Money Market Instruments in Sweden PRESENTED BY: VARUN NATARAJAN 694 AKSHAY VASISTHA 671
MONEY MARKET Money market is a component of the financial market for assets involved in short term borrowing, lending, buying and selling with maturities of one year or less. As regards Sweden, the money market is regarded as a part of the fixed-income market. The bond market comprises trade in securities –bonds – generally with maturities of one year and longer. Trading on the money market comprises, for example, treasury bills and certificates, usually with maturities of up to one year. The participants are largely the same on these two markets, primarily central governments, mortgage institutions, banks and large investors such as insurance companies and pension funds
PURPOSES OF MONEY MARKET Bond Market: the main purpose of the bond market is to channel long-term savings from certain participants to others in need of capital. Money Market: The most important function of the money market is instead to facilitate the investment of surpluses and to mediate short-term funding. In the most short-term segment of the money market (maturities ranging from one day to one week), the instruments are used to carry out daily adjustments of deficits and surpluses in the transaction accounts of the market participants. A large part of the turnover takes place in this segment.
SPECIFIC MONEY MARKET INSTRUMENTS Treasury Bills: is a debt instrument that represents a short-term claim on the state that can be bought and sold on the money market. Treasury bills are issued by the Swedish National Debt Office and are used, among other things, to manage fluctuations in the government’s short- term borrowing requirement. Issued through the Swedish National Debt Office issue framework via tender offers. Bids are submitted to dealers authorised by the Swedish National Debt Office, i.e. banks and securities institutions. Bids at the lowest rate of interest are accepted first
SPECIFIC MONEY MARKET INSTRUMENTS Treasury bills’ previous dominant position on the money market has successively declined. At the end of 2011, treasury bills accounted for slightly less than 30 per cent of the outstanding stock of short-term securities. Certificate: same kind of debt instrument as a treasury bill but is issued by banks and companies. The primary aim of the mortgage institutions’ short-term borrowing is to match their lending to their customers and thus manage their interest rate risks. The short-term borrowing of the mortgage institutions via certificates issued in Swedish kronor amounted to SEK 9 billion at year-end 2011. The banks’ short-term borrowing in certificates issued in Swedish kronor increased during 2011 to SEK 48 billion, the borrowing of the non-financial companies amounted to SEK 68 billion at year-end 2011.
SPECIFIC MONEY MARKET INSTRUMENTS Deposit contracts and Repos: used when maturities in the money market are a week or less. These standardised contracts offer the participants greater flexibility in borrowing or investing at the shortest periods of maturity. Repos: A repo is an agreement in which one party agrees to sell a security to another party in return for liquid funds. Conversely, repos may be viewed as security loans collateralised with cash. A company that wants to obtain liquidity via repos must have a portfolio of securities on which it can raise loans. Almost all the turnover in repos is in repos with maturities of up to one week.
MONEY MARKET INSTRUMENTS (Contd.) Deposit Contracts: are standardised deposit and lending agreements without requirements for underlying collateral used for depositing and lending purposes less than a week’s time. Deposits are preferred to be used to even out the need for liquidity between the banks overnight. The banks agree to assist each other with liquidity and, under normal conditions, to pay the overnight rate for this, which is usually the same as the Riksbank’s repo rate plus a supplement.
INVESTORS IN MONEY MARKET The central government, the mortgage institutions and the banks are the largest borrowers on the money market. Central government borrowing on the money market takes place through treasury bills. Other institutions borrow by issuing certificates such as bank certificates and mortgage certificates. Swedish banks, insurance companies and funds form the largest categories of investors in the money market. The category companies, funds and others together has the largest holdings on the money market and control almost half of the outstanding stock. banks’ holdings of short-term fixed income securities constituted about one quarter of the total money market at year-end 2011, while the insurance companies’ holdings corresponded to about 12 per cent of the market. Foreign investors accounted for about 16 per cent of the market’s total volume at year-end 2011.
RECENT TRENDS The total stock of money market instruments issued has decreased significantly in recent years. Compared with 2009, the stock has decreased by almost SEK 290 billion. The substantial fall in the total stock in recent years is partly due to the increase in borrowing in money market instruments denominated in foreign currencies, which has replaced parts of borrowing in Swedish kronor. The government’s issue of treasury bills has also declined in pace with the fall in the government’s borrowing requirement. Borrowing at longer maturities through bonds has been given priority ahead of the issue of treasury bills. Banks and mortgage institutions have also issued a greater proportion of long-term securities than previously, at the expense of borrowing over the shorter term.