Approval of financial instruments, markets and bond issuers

The Ministry of Finance’s Management Mandate for the Government Pension Fund Global requires Norges Bank to approve all financial instruments, markets and government bond issuers. Approval is to be based on an assessment of all relevant investment risks and operational risks.

Norges Bank has developed a framework for the systematic assessment of investment risks and operational risks associated with investments in different financial instruments, markets and government bonds from different issuers. Information on relevant risks is obtained from a variety of recognised international organisations and data providers. Investment risks are assessed along the following dimensions:

Government bond issuers

• Stability - assessment of political stability, risk of war/terrorism, abuse and misuse of public authority, the rule of law, and protection of private property rights.
• Sustainability – assessment of environmental, social and governance factors, such as exposure to climate change, emissions intensity, water and waste management, protection of natural resources, biodiversity, living standards, labour rights and social standards, corporate governance and corruption risks
• Serviceability – assessment of the issuer’s expected ability to service its debt, and government finances’ resilience to financial crises

If an issuer of government bonds is categorised as heightened risk, further analysis shall be conducted to identify and manage the potential risk associated with the fund’s investments.

Markets

• Stability – assessment of political stability, risk of war/terrorism, abuse and misuse of public authority, the rule of law, and protection of private property rights
• Sustainability – assessment of environmental, social and governance factors, such as exposure to climate change, emissions intensity, water and waste management, protection of natural resources, biodiversity, living standards, labour rights and social standards, corporate governance and corruption risks
• Market regulation and infrastructure – assessment of sovereign immunity, investment treaties, capital mobility and securities market regulation
• Functioning of the marketplace – assessment of investor protection and of monitoring and enforcement in the securities market
• Ownership – assessment of minority shareholder rights and restrictions on foreign ownership

If a market is categorised as heightened risk, further analysis shall be conducted to identify and manage the potential risk associated with the fund’s investments in both internal and external investment mandates.

Financial instruments

• Legal documentation – assessment of requirements for instrument-specific legal documentation
• Tax – assessment of withholding taxes, transaction taxes and capital gains taxes
• Investment risks – assessment of credit, counterparty and market risks

Operational risks are assessed along the following dimensions:

Government bond issuers

Operational risk is assessed at the financial instrument (bond) level only

Markets

• Stock exchange – considers stock exchange regulation and responsibilities.
• Settlement and safekeeping – considers settlement risks, default protection and custody.
• Market infrastructure and trade processing – considers settlement cycles, account structures and trade flows
• Restrictions and disclosure – considers requirements related to licenses and investment restrictions.
• Stock exchange – considers stock exchange regulation and responsibilities.
• Settlement and safekeeping – considers settlement risks, default protection and custody.
• Market infrastructure and trade processing – considers settlement cycles, account structures and trade flows
• Restrictions and disclosure – considers requirements related to licenses and investment restrictions.

Financial instruments

• Ownership and operational factors – assessment of valuations and corporate actions
• Risk measurement – assessment of measurement of credit, counterparty and market risks and measurement of returns
• Data and systems – assessment of underlying data and system configuration
• Compliance – assessment of mandate, regulations and other aspects of compliance
• Tax – assessment of instrument-specific operational tax issues

Information is obtained from both internal and external sources with local knowledge from the specific market. Our assessment of operational risks also takes account of any ongoing work on controls, procedures and improvements that could help reduce these risks.