separate remuneration account at the discount rate set in the bill auction; the treasury cannot draw on this account and the bills will be redeemed from it.
- These arrangements require trust between the treasury and the central bank and may be difficult when the central bank’s borrowing needs exceed the treasury’s.
- In some countries the central bank can issue T-bills at its discretion with proceeds passed directly to the government’s account, but this must be done within a framework agreed with the treasury and be transparently explained to the market.
- Cost sharing:
  - The cost of open market operations falls to the central bank as part of discharging monetary policy operations.
  - By paying interest on the treasury’s sterilized account at the same rate as materialized in the auction, the treasury is left unaffected and the central bank pays broadly the same rate as if it had issued CB-bills.
  - Where liquidity surpluses are driven by credit to the government, the ministry of finance should be prepared to pay for the costs of sterilizing that liquidity.
  - If the central bank is chronically in deficit, it should be recapitalized from the budget or from long-term government securities issued to it.

### TSA outside the central bank
- Some countries hold government balances partially or totally outside the central bank in a government-owned commercial bank; such a bank can provide the pooling function of the TSA and help protect the central bank from fluctuations in the government’s cash position.20
- Safeguards required:
  - A clear agency agreement giving the treasury unambiguous control over all government balances, backed by timely and detailed information on those balances.
  - Good coordination and information sharing.
  - A market-based risk assessment of the bank, reducing potential exposure of the government to credit risk and moral hazard.
  - Financial and cost transparency, covering costs and activities performed on behalf of the government.
- Risks and transitions:
  - Government-imposed requirements may leave the intermediary bank ill equipped to compete; it may be dependent on government deposits or collection lags to finance its business.
  - Rapid withdrawal of excess balances cannot be unwound overnight; a phased withdrawal may be required to allow the bank to adjust.21
  - Governments may continue using the bank for transaction purposes where it is the only presence in smaller towns and rural areas; over time internal cross-subsidies should be removed and social obligations subsidized transparently.

### Remuneration of treasury deposits by the central bank
- Agreement is needed on rates of interest paid on the TSA balance and any other government deposits at the central bank.
- Good practice is to pay a market-related interest rate:
  - This improves transparency and avoids implicit cross-subsidies associated with administered rates.
  - It removes the incentive for the treasury to make economically inappropriate decisions in relation to its balances, such as placing funds in commercial banks with low credit ratings.
- Reciprocal arrangements (treasury paying transaction-related fees and central bank remunerating deposits) help avoid potential distortion to treasury investment choices.
- Short-term practicalities:
  - Legislative constraints or pressures on the central bank’s balance sheet may complicate immediate full remuneration.
  - In the short term, it may be expedient for the treasury to forego interest on a portion of balances (for example, below a threshold), preserving correct incentives on balances above the threshold.
- International practice varies; interest is paid by central banks in proportionately more developed countries than in emerging market or low-income countries.22
- Sound practice: the interest rate paid to the treasury should be at the same level as the market overnight rate or the central bank’s policy rate.

### Other issues
- In countries with less developed money markets, constraints on liquidity management may force the TSA held at the central bank into overdraft; limitations on overdraft use should be defined and reasonable notice given to the central bank of any drawdown.
- Payment of a market interest rate should act as a disincentive to use overdraft; any overdraft should be used only for very limited short-term borrowing and be repaid before the end of the fiscal year.
- Countries with a structural surplus of cash (for example from natural resources) may hold it in the central bank but outside the TSA in some form of sovereign wealth fund; rules to create and operate these accounts should be clearly defined, particularly in relation to the treasury’s ownership of the resources.

*Source: Box 3: The Importance of the Money Market (Technical Notes and Manuals 12/02, 2012).*

### Box 4: Interest Paid on the TSA: Some International Experience

### Box 4: Interest Paid on the TSA: Some International Experience

### Prevalence of interest payment on TSA balances
- The payment of interest by the central bank is relatively rare among sub-Saharan African countries, where there are often legislative constraints (South Africa and Ethiopia are exceptions).
- In Latin America historically interest was often not paid, although interest is now paid on balances in Peru and Mexico, and Chile currently earns a market rate on most of its cash balances.
- Many central banks that do not pay market interest rates on the main TSA current account are willing to do so on term deposits.

### Benchmark rates used for remunerating government balances
- Benchmark rates applied by various countries include:
  - Rates available for nonbank deposits at commercial banks (Peru, Belarus, China).
  - Rates for interbank deposits (Mexico).
  - Rates received on recent T-bill or related tenders (Italy, South Africa, Canada).
  - Rates on counterpart assets held by the central banks (Brazil, Trinidad and Tobago, countries in the Eastern Caribbean Currency Union).
  - Rates linked to the central banks’ policy or corridor rates (several Eurozone countries), noting that different rates may be paid depending on whether balances exceed target levels.
  - Size-related schedules where different rates apply depending on the balance size (example: Mauritius).

### Practices and implications of using counterpart assets as benchmarks
- Some central banks use the rate on counterpart assets when balances are large; this helps to protect the central bank’s balance sheet.
- The use of counterpart-asset-based rates raises the argument that the central bank is then acting as agent and that the treasury should have a role in identifying the assets.
- The same point applies to wealth or stabilization funds held on central banks’ balance sheets (examples cited: Botswana and Peru).
- In Brazil, counterpart assets mirror the outstanding stock of debt in the market, giving the monetary authority a range of instruments to use as collateral, and remunerating the treasury at a rate that reflects the overall cost of debt.

### Cases of below-market rates and current context
- There are examples where the interest paid is at rates below the market’s rates (Philippines, Macedonia, and Vietnam).
- Currently low international interest rates often make the differential between paid and market rates negligible.

### Operational and policy considerations
- The choice of benchmark and the basis of interest—maturity, relevant market analogues, etc.—should be identified and agreed at the policy level.
- When central banks remunerate large balances using their own counterpart assets, governance and the respective roles of treasury and central bank in asset identification should be clarified.
- Term-deposit arrangements are a common compromise for central banks that do not pay market interest rates on the main TSA current account.

*Source: Box 4, "Interest Paid on the TSA: Some International Experience", Technical Notes and Manuals TNM/12/02 (2012).*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/tnm/2012/_tnm1202.pdf_