BT 2016 Annual Report Download - page 208

214 BT Group plc
Annual Report 2016
27. Financial instruments and risk management
The group issues or holds financial instruments mainly to finance its operations; to finance 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 finance. In addition, various financial 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 financial 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 as well as the group’s
exposure to associated financial 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 borrowing,
investments and group-wide exposures. The Board has delegated authority to operate these policies to a series of panels responsible for
the management of key treasury risks and operations. Appointment to and removal from the key panels requires approval from two of the
following: the Chairman, the Chief Executive or the Group Finance Director.
There has been no change in the nature of the group’s risk profile between 31 March 2016 and the date of approval of these financial
statements.
Interest rate risk management
Management policy
Interest rate risk arises primarily from the group’s long-term borrowings. Interest cash flow risk arises from borrowings issued at variable
rate, partially offset by cash held at variable rates. Fair value interest rate risk arises from borrowings issued at fixed rates.
The group’s policy, as set by the Board, is to ensure that at least 70% of net debt is at fixed 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 of Treasury and Risk Management or the BT Group Treasurer who each have been delegated such authority from the
Board.
Hedging strategy
In order to manage the group’s interest rate profile, 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 fixed. 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 fixed 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 inflows and
net outflows will be adversely affected by changes in exchange rates.
The Board’s policy for foreign exchange risk management defines the types of transactions which should normally be covered, including
significant operational, funding and currency interest exposures, and the period over which cover should extend for the different 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 of Treasury and Risk Management or the BT Group Treasurer
who have been delegated such authority by the Board.
Hedging strategy
A significant proportion of the group’s external revenue and costs arise within the UK and are denominated in Sterling. The group’s non-UK
operations generally trade and are funded in their functional currency which limits their exposure to foreign exchange volatility. Foreign
currency borrowings used to finance the group’s operations have been predominantly swapped into Sterling using cross-currency swaps.
The group also enters into forward currency contracts to hedge foreign currency, capital purchases, purchase and sale commitments,
interest expense and foreign currency investments. The commitments hedged are principally denominated in US Dollar, Euro and Asia
Pacific region currencies. As a result, the group’s exposure to foreign currency arises mainly on its non-UK subsidiary investments and on
residual currency trading flows.