The primary objective of liquidity risk management is to avoid the risk of government not meeting its payment obligations on time and in full. This chapter outlines the foundations of liquidity policy frameworks in terms of objectives, coverage and disclosure policy. It examines different country practices relating to liquidity risk management and performance assessment frameworks. These include setting cash balance or liquidity targets as buffers, aligning cash inflows and outflows, buybacks, and pre-funding tools. It also discusses the interaction between liquidity policy and monetary policy under different organisational frameworks.
Managing Government Cash
A Review of Practices in OECD Countries
Abstract
In cash management, the primary objective of liquidity policy is ensuring the government can meet its payment obligations in full and on time. A country’s approach to liquidity risk is, therefore, central to understanding its cash management framework.
Countries adopt different approaches to liquidity risk management. This chapter documents the diverse liquidity risk management practices of OECD countries, highlighting commonalities and differences. It serves as a resource for countries evaluating the most relevant components for their specific circumstances.
The chapter is structured as follows: it first addresses the foundations of liquidity policy frameworks, including their objectives, scope, institutional mechanisms and the definition of liquidity. It then discusses the interplay between liquidity and monetary policy, highlighting how agreements between the central bank and the treasury shape liquidity policies. This is followed by a section about risk management and the performance of liquidity policies, focusing on key risks, KPIs monitored by cash management teams, and frameworks for oversight and transparency. The next section focuses on various aspects of cash and liquidity buffer practices, which are the core elements of liquidity risk management practices. The last section prior to the conclusion covers other approaches to liquidity risk management, such as matching cash inflows and outflows, liability management, pre-funding redemptions, and contingency plans.
3.2.1. Objectives
Although the primary objective of liquidity policies is the same across all countries, some also have secondary objectives that can significantly shape their liquidity policies. For instance, the United States explicitly plans for potential market disruptions, such as natural disasters or cyberattacks, and maintains a large cash buffer as a contingency to guard against such events. In the euro area, some countries also focus more on optimising the returns on their cash investments, while in the United Kingdom, minimising the impact of government activity on central bank operations and money markets is also part of the cash management objective.
These secondary objectives are driven by country-specific contextual factors that are highly influential in cash management practices. In the United States, the current cash buffer policy was introduced in 2015. This change in treasury’s cash management policy resulted from an internal review, the TBAC’s recommendations, and an assessment of emerging threats, such as potential cyber-attacks, that could cause disruptions to the broader financial system and treasury’s auction capabilities (Box 3.1). In the euro area, countries generally seek to invest their cash balances in markets because the European Central Bank (ECB) offers below-market returns on government deposits. This creates the secondary goal of liquidity policy: to maximise returns while managing risk. In the United Kingdom, the current liquidity policy was set when the Bank of England (BoE) gained full independence, and, thus, it includes a goal to minimise the use of the BoE’s balance sheet and reduce interference with money markets to support the efficacy of the BoE’s monetary policy tools.
3.2.2. Policy coverage
The form countries’ liquidity policies take ranges from non-explicit to explicit frameworks with detailed guidelines covering principles, rules, tools, and procedures. In countries with explicit frameworks, liquidity policies are highly structured, detailing principles, rules, tools, and procedures, which may define liquidity indicators for risk management (e.g. Latvia), outline methodologies, calculations, and protocols for managing liquidity risks (e.g. New Zealand), include specific measures for addressing particular risks (e.g. the United Kingdom), or cover short-term investment guidelines, including counterparty risk (e.g. Italy). In contrast, some countries have no formal liquidity policy and rely either on broad guidelines from the MoF or manage liquidity through the DMOs’ delegated responsibility for liquidity management (e.g. Germany).
Somewhere between these two approaches sit countries whose liquidity policies focus broadly on maintaining an optimal or minimum level of liquidity but where there is otherwise limited guidance. Although an explicit liquidity policy exists, the cash management teams have high operational flexibility to meet these levels. This approach is taken in Belgium, Finland, Hungary, and the United States.
3.2.3. Disclosure policy and institutional mechanism
The disclosure of liquidity policies ranges from official public documents to internal guidelines with limited disclosure, with the latter being more common. In most countries, liquidity policies take the form of internal guidelines that follow an approval process but remain confidential (e.g. Belgium, Hungary, Ireland, New Zealand, Türkiye and the United Kingdom).
Some exceptions include Italy, where the main features of cash management activity are formalised through a publicly available ministerial decree while the policy is defined through internal guidelines; Sweden, where it is outlined in the law; and the United States, where critical aspects of the liquidity policy have been publicly announced. An example of a mixed approach is Latvia, where part of the general cash management strategy is public, but the more prescriptive guidelines are internal.
Liquidity policy is most commonly defined by the MoF or the treasury, but in some cases, it is also handled by the DMO. When set by the MoF or treasury, the policy can take the form of a decree (e.g. Italy), guidelines (e.g. Finland, New Zealand), or committee decisions (e.g. Türkiye). In other instances, the DMO establishes the policy independently (e.g. Germany) or through an internal committee (e.g. Belgium and Ireland). In the latter cases, cash management and liquidity policy have been nearly fully delegated to the DMO, which sets these guidelines to formalise its practices internally.
3.2.4. Definitions of liquidity
The definition of liquidity always includes the TSA balance, but it may also include other items. The cash balance at TSA is the safest asset as it bears no credit risk and is deposited with the treasury’s fiscal agent. In some countries, this is the only component of liquidity (e.g. Brazil and the United States).
Many countries also include other assets in their definitions of liquidity. These can range from maturing short-term investment treated as cash at maturity (e.g. Belgium), term deposits placed in commercial banks (e.g. Latvia), term deposits placed in public banks (e.g. Türkiye) and cash instruments depending on their liquidity and quality (e.g. Finland, Italy, Latvia and New Zealand), as discussed in Chapter 4. Additionally, some countries include security holdings that can be readily sold or used as collateral in reverse repos (e.g. Germany and New Zealand), FX deposits of the central government held in the central bank (e.g. Hungary), cash collateral placed by swap counterparties at the DMO (e.g. Hungary), and the ability to borrow cash readily through markets (e.g. the United Kingdom and Türkiye).
These differences are a result of a cash manager's local context. For instance, the US defines liquidity strictly as cash, focusing on mitigating market access risk. This is in large part due to the experience of past events that caused market disruptions. In contrast, euro area countries mostly assume continuous market access and invest a large portion of their cash balances in money markets, which are typically included in their liquidity definitions. With a large portfolio of its own bonds and a very active repo desk, Germany includes these holdings in its liquidity definition. Meanwhile, the United Kingdom holds a relatively small amount of assets, assuming ready market access. This also follows its objective of minimising the use of the BoE’s balance sheet.
After consultation with its Treasury Borrowing Advisory Committee (TBAC), the US Treasury announced a change to its cash management policy beginning in May 2015. Henceforth, the treasury would hold sufficient cash to cover one week of outflows, subject to a minimum balance of roughly USD 150 billion.
The change was motivated by events, including the September 11 terrorist attacks in 2001, Superstorm Sandy in 2012, and a 2013 IT issue, which demonstrated that the treasury could lose market access for up to three business days. Simulations also revealed that heavy seasonal issuance concentrated around specific dates, elevating the risk of a cash shortfall in the event of an extended market shutdown. Thus, a prolonged market disruption could result in a technical default without this minimum balance in place.
The precise level of the balance represents neither a target nor a maximum but rather the minimum level of cash the treasury requires to ensure it can meet its obligations even if its ability to borrow new funds is temporarily disrupted. This value was calibrated considering net fiscal outflows and the gross volume of maturing marketable debt, as well as cash flow uncertainty that can result from various factors, including changes in economic activity influencing tax revenue, irregular outlays from federal programmes, and the potential for legislative changes that affect short-term cash flows.
Variations in cash flows cause the treasury’s liquidity needs to fluctuate weekly. To minimise market disruption, the treasury adjusts auction sizes gradually and bases its borrowing plans on cash flow projections for the coming weeks and months. This process often results in the treasury holding a cash balance above this minimum level.
Buybacks can also help to smooth gross financing needs and enhance market liquidity. The US Treasury conducts two types of buyback operations: liquidity support buybacks (which began in May 2024) and cash management buybacks (which began in September 2024). The cash management buybacks are intended to reduce volatility in treasury’s cash balance and treasury bill issuance, minimise bill supply disruptions, and reduce borrowing costs over time. Specifically, cash management buybacks will generally take place seasonally, predominantly during the weeks immediately surrounding major tax payment dates (e.g., mid-April, mid-June, mid-September, and mid-December), when cash balances tend to increase rapidly.
3.3.1. Agreements between the central bank and the treasury
While central banks implement monetary policy decisions independently from their role as fiscal agents for the government (i.e. handling banking and settlement operations), they may still receive information from the cash management team to better time their monetary policy operations. This is because government cash management operations are substantial, and when the DMO injects cash into the market, liquidity increases in the banking sector, which the central bank may need to sterilise.1 Therefore, central banks benefit from forecasts of government cash flows, typically shared daily and covering the next 10 to 60 days.
The relationship between the central bank and the treasury is often defined by laws. In some cases, it is set out in detail in MOUs, SLAs, or informal arrangements. These agreements outline the central bank’s role as the treasury’s fiscal agent, the costs of services, and coordination mechanisms, such as the daily exchange of cash forecasts and settlement of cash flows. In New Zealand and the United Kingdom, MOUs or SLAs have been established to coordinate operations. In New Zealand, an MOU governs the managed wind-down of the central bank’s large-scale asset purchase programme, specifying the pace and timing for selling government securities back to the treasury. In the United Kingdom, since both the treasury and the BoE issue T-bills, their MOU coordinates these issuances to avoid policy conflicts (Box 3.2). Informal channels are also used, particularly as market dynamics evolve and the interaction between cash management and monetary policy becomes more intertwined. Over time, these informal collaborations may be formalised through SLAs or MOUs.
An important consideration for public authorities is the proper management of public money. All public authority activities in the United Kingdom should be carried out in the spirit and letter of the law, in the public interest, to high ethical standards, and to achieve value for money. The UK DMO has corporate value statements in place enshrining these concepts, and the ethos under which cash management operates is aligned with these.
Public sector organisations are tasked to run their cash management processes to provide good value for the Exchequer. For most departments, this means using the TSA arrangement, limiting the use of commercial banks and providing the treasury with accurate forecasts of cash flows. Any use of non-standard techniques must be kept within defined bounds and carefully controlled.
The DMO’s main strategic objective in carrying out its cash management role is to “offset, through its market operations, the expected outturn cash flow into or out of the National Loans Fund, on every business day; and in a cost-effective manner with due regard for credit risk management”. The DMO is mandated to take a conservative approach to credit risk, taking account of business needs and managing cash flows without influencing the level of short-term interest rates.
An important part of the DMO’s approach is to seek to ensure that its actions do not distort market or trading patterns. In its bilateral dealings with the market, the DMO acts as a price-taker, and its remit is limited to balancing Exchequer cash flows cost-effectively. This means that while the DMO takes account of market levels in seeking to find a cost-effective way of smoothing the Exchequer cash flows, it does not run the cash management operation to profit and does not seek to influence rates.
The delegation of the cash management function to the UK DMO (legally part of HM Treasury) is part of the institutional arrangements that distinguish the roles of the BoE and the treasury and help avoid any perception of conflicts of interest. Another benefit of this arrangement is that the management of the short- and long-term government borrowing programmes can be fully integrated.
Consistent with the rationale for this approach, the mandated aim of the DMO is to smooth the net daily cash flows that will occur across the private sector/central government divide across the TSA (held at the BoE). In essence, for cash management purposes, the DMO operates as a stand-alone treasury function responsible for managing outstanding Exchequer’s short-term assets and liabilities while simultaneously working to minimise day-to-day net cash flows. The DMO’s role means it could be a net lender or borrower on any day and operate at various points along the short-term yield curve. The intended result of the DMO’s daily operations is always to neutralise changes in the Exchequer’s aggregate cash position directly with the private sector. This is intended to allow the BoE’s operations to be the sole means of steering the level of short-term interest rates for monetary policy purposes.
The DMO also may not take speculative positions on the BoE's interest rate decisions. The DMO has no contact with the Monetary Policy Committee (including the non-voting treasury representative) regarding interest rate decisions. In addition, the DMO does not receive advance notice of policy statements or data releases from the treasury, the Office for National Statistics, or other parts of the government that affect the market’s short-term interest rate expectations.2
In addition, the DMO and the BoE work to avoid clashes in delivering their respective objectives in the sterling money markets. HM Treasury and the DMO developed the current framework for Exchequer cash management, which was discussed with the BoE to ensure that the DMO’s approach would not cut across the Bank’s monetary policy operations. Daily operations and strategies are designed in this context by the DMO, considering any operational requirements of the Bank for implementing its monetary policy objectives and its impact on the sterling money markets.
3.3.2. Implications for the liquidity policy
Some aspects of the relationship between the central bank and the treasury significantly impact cash management operations, particularly the remuneration and limits on government overnight deposits at the central bank.
The remuneration of government deposits at central banks plays a critical role in shaping cash management strategies. In the euro area, the ECB sets government deposit rates below market levels, Euro short-term rate, (ESTR) minus 20 bps, in certain circumstances,3 to encourage governments to minimise cash holdings at the central bank and instead invest in money markets. In countries where central banks pay close to market rates on government deposits (e.g. Brazil and Türkiye), governments may choose to hold all their liquidity as central bank deposits. However, when deposit remuneration is below market rates, countries are incentivised to develop more complex structures to manage credit and counterparty risks (see Chapter 4).
Similarly, limits on government deposits at central banks or policies aimed at minimising the impact of cash management operations on markets can strongly influence cash management practices. In Sweden, an agreement between the Riksbank and the DMO limits the government’s holding of cash at the central bank overnight to the very small amount of SEK 100 million (Riksbank, 2024[1]). This in practice compels the DMO to be an active participant in the money markets and, where possible, aim to optimise cash inflows and outflows to reduce fluctuations. In the United Kingdom, the DMO refrains from issuing ultra-short T-bills, such as one-week maturities, to avoid disrupting central bank liquidity operations; and sets limits on the maximum funding or investment left to be completed on each trading day, thereby minimising the impact of cash management on markets. Countries without such restrictions can maintain higher cash buffers (e.g. Belgium, Ireland, Italy, Portugal and Türkiye) and trade more with the market when needed (e.g. Germany and the United States). Changes in monetary policy can also affect cash management operations, as seen with the introduction of QT in Sweden (Box 3.3).
In recent years, the Swedish central bank, the Riksbank, has implemented both QE and QT. QE involved the Riksbank buying assets, such as government bonds, over a period of time, thereby increasing liquidity in the banking system. QT involves the Riksbank allowing the assets to mature and selling some. In its Financial Stability Report in May 2024, the Riksbank discussed how QT is likely to affect Swedish banks over the coming period. The Riksbank concludes that one effect, among others, could be that banks need to balance liquidity in the short-term interbank money market to a greater extent than during the period of QE.
“Banks may have a greater need to balance liquidity in the interbank market. There is an ongoing debate in several countries about the role of central bank reserves in the financial system. As the Riksbank's quantitative tightening measures are implemented, central bank reserves in the banking system will decrease. While this could be sufficient for the banking system's overall need for central bank reserves, they can be unevenly distributed across banks. Individual banks could have a liquidity deficit and need to borrow from other banks or directly from the Riksbank. Activity in the interbank market could, therefore, increase, as banks have largely not needed to engage in liquidity balancing in this way during the quantitative easing period. There is a risk that banks no longer have the necessary expertise and experience to carry out this type of transaction and that internal limits against other banks are not in place when needed. Banks need to ensure this to avoid unnecessary volatility in short-term market rates. It is important that banks ensure they have the right knowledge and tools to be active in the interbank market if needed”.
The Swedish DMO is an active participant in the short-term money market, managing liquidity for the central government account. For the DMO, being more active in the interbank money market may lead to increasing volatility in short-term funding costs and uncertainty about counterparties' behaviour.
3.4.1. Types of risk
The primary objective of cash management is to minimise liquidity risk, which refers to the inability to meet payment obligations in full and on time. All cash management operations, such as cash flow forecasting (explored in Chapter 2), matching cash inflows and outflows, maintaining a cash or liquidity buffer, liability management, and, in exceptional cases, activating contingency plans, are designed to address this risk.
Liquidity risk can be further broken down into various sub-risks. This includes payment concentration risk (i.e. the risk of multiple large payments all falling due over a short period), funding risk (i.e. the risk of being unable to obtain new funding), refinancing risk (i.e. the risk of not securing funds for refinancing maturing debt or having to refinance at higher rates), and risks stemming from the unpredictability of cash flows (Belgium’s risk metrics are explored in Box 3.4).
Belgium adopts a structured and cautious approach to risk management under the supervision of the Minister of Finance. The DMO is in charge of the operational management of federal public debt, adhering to strict risk guidelines, such as refinancing and refixing risks, which are monitored by the Strategic Committee.
Refinancing risk, at its most extreme, is the inability to refinance maturing loans on the market, known as a credit crunch. More commonly, it refers to the risk of needing to pay a higher yield for refinancing due to substantial financing requirements, regardless of changes in the issuer's intrinsic creditworthiness or the general price level. Refinancing risk is, therefore, determined by the annual amount of public debt that needs refinancing. The longer the debt maturity, the lower the short-term refinancing risk and vice versa. The aim is, therefore, to spread the maturities of the debt portfolio as widely as possible. To this end, refinancing limits have been set, corresponding to annual financing amounts that can be achieved without having to make major concessions on yield or price. The percentage of debt to be refinanced within 12 months may currently not exceed 17.5% of the outstanding amount. In addition, the percentage of debt to be refinanced within 5 years may currently not exceed 42.5% of outstanding debt. These percentages are calculated on a six-month moving average.
Interest rate risk is the potential for future higher financing costs due to rising yield levels. This risk is managed by spreading maturity dates ensuring regular resetting of portfolio coupons. Limits for refixing risk are currently set at 17.5% of all outstanding debt over 12 months and 42.5% of outstanding debt over 60 months. Additionally, the annual increase in debt subject to interest rate reset is capped at 20% from the second to the fifth year. A minimum average life to maturity of 9.25 years is maintained for the debt portfolio to balance the maturity profile and manage interest rate exposure.
Issuing foreign currency debt is allowed if it offers more favourable terms than euro issuances, with all such issuances requiring exchange rate risk hedging.
Cash management is fundamentally aimed at controlling liquidity risk, ensuring that sufficient cash is available daily to meet all financial obligations. Belgium’s liquidity policy seeks to reduce uncovered funding needs to realistically manageable amounts. To achieve this, a funnel approach is used, where uncovered liquidity needs decrease as the target date approaches. Maximum uncovered short positions are tracked as part of the DMO’s internal KPIs, with daily monitoring of liquidity gaps to keep expected cash deficits within allowable limits. The policy does not specify seasonal targets or adjustments based on utilisation; however, stricter levels can be enforced during periods of market stress. While the country does not maintain a cash buffer as an objective or policy tool, an informal cash buffer may also be maintained during periods of market stress.
Other types of risk
Cash management and DMO teams also manage other risks, such as credit and counterparty risk, FX risk, and interest rate risk.
In countries where cash balances are invested in markets, particularly in Europe, monitoring credit and counterparty risk is crucial. Outside of Europe, it is common for cash balances to remain in CB deposits, which reduces this risk.
In nearly all OECD and partner countries, FX risk is negligible. Countries don’t always hold foreign currency cash balances, but when they do, they are often small and held purely to pre-fund future foreign currency obligations. These positions are usually fully hedged, as sovereigns mostly have zero risk appetite for net exposure to foreign currency movements. One exception is Türkiye, which does not fully hedge its FX obligations but does so on an ad hoc basis if there is a need to reduce the exposure. The country also pre-funds its obligations to avoid liquidity risk in foreign currency.
Interest rate risk associated with cash management is not as important a consideration when compared to the tolerated range of interest rate risk for debt management, as meeting the cash management objective overrides interest rate risk considerations. Thus, the liquidity policy, such as the definition of the cash or liquidity buffer size, is mainly independent of interest risk considerations, including market conditions. However, interest rate risk is considered primarily in the context of debt management and is monitored by DMOs.
Integrated balance sheet risks
Countries rarely manage risks using an integrated balance sheet approach, which involves analysing assets (mainly cash balances) and liabilities (mainly debt securities) under a single risk management framework. By taking this approach, cash management operations, such as those related to the calibration of the size and composition of cash or liquidity buffers, would be dynamically adjusted based on market conditions that affect both assets and the debt portfolio.
In practice, most countries manage debt and cash portfolio risks separately. Cash or liquidity buffers are typically determined by projected net cash flows over a near-term period, without explicit adjustments based on broader liability or asset risks. Some countries, such as Finland, Latvia (for FX risk management purposes) and Portugal, incorporate more elements of an integrated balance sheet approach.4 These countries integrate only some elements of their cash and debt management operations.
3.4.2. Oversight and transparency
The oversight of cash management operations primarily comes through internal audits, MoF annual reports, and occasionally by parliament. Internal oversight is more regular, often within the DMO or treasury, through periodic committees or even daily reporting (e.g. Canada and the United States). Performance is also reported to the MoF or other central government entities, usually on an annual basis (e.g. Latvia, New Zealand, Sweden, and the United Kingdom). More commonly, cash management operations are subject to regular (often annual) audit reviews, following the regular government auditing schedule (e.g. Finland, Hungary, Ireland, Italy, Sweden and Türkiye). In a few countries, the performance reports are provided to parliament (e.g. Sweden).
Regarding transparency with the public, information about the general guidelines of the liquidity policy is typically available, while cash balances or buffers are either public or can be inferred from central bank data. Cash balance information (or proxies) may be reported by the cash management team or the central bank on a daily (e.g. the United States), weekly (e.g. Canada), monthly (e.g. Finland, Ireland, Italy), or annual (e.g. Latvia) basis. In some countries, including Belgium, New Zealand, Türkiye and the United Kingdom, the DMO chooses not to report this additional information.
3.4.3. Key performance indicators
The main KPIs in cash management typically focus on the lower limit or target for cash balances or liquidity. These are generally liquidity requirements rather than performance metrics tied to meeting the daily benchmark of maintaining the minimum balance in the TSA. This contrasts with debt management, where KPIs are often publicly available, subject to public scrutiny, and include various performance metrics and targets.
However, some countries have performance related KPIs. In Türkiye, for instance, KPIs are reported monthly to deputy ministers, which are focussed on the performance of cash balance forecasts compared to actual balances, the variance in monthly revenue and expenditure forecasts, and the cumulative deviation from the primary balance forecast. The United Kingdom also monitors cash management related KPIs, though these are more operational and less directly tied to liquidity management.5 Another example is Latvia, explored in Box 3.5.
The government debt and cash management strategy has set KPIs that are reported annually to the Minister of Finance, which, in essence, includes the benchmarking of all cash investment transactions to the market rate published by Bloomberg. In addition, for the purposes of liquidity management, the Liquidity Management Committee of the treasury approves separate KPIs. These are:
the minimum liquidity reserve is the cash buffer needed to cover financing requirement for a calendar month estimated by statistical methods using the actual data of liquidity reserves for the last three years and set once a year;
the liquidity reserve for the following month in accordance with the daily cash flow forecast, which is calculated as the maximum of the accumulated amount of the total financing requirement of a respective month, not less than the minimum liquidity reserve, determined and reevaluated twice a month;
the liquidity limit for one workday, which is calculated by adding extra reserve (on average 15%) to the amount of forecasted payments of the respective day. This is monitored daily.
Internal reports on the actual execution of liquidity ratios, their compliance with the amount of financing required and their reasonableness are submitted to the Liquidity Management Committee quarterly and annually.
Countries that invest their cash balances in money markets may also monitor credit related KPIs. For example, Italy tracks the percentage of liquidity in excess of the liquidity buffer invested in markets. Investment performance is often compared to government deposit rates or other money market benchmarks, such as the spread between the repo rate and the government deposit rate (e.g. Italy), or the return on investments compared to the overnight index swap rate (e.g. New Zealand).
3.5.1. Definition and main features
The cash buffer is a specific policy that maintains a minimum target for the cash balances held as central bank deposits in the TSA. It differs from the liquidity buffer or targets, which might encompass other assets, such as cash instruments and might not necessarily be a minimum requirement (Figure 3.1). While liquidity levels can fall below these optimal targets, cash balances should only drop below the cash buffer in extraordinary circumstances. Often, specific triggers are in place to ensure that the minimum level is only breached in such circumstances. Cash buffers can also be considered material for credit ratings as they can help to reassure investors that a country can and will meet its payment obligations (see the Portuguese case, explored in Annex 3.A).
Note: This figure is stylised and simplified to provide an idea of the main differences between liquidity definition and cash and liquidity buffer or targeting policies. Liquidity definitions vary across countries but always include cash balances in the TSA. They may also extend to foreign currency deposits, holdings of cash instruments and other securities, and even the level of and confidence in market access. A cash buffer represents the minimum cash balance target and can be complemented by these other forms of liquidity to form the liquidity buffer.
Source: Based on the OECD Ad Hoc Group on Cash Management Survey (2024).
Since the cash buffer is typically part of the liquidity policy, its rules are established by the same authority, updated as part of the same processes and follow the same disclosure requirements. As most liquidity policies are not publicly disclosed, the cash buffer policy is usually not either. However, even when the buffer policy is not explicitly made public, cash balances are often visible in annual accounts, or in the central bank’s balance sheet, or shown directly in investor presentations.
Most OECD countries have a formal cash buffer policy in place to mitigate timing mismatches and the risks of deviations in cash flow forecasts, as well as refinancing risks. Several of them, including Denmark, Mexico and Poland, adopted their cash buffer policies in the aftermath of the 2007–09 crisis, with an objective to boost market confidence in the government’s financial capacity and to provide more flexibility in funding options (Cruz and Koc, 2018[2]).
Most countries define the buffer as a single fungible cash balance in the TSA, calibrated daily based on projected net cash flows over varying time horizons (Table 3.1). The cumulative net projected cash flow position is the most commonly used indicator, ranging from covering 1 week (e.g. the United States) to 30 business days (e.g. Finland and Ireland) of net cash flows. Since the buffer is adjusted daily for upcoming cash needs, its targeted size fluctuates regularly.
Some countries define cash buffers using multiple components, which may not result in a single fungible balance and can be updated at different intervals. Canada, for example, requires the cash buffer to normally cover 23 business days of net projected cash flows. The underlying assets of its buffer can be grouped into two categories: domestic cash deposits and FX assets in the Exchange Fund Account (Box 3.6).
Ireland combines a minimum balance for the next 30 days with the pre-funding of maturities, while Latvia and Türkiye each have fungible buffers calibrated from multiple components, each updated at different time horizons.
The Government of Canada maintains a liquidity policy called the Prudential Liquidity Plan (PLP). Approved by the Minister of Finance and implemented in 2013, the PLP stipulates the government must hold liquid financial assets to safeguard its ability to meet payment obligations in situations where normal access to funding markets may be disrupted. The objective of this policy is for the government's overall liquidity levels to normally cover at least 1 month, or 23 business days, of net projected cash flows, including coupon payments and debt refinancing needs. The target is forward-looking and varies based on the projected cash management needs over the 23-business day horizon.
The financial assets that make up Canada’s cash buffer can be grouped into two categories, domestic cash deposits and FX assets.
Domestic cash deposits. Canada’s domestic cash deposits (CAD) can be broken down into three components: (1) government deposits held at the central bank in the form of a CAD 20bn callable demand deposit; (2) short-term deposits held at the central bank for operational purposes; and (3) short-term deposits held at other financial institutions. Canada earns a competitive market-driven rate of return on its excess cash balances deposited at financial institutions via a multi-price auction conducted with market participants each morning.
FX assets. Canada’s official international reserves are the second component of the PLP and are held on the government’s balance sheet in the Exchange Fund Account (EFA). A portion of these assets are made available for the PLP. Maintaining liquidity and preserving capital are the primary objectives for managing the EFA. Accordingly, the EFA holds a diversified portfolio of fixed-income assets of high credit quality that can be sold or otherwise deployed on very short notice with limited market impact and loss of value to maintain a high liquidity standard.
In addition to the PLP, Canada maintains an internal cash buffer to mitigate against large and unexpected cash outflows on a day-to-day basis. This buffer helps ensure it always has sufficient cash to fund normal payment-related activities without drawing on the demand deposit.
For large payments, the treasury managers receive a forecast from the federal departments on large scheduled items (e.g. provincial tax collection, transfers) at the start of each month. However, several days' notice may only be provided for one-off or non-recurring payments, making them difficult to forecast. Since the pandemic, the size and frequency of these non-recurring payments have increased, adding additional volatility to the cash forecast. As such, the internal cash buffer is reviewed periodically to ensure it aligns with the latest trends in government cash flows.
A few countries simultaneously maintain a cash buffer and liquidity target policies, including Hungary, Italy, and the United Kingdom. In these cases, the cash buffer is typically held in the TSA, while excess balances are invested in money markets. Cash balances may fluctuate above the optimal target, but the cash buffer is only drawn upon in emergencies.
Two notable exceptions are Germany and Sweden, where no formal cash buffer or target exists. Germany relies on its own security holdings as a buffer, considering market access permanent because of its deep repo markets. As a result, any event severely disrupting market functioning would also affect payment systems, making cash balances irrelevant.6 In Sweden, the DMO is constrained by budget law, which prohibits raising funds to build a buffer and limits financing to cover the budget deficit and maturing debt. Consequently, the DMO is not allowed to maintain overnight cash balances in the central bank, as outlined in an SLA.
3.5.2. Methodologies used to calibrate the cash buffer
The methodology used to calibrate the cash buffer incorporates liquidity management objectives, the debt repayment profile, cost of carry and external factors such as exposure to market disruptions (e.g. disaster risks), access to the money market and availability of other contingency plans.
Countries utilise different methods to determine the level of cash buffers. Several rely on scenario analysis or statistical simulations, often based on historical data, to set the level of their cash buffer, factoring in stress tests (e.g. Italy, Latvia, Türkiye and the United States) (Table 3.2). These simulations can be stochastic (e.g. Italy) or used to generate statistical indicators such as daily forecast error and standard deviation between forecasted and realised values (e.g. Türkiye). It is less common for countries to include hypothetical scenarios, such as energy shocks, geopolitical risks, or macroeconomic downturns (e.g. Latvia and New Zealand).
Contingent liabilities are rarely explicitly factored into cash buffer calibration. Exceptions include Canada, Latvia, New Zealand, and the United Kingdom, where the cash buffer may account for contingent liabilities under certain conditions, such as when they are deemed more likely to materialise. Other countries assume that the potential materialisation of contingent liabilities is already incorporated into their projections through conservative statistical models, which are trained on past instances of contingent liabilities being realised.
3.5.3. Funding policy
Cash buffers are typically primarily funded through general debt financing, although some countries also use T-bills, especially to calibrate the size to nearing outflows. Bonds are generally used to build the buffer gradually, aligning with long-term funding strategies. The gradual adjustment of issuance plans ensures a steady accumulation of funds without placing immediate pressure on the market. Bonds are preferred for this purpose because they provide stable, long-term financing, helping to avoid excessive refinancing needs and minimising interest rate risk.
In contrast, T-bill issuance is typically employed for managing more immediate cash needs, including sudden or seasonal peaks in cash requirements, as well as for fine-tuning cash balances. T-bills offer flexibility for short-term funding, making them ideal for adjusting cash positions in response to day-to-day fluctuations. However, relying heavily on T-bills to fund a sizeable cash buffer could lead to a large stock of short-term debt that must be regularly rolled over.7 This could strain money markets and significantly increase refinancing needs and interest rate risk, as T-bills typically have a shorter average life.8
3.5.4. Investment policy
Regarding the investment of cash buffers, most countries define the buffer as the minimum target balance in the TSA, and, thus, they only invest the excess liquidity (i.e. above the cash buffer level) in money markets. This approach is, for instance, followed in Finland, Hungary, Ireland, Italy, Latvia, the United Kingdom, and, partially, in Canada.
Exceptions include Brazil, Türkiye and the United States, where the entirety of cash balances in domestic currency, including the cash buffer and any excess cash, are placed as central bank deposits (or also as public bank deposits in the case of Türkiye). Brazil and Türkiye earn returns close to or identical to the risk-free overnight borrowing cost, while the United States does not receive direct remuneration but benefits indirectly through the remittance of central bank profits to the treasury. The policy regarding the investment of excess cash balances in other countries is further discussed in Chapter 4.
Note: This table gives only the main rules and variables used to determine the size of cash buffers in domestic currency.
Source: Based on the OECD Ad Hoc Group on Cash Management Survey (2024).
3.5.5. Cash buffer in foreign currencies
About half of the countries maintain cash reserves in foreign currencies, though these are typically small and held solely to meet foreign currency payment obligations. These reserves are often managed under a simplified policy and may be overseen by a separate team. For example, most countries do not have specific targets for foreign currency cash balances (except Canada and Latvia), keeping reserves primarily to pre-fund FX debt maturities and foreign currency payments. New Zealand is a notable exception, where liquidity management considers domestic and foreign currency in consolidated cash flows (for more information on New Zealand’s cash management practices, see Annex 3.B). Generally, OECD countries have no appetite for foreign currency risks.
3.5.6. Use of buffers
As cash buffers are primarily built to insure against specific risks, they are typically used only when those risks materialise. Buffers are often drawn down in cases of unexpected events, forecast errors, or settlement issues. For example, in the United Kingdom, the buffer is drawn only for forecast errors or settlement failures occurring outside of market trading hours. Similarly, the United States may draw down its buffer when issuance is constrained, such as when the debt ceiling fiscal rule bites.
In some countries, cash buffers are also used to manage borrowing costs during periods of market stress. Buffers help smooth issuance when market conditions deteriorate, helping to prevent further increases in borrowing costs. Countries like Canada, Ireland and New Zealand consider market conditions, especially borrowing costs, when using their cash buffers. It is important to note that while cost is an important consideration, cash buffers are primarily maintained as insurance against risk.
Excess liquidity beyond the cash buffer, however, can be used more frequently to make short-term adjustments to borrowing plans and reduce funding needs during stressed market conditions. This additional liquidity provides greater flexibility to the DMO, allowing for more dynamic responses to market fluctuations and helping mitigate the impact of temporary market access or pricing disruptions.
3.5.7. Costs of carry
Cash management carry costs are generally considered secondary to the primary goal of meeting payment obligations and are not widely monitored. In this context, carry costs refer to the difference between the cost of debt issuance used to build the cash buffer and the returns earned on cash balances, whether as central bank deposits or money market investments. Liquidity policy—including the use, composition, and size of cash buffers—is primarily driven by liquidity risk and operational considerations rather than cost.
However, some countries do calculate the carry cost of cash or liquidity buffers. For example, Canada estimates carry costs weekly based on the blended yield of nominal bonds and the weighted average cost of new T-bills issued using 3-, 6- and 12-month T-bill rates. In New Zealand, comparisons are performed between the cost of funding the buffer with the investment income generated from cash investments as part of biannual and ad hoc reviews.
A key complication in calculating the carry costs of cash buffers is the impact of cash management operations on monetary policy and their further implications for government revenue through central bank profit remittances. For the central government, cash balances held at the central bank reduce system reserves or balances invested in the central bank’s reverse repo facility. Since these balances would otherwise earn interest at deposit or reverse repo rates, central bank profits increase accordingly and are remitted back to the government, effectively remunerating the central government.
When considering the public sector as a whole, central government investments in money market securities increase liquidity in the system, complicating the calculation of the costs. To maintain the target policy rate, central banks may need to utilise the excess liquidity generated by these investments by paying deposit or reverse repo rates. While the central government earns money market rates, central banks incur costs, reducing the profits remitted to the government. Furthermore, the timing and profitability of central bank remittances are not guaranteed, particularly with recent losses from QE portfolios, further complicating the accurate computation of carry costs for cash balances.
Although cash and liquidity buffers are central to liquidity policies in many countries, they come with costs and cannot cover all cash flow mismatches. Liquidity is primarily funded through debt issuance and held either as bank deposits or short-term securities. Since yield curves are typically upward-sloping, maintaining liquidity imposes a burden proportional to the term premium. Holding liquidity, therefore, is somewhat akin to paying an insurance premium.
Moreover, DMOs often issue multiple bond lines at key maturities and build them up in size through reopening’s to serve as liquid benchmarks, which leads to concentrated payment obligations on coupon and redemption dates. This presents a trade-off between the market liquidity provided by having multiple large bond lines outstanding and the increased risk of payment concentration.9 Without additional liquidity management strategies, liquidity buffers would need to be sized proportionally to meet those repayments, or the DMO would need to rely heavily on accurate cash forecasting and deep money markets to secure the necessary funding at relatively short notice.
To some extent, market depth and access act as a shock absorber, much like a cash buffer. For fine-tuning cash balances and managing unexpected outflows, most countries rely at least partially on markets through instruments like CMBs, CPs, or, more commonly, repo operations. Countries with strong confidence in their ability to access markets under all conditions can maintain lower liquidity levels while still having large redemptions to meet. Germany, for example, does not maintain a formal cash buffer and relies primarily on repo transactions to manage liquidity risk, with the regular use of repos for cash management further boosting repo market liquidity, generating a self-reinforcing loop.
To avoid putting excessive pressure on markets or holding a large cash buffer, countries also manage liquidity risks through strategies such as cash-flow matching, liability management, pre-funding redemptions, and contingency plans. This includes buybacks and switch auctions ahead of the date of maturity and/or large coupon payments; aligning bond maturities with auction settlement dates; and planning larger operations (big auctions and syndications) closer to redemptions. These approaches reduce the need for rapid large-scale funding and also minimise reliance on substantial cash buffers, which can be expensive to maintain.
3.6.1. Matching cash inflows and outflows
One way to reduce the need for active cash management is to minimise the timing mismatch between cash inflows and outflows. When both occur on the same day, they can offset each other, eliminating the need to pre-fund expenditures or lend excess cash out to the date of future expenses. As a result, better matching of cash flows leads to smaller fluctuations in balances and reduced dependence on markets. Timely matching is especially important in countries with limited ability to actively manage cash through money markets.
Matching financial cash outflows to fiscal cash inflows
Most countries treat fiscal flows as fixed, making financial flows the primary lever for the cash management team. Fiscal flows are difficult to adjust, as they are scheduled according to laws and policy objectives. In contrast, financial flows are managed by the DMO and are either integrated with or closely coordinated with the cash management team. As a result, the alignment of inflows and outflows is generally achieved through adjustments to financial flows.
Tax receipts are typically seasonal and concentrated on specific dates, allowing for matching with debt service payments. Some countries aim for precise daily matching, while others align inflows and outflows on a weekly basis. For example, Canada matches the maturity dates of long-term bonds with corporate tax and VAT receipt dates. Hungary, on the other hand, targets debt redemptions at the end of the month when tax receipts are higher.
An exception to this is the United States, which in 1997 implemented a change to transition social security benefit payments to reduce payment concentration. Before this change, all these social security benefit payments occurred on the 3rd of each month. To reduce the concentration of outflows, these monthly payments were distributed on the 2nd, 3rd, and 4th Wednesday of each month. This required a regulatory change to be implemented as most major payment dates are governed by regulation or statute.
Matching financial inflows to outflows
Matching financial inflows to outflows is a common practice, particularly for T-bills. In several countries, T-bills are primarily funded through new T-bill issuances (e.g. Canada, Finland, Hungary, Italy, Türkiye and the United States). In these cases, issuance and maturity redemption dates are aligned on the same day or close to it, and regular auction cycles are maintained.10 This alignment allows the size of T-bill auctions to be calibrated to account for both the current day’s redemptions and projected future outflows. With regular auctions, adjustments can be made easily to reflect changing conditions, including unexpected events, beyond the scheduled cash outflows from redemptions.
When countries don’t closely match T-bill issuances with redemptions, they rely on cash or liquidity buffers to absorb the mismatches. In such cases, the buffer target often includes a component that tracks projected borrowing requirements to ensure any gaps are fully covered. For example, Ireland pre-funds maturities well in advance as part of its cash buffer, while Latvia's liquidity buffer covers at least all of its gross borrowing needs for the upcoming month. Portugal also doesn’t align issuance and redemption dates and maintains a cash buffer equivalent to one-quarter of its gross borrowing requirements for the next 12 months. Both Ireland and Portugal have been able to build larger cash buffers recently, benefiting from multiple years of running primary surpluses.
Closely matching cash inflows and outflows for long-dated bonds is less common but is also performed by DMOs. In these cases, bond maturities are aligned with auction settlement dates and the auction size is calibrated accordingly. This requires more detailed planning than matching T-bills, as bonds have a broader variation in maturities and coupons. Italy and the United States are examples of countries that synchronise long-term bond redemptions or coupon payments with new issuances.
3.6.2. Liability management
DMOs utilise various methods to manage liabilities, including the wide use of buyback or switch operations to manage redemption profiles, smooth cash flows, and enhance market liquidity. By repurchasing bonds nearing maturity, DMOs can reduce cash flow volatility without over-relying on money-market funding. This helps avoid sharp adjustments in T-bill issuance when large redemptions are due, ensuring stability in debt servicing and reducing dependence on money market conditions. Additionally, buybacks serve broader objectives, such as improving market liquidity and addressing yield curve distortions by removing less liquid and richer bonds from circulation. Around half of OECD countries regularly conduct buybacks or switches (OECD, 2023[3]).
Buybacks offer flexibility to cash management operations. Some countries carry out ad hoc buybacks in response to immediate cash needs or shifting market conditions. The time flexibility comes from the ability to organise reverse tender auctions on short notice or use more adaptable methods such as secondary market purchases or bilateral transactions. Additionally, DMOs adjust the size of their regular buyback operations to accommodate evolving requirements, providing flexibility in terms of scale.
Flexibility in timing and scale makes buyback operations valuable for DMOs facing volatile market conditions and uncertain cash management needs. Buybacks can be deployed when pre-funding maturing bonds through traditional issuance channels become expensive or risky due to adverse market conditions. They also allow DMOs to retire debt during periods of surplus liquidity, reducing the need to refinance debt under potentially less favourable market conditions, or minimise adjustments to auction sizes caused by unexpected fluctuations in cash balances.
Despite their advantages, buybacks and switches can be costly when market demand is low, forcing DMOs to offer significant buyback premiums to reach their target operation size. In addition, failed buybacks carry reputational risks. Against this backdrop, buybacks are often part of a broader toolkit for managing liquidity risks, often complementing other cash management tools. In practice, buybacks and switches targeting bonds near maturity rarely exceed 1% of outstanding debt, making them relatively small compared to annual redemptions.
3.6.3. Pre-funding of redemptions
Nearly all countries still engage in pre-funding to help meet redemptions, even if they engage in liability management operations and efforts to match cash flows. Payment concentration risk remains significant, as bond lines can grow much larger than what can feasibly be bought back, matched, or permanently held in cash buffers. Pre-funding is done either through a cash buffer or liquidity targeting policy, or on an ad hoc basis.
Cash management teams must pre-fund upcoming maturities to meet targets, since the cash buffer or liquidity targeting rules generally account for net cash flows or financial requirements in the short-term. For instance, Belgium’s internal KPI requires the DMO to pre-fund weeks in advance in order to reduce large expected short positions. Canada’s cash buffer must cover 23 business days of net cash flow projections, and the United States' cash buffer covers one week of projected net cash flows. Adhering to these rules effectively compels the pre-funding of redemptions.
In some cases, the cash buffer or liquidity targeting rule includes a specific component for pre-funding nearing maturities. For example, in Latvia, monthly financial requirements are a part of the cash buffer, while Türkiye considers three months of debt service when calibrating its cash buffer.
Pre-funding can also be driven by broader policies not directly linked to the cash buffer or liquidity targeting formulas. In these cases, cash management teams pre-fund maturities to mitigate the risk of raising large amounts of cash quickly under uncertain market conditions. Gradual pre-funding locks in known market conditions and reduces the size of daily operations, with the benefit of more favourable pricing, everything else held constant. Most countries pre-fund maturities between one week and six months in advance, with one month being the most common timeframe.
After the redemption date passes, steps must be taken to restore the cash buffer (if used) to its pre-determined level. Additionally, there may be a need for market management, such as making collateral available to market participants, allowing them to place the cash released by the redemption.
It is worth noting that bond redemptions are typically pre-funded, while T-bills are rolled over to maintain a stable stock, as they are generally not part of the primary funding strategy. If the stock of T-bills increases at the end of the fiscal year, versus the stock at the beginning, it suggests that a portion of net borrowing is being financed through T-bills, extending their role beyond merely absorbing cash flow fluctuations to helping to meet the government’s financing requirement.11 Similarly, the redemption of pure CMBs, issued on an ad hoc basis to smooth large or unexpected cash flow variations, are generally pre-funded to prevent increases in the T-bill stock and avoid integrating them into the broader funding strategy. Rolling them over would proportionally increase the T-bill stock and, thus, short-term refinancing needs.
3.6.4. Contingency plans
Contingency cash management plans for extraordinary and unexpected disruptions that cannot be managed through traditional tools and measures are often triggered by specific events. They enable the government to access immediate funding with near-instant settlements or to postpone or cancel expenditures to conserve cash.
Most commonly, contingency plans involve agreements between the MoF or treasury and either the central bank or commercial banks to provide special credit lines or overdraft facilities. In some countries, central banks allow overdrafts up to a certain limit or grant access to specific deposit accounts, but only under extreme conditions. These arrangements are often formalised through an MOU or a credit policy framework (e.g. Canada, New Zealand, and the UK).
Contingent measures that do not rely on commercial or central banks are rare but do exist. For example, Germany can consider selling securities from the central government’s portfolio as a last resort measure in times of distress.
This chapter highlighted the foundations of efficient liquidity policy frameworks, including objectives, policy coverage, disclosure and institutional mechanisms. Across countries, the main objective of liquidity policy practices is to minimise liquidity risk, with other considerations, such as interest rate risk or costs, often seen as secondary. Complementary goals could include maximising return on investment and reducing the impact of operations on money markets or monetary policy. Liquidity policies can be defined implicitly or explicitly, and may include, in varying degrees of detail, the following: principles, tools and procedures, liquidity indicators, methodologies, calculations, and protocols for managing liquidity risks.
One of the most important factors affecting liquidity policies and practices is the interaction with monetary policy, which requires formal arrangements, high-level policy coherence and operational coordination. From a central banking perspective, cash balance projections have implications for monetary policy given the link between the liquidity in the government’s account and liquidity in markets. From a cash management perspective, the remuneration and limits on government overnight deposits at the central bank are key issues affecting cash buffer and investment strategies.
Regarding risk management tools, one of the most common practices is holding cash as a financial buffer. The definition of ‘liquid’ varies across countries, from TSA balance to short-term investment. The level of the buffer depends on various factors, including objectives targeted as part of the liquidity management policy, debt repayment profile, cost of carry and external factors such as exposure to market disruptions and access to the money market. In addition, some countries employ other contingency plans, such as credit lines at commercial banks and overdraft facilities with central banks. Country examples indicate that clear governance arrangements and approvals are required to utilise the liquidity buffer and ensure it serves its primary purpose during stress events.
References
[2] Cruz, P. and F. Koc (2018), “The liquidity buffer practices of public debt managers in OECD countries”, OECD Working Papers on Sovereign Borrowing and Public Debt Management, Vol. No. 9, https://doi.org/10.1787/3b468966-en.
[4] ECB (2025), Two-tier system for remunerating excess reserve holdings, https://www.ecb.europa.eu/mopo/implement/mr/two-tier/html/index.en.html#:~:text=The%20two%2Dtier%20system%20introduced,when%20the%20rate%20is%20negative.
[3] OECD (2023), OECD Sovereign Borrowing Outlook 2023, OECD Publishing, Paris, https://doi.org/10.1787/09b4cfba-en.
[1] Riksbank (2024), Terms and Conditions for RIX and Monetary Policy Instruments, Riksbanks, https://www.riksbank.se/globalassets/media/rix/terms-and-conditions-for-rix-and-monetary-policy-instruments.pdf.
Following other European countries, in April 2011, Portugal requested economic and financial assistance from the IMF, European Commission (EC) and ECB. The three-year programme involved a financing package, designed to cover the state’s borrowing needs until September 2013, ensuring a comfortable cash position over this period.
Among other aspects, cash management changed significantly during and in the aftermath of the programme. Immediately after the start of the programme, the cash position increased substantially: while it averaged a little more than EUR 1 billion between 2005 and 2010, it has exceeded EUR 10 billion since June 2011.
The increase in the cash buffer was driven by several factors. In addition to being a requirement defined by official creditors, an increased cash buffer was seen as crucial for regaining market access, particularly by helping build investors’ confidence while Portugal’s credit rating remained below investment grade, and by avoiding issuance pressure during periods of market volatility. Even in the years following the programme, Portugal continued to maintain sizeable cash positions.
Being in a financial assistance programme implied closer monitoring and greater transparency on cash management. However, the larger cash buffer also increased the risk of “moral hazard”, as it diminished the incentive for more accurate cash flow forecasting.
Ten years after the end of the programme, Portugal has fully recovered and consolidated its market access conditions. The country is approaching its pre-sovereign crisis credit rating levels, achieving an A rating across the board, while interest rates on Portuguese debt are aligning with those of other low-risk European economies. This context, combined with an environment of rising interest rates that increase the cost of financing a significant cash position, creates incentives for more efficient cash management and for a reassessment of the framework in place for the past decade.
In this improving context, Portugal has in recent years been targeting a lower average cash balance, while ensuring a prudent cash position, taking into consideration a smoother redemption profile, market financing conditions, and the wider range of cash management instruments (e.g. repos) available.
Additionally, developments have been made to increase the centralisation of funds at the TSA, and to improve interactions with the state entities most relevant for cash flow forecasting, bringing greater stability to the centralised funds and reliability to treasury forecasts.
New Zealand Debt Management (NZDM) operates in a small, open economy with a free-floating exchange rate and an independent central bank, the Reserve Bank of New Zealand (RBNZ). The RBNZ is responsible for monetary policy and financial stability policy. The Reserve Bank of New Zealand Act 2021 cements its operational independence. The Public Finance Act 1989 requires the New Zealand Government to be transparent in its short and long-term fiscal objectives and publish economic and fiscal forecasts twice a year.
NZDM, part of the New Zealand Treasury, is responsible for managing the consolidated Crown cash position. Liquidity is defined as cash and securities. The key liquidity management tool used to manage between cashflow peaks and troughs in a normal operating environment is flexing short-term funding volumes (discussed further below). This sits on top of the structural asset and liability management already in place from short-term funding (matching short-term issuance dates with maturity dates) and long-term funding (most maturities to coincide with key month tax receipt periods).
NZDM manage the consolidated Crown cash position with two types of cashflow forecasting:
Monthly: At each biannual Economic and Fiscal Update, as part of the budget process, NZDM updates forecasts for month-end cash and marketable security balances for the forecast period (current and next four fiscal years). These are based on updated fiscal flows and are used to set the size of the forecast core Crown borrowing programme over the forecast period.
Daily: NZDM produces a rolling one-year daily cash flow forecast, which is used for short-to-medium-term cash management. NZDM’s daily cashflow forecasts use forecast Government expenditures and revenues produced by the RBNZ. The purpose of this forecast is to ensure NZDM has sufficient balances in all currencies, meets compliance limits, and determines if there is surplus cash to invest in or if short-term borrowings need to be adjusted.
RBNZ provide forecasts of government agency expenditures and revenues to support forecasting the size of the Crown Settlement Account to manage settlement cash levels (commercial banks’ accounts with the RBNZ). To create the forecasts, the RBNZ surveys key government departments and agencies and scales historical flows based on growth assumptions. RBNZ forecasts daily cashflows up to one year out.
Relative to New Zealand government bond issuance, a key benefit of short-term borrowings is that they can be used flexibly for temporary periods to smooth cash levels. This helps to maintain the minimum liquidity buffer through periods of cash shortfalls during normal market conditions.
NZDM’s short-term borrowings consist of two instruments: T-bills and Euro Commercial Paper (ECP). T-bills are issued in NZD, and ECP is primarily issued in USD. NZDM has a liquidity management strategy to maintain a minimum volume of ECP and T-bills on the issue to signal a commitment to these products, keeping investors engaged and ensuring ongoing access to both markets. T-Bills have a more stable and predictable issuance schedule. While T-bill issuance can be adjusted higher at relatively short notice, the quantum of the increase and potentially unfavourable impact on pricing with the main (domestic) investors make them relatively less flexible as a product.
ECP is the most flexible funding tool for increasing the volume of issues relatively quickly with limited price impact. NZDM’s ECP programme is highly rated. The foreign currency ECP market is deeper and more liquid than the New Zealand domestic market. This enables NZDM to quickly raise a material volume of ECP at short notice, with limited market (i.e. investor or pricing) impact. The chart below shows NZDM has used ECP as a liquidity tool to take volumes higher when required, with volumes outstanding now exceeding T-Bills.
Source: NZDM.
ECP issuance tenors typically average 90 days, which allows volumes to be quickly reduced when cash levels are restored, and liquidity compliance limits are supportive. The one-year cashflow forecast horizon provides insight into expected liquidity peaks and troughs over the financial year.
NZDM’s FX risk limits only allow for minimal exposure to FX risk. Therefore, to manage the FX risk associated with this offshore short-term funding, typically denominated in USD, all issuance is immediately swapped back to NZD to remove FX risk.
NZDM also holds a liquidity buffer that provides additional liquidity for managing risks associated with unexpected, significant, and immediate cashflow requirements during stress events (i.e. fiscal shocks, natural disasters or disruptions in funding markets). Its secondary purpose is to help meet cash shortfalls during normal conditions when increasing short-term borrowing would be uneconomic. The potential impact of stress events on the ability to issue debt, tax receipts, government expenditures, and the eventuation of contingent liabilities are considered in assessing the liquidity buffer level. The minimum size of the liquidity buffer is currently NZD 15 billion (3.6% of GDP) and is complemented by an NZD 5 billion overdraft facility with the RBNZ. The size of the liquidity buffer is reviewed every two years. Clear governance arrangements and approvals are required to utilise the liquidity buffer and ensure it serves its primary purpose during stress events.
← 1. The United States exemplifies the impact of cash management operation on monetary policy well. Before the 2007-09 financial crisis, the Federal Reserve's monetary policy framework operated in a system where reserve scarcity allowed small reserve changes to influence the federal funds rate. Given the direct link between the treasury’s cash balance and banking system reserves, the treasury collaborated closely with the Federal Reserve Board and the Federal Reserve Bank of New York, holding daily calls to share cash balance projections. These calls still occur but are now more for contingency purposes, as they no longer directly influence monetary policy. Over time, the treasury’s daily cash balance has increased from an average of USD 27 billion (with USD 5 to USD 7 billion in the treasury’s general account) to between USD 500 and USD 700 billion today. Similarly, banking system reserves have grown from approximately USD 45 billion (with USD 2 billion in excess reserves) to about USD 3.5 trillion.
← 2. The only exceptions are data and forecasts relating to the government’s financing needs, or any policy announcement that could involve significant short-term cash flow implications.
← 3. The ECB's two-tier reserve remuneration system, introduced to mitigate the impact of negative interest rates on banks’ profitability while maintaining monetary policy, divides reserves into two tiers (ECB, 2025[4]). The exempt tier, a multiple of the required reserves, is remunerated at 0% or the deposit facility rate (whichever is higher). Non-exempt reserves are remunerated at the lower of the deposit facility rate or ESTR minus 20 bps, incentivising banks to lend excess reserves rather than hold them, thereby supporting interbank activity. When the deposit facility rate exceeds ESTR minus 20 bps, it applies to non-exempt reserves.
← 4. Portugal adopts an integrated balance sheet approach by assessing risk across both its debt portfolio and cash surpluses. Limits are set for maximum exposure to interest rate, foreign exchange, and credit risks, although credit risk is measured differently for derivatives and cash management activities. Foreign currency exposure is strictly limited and generally hedged into euros using FX forwards, swaps, or cross-currency swaps. Additionally, exposure to interest rate risk is managed through derivatives, with a minimum portfolio duration of 4.0 years. Central bank deposits, remunerated at a floating rate, help offset the fixed-rate risk from bond issuance and other fixed-rate debt.
← 5. The United Kingdom tracks several operational KPIs in its cash management. These include (i) avoiding the use of the DMO’s overdraft facility by maintaining a positive DMA balance at all times; (ii) conducting operations to meet the cumulative target balance in the central bank account; (iii) maintaining formal and informal communication with the central bank about developments in sterling markets; (iv) avoiding weekly or ad hoc T-bill tenders when the Bank conducts its weekly open market operations; (v) advising the MoF on the impact of Exchequer cash flows on liquidity conditions in sterling money markets; (vi) providing quarterly reports to the MoF detailing cash management activities, including active management performance after factoring in the cost of funds and liquidity, interest rate, foreign exchange, and credit risks. This performance may also be included in the DMO Annual Review. Additionally, (vii) maintaining communication with money market participants and T-bill counterparties, both formally and informally, to clarify the nature and objectives of the DMO's operations in money markets.
← 6. It is worth noting that while the United States also has deep money markets, it maintains a buffer due to past experiences with market disruptions.
← 7. For example, with an average T-bill maturity of three months, annual refinancing needs would be four times the size of the cash buffer. As a result, bonds are generally preferred for funding at this scale.
← 8. Examples of some typical benchmark maturities are 1, 3 or 6 months.
← 9. For instance, New Zealand reduces payment concentration risk by setting a hard upper limit on the size of bond lines.
← 10. For example, the US Treasury issues benchmark T-bills on two linked settlement/maturity cycles: Tuesday-to-Tuesday (for 4-, 8-, and 17-week T-bills) and Thursday-to-Thursday (for 13-, 26-, and 52-week T-bills). Similarly, Canada issues T-bills bi-weekly on Tuesdays, with terms of 3-, 6-, and 12 months, and amounts split roughly 60%-20%-20% across the terms. Issuance and redemption dates are always matched to limit potential cash mismatches.
← 11. In the United Kingdom, for example, T-bill issuance for cash management is structured so that maturing cash flows align with the settlement dates of new issuances, allowing for rollovers without the need for explicit pre-funding, provided the stock of T-bills remains stable. For long-term debt under the debt management programme, pre-funding is essential as simultaneous issuance and maturity cannot be accommodated. Pre-funding must occur within the fiscal year due to the government's "full funding" rule, which requires the DMO to finance each year based on the annual remit fully. Large redemptions are pre-funded by building cash reserves, often by increasing the T-bill stock. Some prefunding can be placed with the central bank, but this is typically a minority of the total flow required. Thus, active cash management of both the funding leg and the temporary reinvestment leg is required.