BT 2014 Annual Report Download - page 171

168 Financial statements
26. Financial instruments and risk management
The group issues or holds nancial instruments mainly to nance its operations to nance corporate transactions such as dividends, share buybacks
and acquisitions for the temporary investment of short-term funds and to manage the currency and interest rate risks arising from its operations
and from its sources of nance. In addition, various nancial instruments, for example trade receivables and trade payables, arise directly from the
group’s operations.
Financial risk management
The group’s activities expose it to a variety of nancial risks market risk (including interest rate risk and foreign exchange risk) credit risk and
liquidityrisk.
Treasury operations
The group has a centralised treasury operation whose primary role is to manage liquidity and funding requirements and the group’s exposure to
associated nancial and market risks, including credit risk, interest rate risk and foreign exchange risk.
Treasury policy
Treasury policy is set by the Board. Group treasury activities are subject to a set of controls appropriate for the magnitude of the borrowing,
investments and group-wide exposures. The Board has delegated its authority to operate these policies to a series of panels that are responsible for
the management of key treasury risks and operations. Appointment to and removal from the key panels requires approval from two of the Chairman,
the Chief Executive or the Group Finance Director.
There has been no change in the nature of the group’s risk prole between 31 March 2014 and the date of approval of these nancial statements.
Interest rate risk management
Management policy
The group’s interest rate risk arises primarily from our long-term borrowings. Interest cash ow risk arises from borrowings issued at variable rate,
partially oset by cash held at variable rates. Fair value interest rate risk arises from borrowings issued at xed rates.
The group’s policy, as set by the Board, is to ensure that at least 70% of net debt is at xed rates. Short-term interest rate management is delegated
to the treasury operation while long-term interest rate management decisions require further approval by the Group Finance Director, Director
Treasury, Tax and Risk Management or the Treasurer BT Group who have been delegated such authority from the Board.
Hedging strategy
In order to manage the group’s interest rate prole, the group has entered into cross-currency and interest rate swap agreements with commercial
banks and other institutions to vary the amounts and periods for which interest rates on borrowings are xed. The duration of the swap agreements
matches the duration of the debt instruments. The majority of the group’s long-term borrowings have been, and are, subject to xed Sterling
interest rates after applying the impact of these hedging instruments.
Foreign exchange risk management
Management policy
The purpose of the group’s foreign currency hedging activities is to protect the group from the risk that eventual future net inows and net outows
will be adversely aected by changes in exchange rates.
The Board’s policy for foreign exchange risk management denes the type of transactions which should normally be covered, including signicant
operational, funding and currency interest exposures, and the period over which cover should extend for the dierent types of transactions.
Short-term foreign exchange management is delegated to the treasury operation whilst long-term foreign exchange management decisions require
further approval from the Group Finance Director, Director Treasury, Tax and Risk Management or the Treasurer BT Group who have been delegated
such authority by the Board.