Risk Management & Compliance

Risk Management & Compliance

Internal Risk Management and Control
TCV’s operations expose the Corporation to financial and operational risks. Effective management of these risks is one of our core organisational objectives.

We aim to provide a robust and consistent risk management, performance measurement and capital management framework. This framework is commensurate with TCV’s business mandate, corporate objectives and appetite for risk.

TCV’s Board has adopted an annually reviewed formal Risk Appetite Statement. This statement sets the parameters for our exposure to risk.

TCV's risk management framework is consistent with the Prudential Policy requirements established by the Treasurer. The framework is monitored by the Board and the Prudential Supervisor appointed by the Treasurer. It includes an independent Risk and Performance Measurement business unit, and internal risk management controls set by the Board and senior management. Clear delegations, responsibilities and authorities further strengthen the framework.

TCV also maintains an Internal Audit function (currently outsourced to PricewaterhouseCoopers).

Interest Rate Risk
Interest rate risk is the risk of a loss caused by adverse movements in interest rates.

TCV has a comprehensive measurement and control framework to manage Interest rate risk, as it is the principal market risk to which TCV is exposed. We use both Value-at-Risk and other portfolio level risk measures. Risk and revenue are monitored daily within an approved control and limit structure, with breaches or excesses reported to the Managing Director and Board.

Funding Liquidity Risk
Funding liquidity risk is the risk of TCV being unable to raise funds to meet its financial obligations.

TCV has a comprehensive internal policy on liquidity risk management which includes the following key elements:

• operating (or day-to-day) liquidity management. We ensure that there are sufficient cash inflows, including from maturing assets, to fully meet the obligations of maturing liabilities at all times
• prudential liquid assets holding. We require that a minimum level of high quality, readily liquefiable assets is always held to meet any emerging liquidity requirements
• balance sheet mismatches and sources of funding are monitored to make sure they are within acceptable parameters
• a periodically-reviewed liquidity crisis action plan.

The size of the minimum prudential liquid assets holding requirement is assessed periodically through liquidity stress testing.

Investment Liquidity Risk
Investment liquidity risk is the risk of TCV needing to dispose of an investment at a time when a lack of market liquidity makes achieving a fair return impossible. To manage this risk, eligible investments must satisfy certain minimum market-liquidity criteria.

Credit Risk
TCV's exposure to credit risk arises primarily through investment in financial assets and outstanding derivative transactions with market counterparties. The credit risk arising from loans to participating authorities is offset, in all instances, by a guarantee from the Treasurer of Victoria.

The minimum credit quality and types of investments that TCV can make are set by the State Government under the approved investment powers for TCV. Under these powers, TCV’s credit-risk management framework sets conservative limits for both the quality and amount of credit exposure TCV can hold.

TCV’s credit assessments are based on both external credit ratings and in-house credit analysis. We generally require long-term ratings of at least A-/A3/A- by Standard & Poor’s/Moody’s/Fitch for exposures of up to 12 months, and progressively higher minimum ratings for longer-term exposures. Credit limits must be approved by the Board or the Managing Director (under powers delegated by the Board). Our managers actively monitor credit exposures for changes in credit quality and modified limits.

Operational Risk
TCV has adopted the generally accepted definition of operational risk as ‘the risk of indirect or direct loss resulting from inadequate or failed internal processes, people and systems or from external events’. We use a scorecard approach to regularly map and evaluate our operational risk profile, assessing the likelihood and consequence of identified risks. We then develop plans to manage these risks. The implementation of these plans is monitored regularly.

Prudential Policy on Capital
TCV’s risk management framework incorporates the risk-based capital adequacy approach specified in our Prudential Policy. This framework is adopted from the capital adequacy standards that the Australian Prudential Regulatory Authority (APRA) sets for Australian banks. We are required to hold a minimum capital adequacy ratio of 8% of risk-weighted assets under this policy. We aim to maintain a capital ratio of at least 10.5%.

Business Continuity
TCV has implemented detailed business continuity and information technology disaster recovery plans. These plans ensure that:

• all critical TCV business operations are safeguarded in all situations
• key resources are available and effectively managed
• these plans are reviewed quarterly and tested annually.

Occupational Health & Safety (OHS)
We manage risks to the personal safety of our staff and visitors to our premises through a comprehensive occupational health and safety program.

External Compliance
TCV’s compliance monitoring is consistent with the State’s financial management principles and financial risk management framework. Several external entities are responsible for monitoring, supervising and reporting on our activities, including:

Treasurer of Victoria – Member of Parliament and TCV’s sole shareholder.

Prudential Supervisor – reports to the Treasurer. Oversees TCV's risk framework and provides independent advice to the Treasurer on the financial health, risks and risk management policies of our operations. The Treasurer has appointed Ernst & Young as TCV’s current Prudential Supervisor.

Department of Treasury and Finance (DTF) – reports to the Treasurer. Maintains a shareholder monitoring role and manages the Prudential Supervision relationship with TCV.
Prudential Auditor – reports to the Prudential Supervisor and DTF. Ensures TCV meets prudential requirements and that information reported to the Prudential Supervisor by TCV is accurate. The Treasurer has appointed PricewaterhouseCoopers as TCV’s current Prudential Auditor.

Auditor-General – reports to Parliament. Provides an independent audit of TCV’s financial report and offers opinions to the Members of the Parliament of Victoria, the responsible Ministers and TCV’s Board, as required by the Audit Act 1994. The Victorian Auditor-General’s Office has appointed Ernst & Young as its current agent.

Minister for Finance – Member of Parliament. Monitors TCV’s compliance with the State’s financial and tax reporting and accountability framework via DTF's annual compliance certification process.