Money markets in australia


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Money markets in australia

  1. 1. Anjali V.S. Sharma 673Sushreet Pattanayak 692
  2. 2.  Money market means market where money or its equivalent can be traded. Money is synonym of liquidity. Money market consists of financial institutions and dealers in money or credit who wish to generate liquidity. It is better known as a place where large institutions and government manage their short term cash needs. For generation of liquidity, short term borrowing and lending is done by these financial institutions and dealers. Money Market is part of financial market where instruments with high liquidity and very short term maturities are traded. Due to highly liquid nature of securities and their short term maturities, money market is treated as a safe place. Hence, money market is a market where short term obligations such as treasury bills, commercial papers and banker’s acceptances are bought and sold.
  3. 3.  Treasury bills Treasury bills are short-term securities. It helps to finance current federal deficits. Sold on an irregular basis to smooth out the uneven flow of revenues from corporate and individual tax receipts. Certificates of deposit(COD) A certificate of deposit is a document evidencing a time deposit placed with a depository institution. The following information appears on the certificate: - the amount of the deposit; - the date on which it matures; - the interest rate; and - the method under which the interest is calculated. Large negotiable CDs are generally issued in denominations of $1 million or more. Commercial Paper Commercial paper is a short-term unsecured promissory note issued by corporations and foreign governments. It is a low-cost alternative to bank loans, for many large, credit worthy issuers. Issuers are able to efficiently raise large amounts of funds quickly. Bankers Acceptance Bankers acceptances are generally used to finance foreign trade. A buyers promise to pay a specific amount of money at a fixed or determinable future time (usually less than 180 days) is issued to a seller. A bank then guarantees or "accepts" this promise in exchange for a claim on the goods as collateral. The seller may obtain immediate cash in lieu of future payment by selling the acceptance at a discount.
  4. 4.  The official money market in Australia is basically analogous to the U.S. federal funds market. It allocates funds that receive same day credit in accounts held by trading banks and dealers at the Reserve Bank of Australia. These accounts, which are used for clearing funds, are called exchange settlement accounts.
  5. 5.  Australia also has an unofficial money market that handles all money market transactions in which banks do not receive same-day credit in their exchange settlement accounts. In short, Australia has two types of funds. The first consists of same-day funds or exchange settlement funds that accrue to exchange settlement accounts at the Reserve Bank. Funds of the second type are those transferred by bank checks. These are next-day funds because checks presented against banks in Australia are cleared through the Australian Clearing House and do not affect the exchange settlement accounts of banks until the following morning.
  6. 6.  Dealers Dealers play a pivotal role in the daily functioning of the official money market. For one thing, the Reserve Bank deals almost exclusively with authorized dealers so that, with the exception of rediscounting, all movements in same-day funds are initiated through the accounts of dealers at the Reserve Bank of Australia. Another reason relates to the timing convention for debiting and crediting the exchange settlement accounts of dealers. These accounts are credited and debited on a same-day basis which gives dealers the central role in distributing exchange settlement funds throughout the banking system.
  7. 7.  Trading banks Trading banks in Australia are banks that are authorized to clear checks. Nonbanks are allowed only indirect access to the check clearing system either by holding accounts with trading banks or by having an agency arrangement with a trading bank. Reserve Bank of Australia The monetary policy of the Reserve Bank of Australia is conducted through its exchange settlement position with the banking system. To influence the cash position of the banking system the Reserve Bank actively uses open market operations consisting of outright purchases and sales of government securities and repurchase and reverse repurchase agreements.
  8. 8.  With respect to the rediscounting of government securities, the Reserve Bank stands ready to purchase securities at a price P, determined by P = 100 (1 -nr/365) where r is the rediscount rate and n is the number of days to maturity on the note.
  9. 9.  ASIC is Australia’s corporate, markets and financial services regulator. They are required to:  maintain, facilitate and improve the performance of the financial system and entities in it  promote confident and informed participation by investors and consumers in the financial system  administer the law effectively and with minimal procedural requirements  enforce and give effect to the law  receive, process and store, efficiently and quickly, information that is given to us  make information about companies and other bodies available to the public as soon as practicable.
  10. 10.  Subject to availability, the Bank will sell selected series of Treasury Fixed Coupon Bonds and Treasury Capital Indexed Bonds. Treasury Fixed Coupon Bonds pay interest on a semi-annual basis at the prescribed coupon rate, applied to the face value. At maturity, the face value amount is repaid. Treasury Capital Indexed Bonds pay interest on a quarterly basis at the prescribed coupon rate, applied to the face value. However, the face value is adjusted by indexing the principal to inflation. At maturity, investors receive the adjusted capital value of the security (i.e. the face value as adjusted for inflation over the life of the bond).
  11. 11.  Repos-The Repo or the repurchase agreement is used by the government security holder when he sells the security to a lender and promises to repurchase from him overnight. Hence the Repos have terms raging from 1 night to 30 days. They are very safe due to government backing. Floating Rate Notes (FRNs)-Debt instrument with an initial maturity longer than one year and shorter than 10 years the payment of which depends on a FRN depending on short-term interest rates.