Meeting papers

•   Only unconditional financial securities will be accepted as they are not a secondary obligation and
    are therefore not dependent upon Council proving breach of the obligation
•   The security shall not have an expiry date. Bank guarantees are invalid and unenforceable after
    their termination dates even if the obligation has not been performed or the work is yet to be
    completed. Therefore, Council will not accept bank guarantees with a termination date
•   Their real value is sometimes not known until a call is made for the cash to be paid out in the
    event of a breach of an obligation. A call up of a financial security involves Council requesting a
    cash payment from a financial institution that has issued the security
•   It is critical that all risks associated with financial securities are managed within a well-documented
    framework in the form of policies and procedures
•   An effective policy should address the risks related to credit exposure, legal, accessibility and
    documentation in order to mitigate against the risk of limitations being imposed on Council in the
    event of making a call on a financial security
•   The fundamental considerations that a policy must address are the reputation and credit rating of
    the issuer and the wording of the security document
•   An effective policy should act to ensure compliance with relevant legislation and streamline
    internal processes with related process documents
•   The primary aim of the policy is to ensure that the accepted financial securities are irrevocable
    and payable on demand.

Risk management considerations

Council must ensure that the risks associated with accepting, managing, and releasing securities are
identified and managed through adherence to stipulated requirements and processes. This will
mitigate against the risk of limitations being imposed on Council when a call is made for the cash to
be paid out in the event of a breach of an obligation.

A call up of a security involves Council requesting a cash payment from the financial institution that
has issued the financial security. The ‘Policy Guideline – Guidelines for the Acceptance, Management
and Release of Financial Securities’ that supports the implementation of this policy, provides specific
procedures that must be implemented to ensure that the following risks are minimised in the event of
a call up:

•   Credit risk is the risk that a financial institution is unable to pay when a financial security is called
    up, this may include either late or non-payment of some or all of the security.
•   Access risk is the risk that in the event of a financial security being called up access to the funds
    may be delayed or prevented.
•   Legal risk is the risk that the contractor/developer or financial institution may seek to hold back or
    avoid a call up of a financial security by seeking to involve the court.
•   Financial risk is the risk that Council won’t be able to meet its commitments in the event of a
    breach of an obligation by a party.
•   Documentation risk is the risk that the security document is not valid, and binding and it does not
    reflect adequately the underlying transaction.

When a financial security will be required

Council will require a security to guarantee performance in the following instances:

• Pursuant to the adopted fees and charges schedule which specifies when a bond is required for
  certain works or activities
• Contract works where the requirement for a financial security is stated in the requests for
  Quotation/Tender (RFQ/T) document
• Agreed works as a condition of subdivision or other approvals where the requirement for a financial
  security is stated in the development agreement
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